In a presentation in London, Abitibi Royalties(TSXV: President and CEO Ian Ball put forward an ambitious slogan – To Build the Best gold company – not the biggest, Abitibi Royalties will never be that, but the Best in terms of stock appreciation, and it has a good track record of so doing since its inception as a spin-off from Golden Valley Mines back in 2011, although has been mostly underperforming its peer, and larger, royalty companies in the current year. It has a strong core asset in a 3% net smelter return (NSR) royalty on the eastern portion of the Canadian Malartic mine (owned and operated by Agnico Eagle and Yamana Gold), which includes the Barnat Extension and Jeffrey gold deposits. The NSR also includes the exciting new Odyssey North discovery that was announced in 2014 which gives it some good growth potential assuming these extensions to the Canadian Malartic property pan out as anticipated as the mine progresses from a large scale open pit to an equally large scale underground bulk mining operation as the pit section is depleted.
Ball describes the changes ahead as a ‘paradigm shift’ which may just be CEO talk, but with Agnico Eagle (which has some existing bulk underground mining expertise) the main driving force behind the change could just be an apt description. The new sections of Canadian Malartic, Canada‘s largest gold mine certainly have potential but whether they offer the paradigm shift Ball talks about is, as yet, unproven.
While the royalties in and around the Canadian Malartic property do underpin Abitibi Royalties’ earnings prospects, it also has an unusual (among royalty companies) policy of buying low cost royalties on ground held adjacent to known high potential deposits – mostly in Canada, but also a royalty in a big ground holding which almost surrounds Eldorado’s Efemcukuru gold mine in Turkey. The Canadian near-mine royalties include ground close to the Red Lake and Rainy River deposits. These royalties have been picked up at extremely low cost and even if only one of them comes good then that would be a potentially good investment.
Ball, a former associate of Rob McEwen, who himself is a major shareholder in Abitibi Royalties, says he does not take a salary from the company, but ploughs any earnings into buying additional stock, and also says he has no intention of widening the share base – currently around 11.3 million shares outstanding – indeed currently plans to reduce it by buying back stock with a target of bringing it down to 10 million shares outstanding over a three year buy back programme. Abitibi Royalties has a strong balance sheet with Can$7.7 million in cash and no debt. Its market cap is currently around Can$100 million, with a stock price of a little over Can$9 at the time of writing.
Royalty companies tend to be a relatively low risk way of investing in mining and Abitibi Royalties is no exception with its big underlying Canadian Malartic net smelter royalty underpinning earnings. It does have potential in terms of improving shareholder value, but remains perhaps more speculative than most of its royalty company peers due to unknowns in the tenor of some of the areas for potential royalty growth. A strong gold price should see it grow regardless, but there remains a downside risk from a weakening gold price – and if none of its prospective royalty growth areas pan out. But adding an additional risk element to a royalty company with strong baseline earnings could well have an appeal to less risk averse investors.