EMX Royalty ($EMX)
EMX is a small copper-gold royalty company trading at around half of estimated NAV-5% at $2000 gold and $4 copper. While the stock is currently at $1.71, HC Wainwright just upgraded their price target to $7/share and Taylor Dart sees a fair value of $2.70/share with a net asset value of $400M based on $1950 gold and $3.80 copper.
I did an independent analysis of the value of the producing royalties and also arrived at an NPV-5% estimate of around $400M at $2000 gold and $4 copper and including Lower Timok which isn’t producing but is under construction and is part of Timok which is producing. The balance sheet has a NCAV of $6.2M which is negligible compared to the uncertainty in the NPV estimate. There are 126.2M fully diluted shares, so the NAV-5% would be around $3.20 implying a P/NAV of 53%. And this assigns zero value to their large portfolio of advanced and exploration royalties and potential expansion upside from producers. It also doesn’t include one-off payments that are typically part of their deals.
Note that some of their royalties are on privately owned mines that don’t disclose data so it is difficult to calculate accurate estimates, and this is also frustrating because management effectively has inside information while they trade against us in the market with buybacks/issuance (there’s no way they invested without more data than is publicly available). I think publicly traded royalty companies should insist on public disclosures from mines as a condition of investment.
The NAV calculation helps us determine what the company would be worth to an acquirer who intends on shutting the operation down and just keeping the royalty portfolio, but this is very different than the valuation to a minority shareholder. The difference lies in the large operating expenses which are not factored into the NAV at all.
Looking at the income statement, they are spending about $7M/year on general and administrative costs and $12M/year on royalty generation and project evaluation costs. The NPV-5% value of these costs would be -$380M if extended in perpetuity, which basically cancels out all of the value of the currently producing royalties.
They’re spending 10% of enterprise value per year on expenses while royalties are typically discounted at 5% per year for NPV calculations. The 5% discount rate means that the present value of the producing royalties and their cumulative recurring cashflows goes up by 5% per year. At 50% EV/NPV, when the NPV goes up by 5% after a year, this delta is equal to 10% of EV. After subtracting 10% of EV for expenses, the value of the stock hasn’t changed, at least if we’re only considering the producing royalties. This means that if we only count the recurring cashflows from producing royalties, the discount rate of the stock would be approximately 0%.
Of course to get a proper valuation we should also try to account for the future revenues from currently non-producing royalties and even from royalties that will be acquired in the future, but this is difficult to predict and is not a sufficiently robust foundation for an investment thesis in my case. An investment thesis would rely on growth outstripping expenses and they don’t have the track record to make that a safe assumption. In other words, it is not obvious that it is undervalued and that’s all that I need to know.
Besides the math, I think the main problem is the way management chooses to run this business. All they would have to do is completely shut down the royalty generation operation and devote all that cashflow to buybacks in order to make this business benefit shareholders. Ideally they would also drastically scale down and cut G&A expenses. I think their overhead is just way ahead of their revenues. If this was a one person operation with $1M in annual expenses it would be a very different story. They could eventually scale back into royalty generation slowly when the stock started trading over NAV. Management would probably argue that this would slow their growth but they already have a lot of potential long-term growth in their current portfolio and growth is fueled by reinvested capital which would be much higher if expenses were lower.
To me it looks like they’re doing a lot of work that doesn’t clearly benefit shareholders, making this appear to be more of a lifestyle business than an investment opportunity. This is the 20 year history of the stock:
There’s always a chance that they change course or get bought out or just close some incredible deals, but the base case scenario is not compelling at this point.