Sasfin Precious Metals Yield Portfolio

The Sasfin Precious Metals Yield (PMY) Portfolio

The Sasfin Precious Metals Yield portfolio is designed for investors who wish to gain exposure to the intrinsic value inherent in precious metals, with the notion that returns may be uncorrelated to traditional asset classes. It aims to achieve this by using a combination of active and passive strategies, diversified across the royalty, mining and physical sectors. In this reading, I give an overview of some of the royalty and streaming instruments held in the Sasfin PMY portfolio.

What are Precious Metals Royalty/Streaming Companies?

Royalty and streaming companies are companies that invest in the development or exploration projects of traditional mining companies. The agreements usually involve the partial financing of the project costs, and once the mine becomes operational, the royalty/streaming company will receive a certain percentage of revenues (royalty agreement) or get a stream where it can buy a certain amount of production at a discount to the market price (streaming agreement). Like any other investments in the stock market, royalty and streaming companies are subject to upside and downside risks.

Upside:

• Generate sizeable margins from metal reselling
• Embedded growth through a large portfolio of producing and development assets
• Fixed-cost investment with a no-cost exploration upside: Royalty/streaming companies receive the royalties or stream for the entire Life of Mine (LoM). Should more exploration work be done resulting in the mine’s mineral reserves or LoM growth, the royalty/streaming company continues to benefit with no extra capital/cash injection required
• Limited downside: the chances of not generating positive cash flows are limited by the “stream cost” agreements

Downside:

• Negative movements in commodity prices which may limit margins
• The mine shutting down due to regulatory or other reasons
• Royalty/streaming companies look stable, pay dividends and produce cash which makes them trade at a premium when compared with traditional mining equities
• Failure of the exploration/development project which ends up prohibiting the mine from becoming operational

A Case for Franco-Nevada Corporation (FNV)

Franco-Nevada is a gold-focused royalty and streaming global company. It was founded in 1983 by Seymour Schulich and Pierre Lassonde under its original name, “Franco-Nevada Mining Corporation Limited”. It then became the first public mining royalty business following its acquisition of the Goldstrike royalty in 1985. It has the largest and most diversified portfolio of royalties and streams by commodity, geography, revenue type and stage of project and has listings on the Toronto and New York stock exchanges.

Investment Case:

• Competitive business model with high profit margins.
• Commodity and geographic diversification.
• An investment in Franco-Nevada’s shares provides investors with yield and exposure to commodity price and exploration optionality while limiting exposure to cost inflation and other operating risks.
• The company’s aspiration to make Franco-Nevada the “go to” gold stock for the generalist investor presents an upside potential.
• Good shareholder returns through minimized risk, paying dividends and maintaining a strong balance sheet along with high environmental, social and governance standards.
• Share price has outperformed the gold price since the company’s IPO over 13 years ago.
• Good track record - Historic outperformance of Nasdaq, S&P 500, Gold Bullion ETF, Barclays US Aggregate Bond and GDX.
• Dividend policy is not tied to any financial metric or the gold price.

A Case for Wheaton Precious Metals Corporation (WPM)

Wheaton Precious Metals is one of the largest precious metals streaming companies in the world. The company has entered into agreements to purchase all or a portion of the precious metals or cobalt production from high-quality mines for an upfront payment and an additional payment upon delivery of the metal. It currently has streaming agreements for 23 operating mines and 8 development stage projects. WPM’s production profile is driven by a portfolio of low-cost, long-life assets, including a gold stream on Vale’s Salobo mine, and a silver stream on Newmont's Peñasquito mine.

Investment Case:

• Competitive business model with high profit margins and low-cost operations.
• Shareholder value-creation through its unique business model which provides:
• Leverage to increases in the price of precious metals;
• Additional growth through the acquisition of new streams;
• A dividend yield, which has the potential to grow over time; and,
• Participation in the exploration and expansion success of the mines underlying its current agreements.
• Reduced downside risks vs traditional mining companies.
• Offers its investors both capital and operating cost predictability.