Nomad Royalty Company Ltd.            

Nomad Royalty Company Ltd. (TSX: NSR) is a royalty mining company, that mines silver, gold, and other base metals. The portfolio includes Woodlawn property, Blyvoor property, Gualcamayo property, Suruca property, and other properties.

Key Highlights:

• Announced Issuer Bid: On 27 April 2021, the company announced a normal course issuer bid (NCIB) to purchase up to 15,550,053 common shares in the capital of the Company. This constitutes around 10% of the public float and 2.75% of the issued and outstanding common shares as on 15 April 2021. Management believes that repurchasing its Common Shares provides financial strength to the company by protecting and enhancing its shareholder’s value.

• First delivery from Blyvoor Gold stream: The company has received its first gold delivery from the Blyvoor gold mine. Hence, the Company realized preliminary revenues of USD 9.7 million for the three-month period ended March 31, 2021 and cash operating margin recorded was USD 7.9 million.

• Amendments on deal with Equinox Gold Corp: The group announced few modifications regarding its deal with Equinox Gold Corp for the New Mercedes Gold and Silver Stream Agreement and repayment of Gold Prepay Agreement. As per the new Mercedes Stream Agreement, around 1,000 ounces of refined gold would be provided to OMF Fund II Ltd. (OMF) from the Mercedes Mine and an additional 6.5% of adjusted amount payable in refined gold. Additionally, OMF and i-80 Gold have entered into a new South Arturo Stream Agreement that provides deliveries from i-80 Gold to OMF.

• Improved Liquidity: The company has cash of USD 22.5 million as on 31 Dec 2020 as compared to zero cash on 31 Dec 2019. Also, the working capital registered was USD 27.4 million in 2020 as compared to USD 6.9 million during 2019.

• Improved Cash Flow and dividend distribution: The company has generated operating cash flow of USD 20.4 million in 2020 as compared to USD 15.0 million during the comparable year 2019. On February 19, 2021, the Board of Directors of the Company declared a quarterly dividend of USD 0.005 per common share payable on April 15, 2021 to shareholders of record as of the close of business on March 31, 2021.

FY20 Financial Highlights:

• NSR announced its FY2020 annual result, wherein the company posted total revenue of USD 26.766 million, higher than USD 17.377 million in the previous corresponding period (pcp). The improvement was primarily driven by improved income from gold and silver sales.
• The quarter was marked by a higher cost of sales (USD 22.233 million v/s USD 17.261 million in pcp) and an increase in general and administrative expenses (USD 2.708 million v/s USD 2.448 million in pcp).
• Total Operating loss reported during the period was USD 18.955 million against operating gain of USD 1.958 million in pcp. The reported operating loss primarily attributable to the higher listing expense of USD 23.492 million followed by higher share-based compensation expenses.
• Net income soared to USD 20.111 million, from USD 1.958 million in FY19, supported by an income tax recovery of USD 41.573 million coupled with a gain from change in fair value of conversion option of USD 1.693 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The Company holds royalty, stream and gold prepay loan interests and operates in an industry that is dependent on several factors that include environmental, legal, operational/execution, financing and political risks. The occurrence of any of these risks would adversely affect the operating results and the financial condition of the Company.

Valuation Methodology (Illustrative): Price to Cash Flow based

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation:

Recently, the company announced its first gold deliveries from Blyvoor Gold stream for Q1 2021, wherein the company’s preliminary revenue recorded was USD 9.7 million and cash operating margin was USD 7.9 million. The group is anticipating further revenue growth from this recently commissioned gold stream.  Additionally, the acquisition of royalty on a large gold deposit Blackwater Gold project has the potential for the company’s resource expansion, which is a key positive. Moreover, historically, gold as an asset class has given exponential return, and we believe the momentum to continue in the coming days, supported by uncertainties around economic recoveries. We have valued the stock by using Price to Cash flow based relative valuation approach and arrived at a target price offering lower double-digit upside potential (in % terms). We have considered peers like Maverix Metals Inc, Metalla Royalty & Streaming Ltd etc. Based on technical analysis, the stock has a support at CAD 0.89 level. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of NSR at the closing price of CAD 1.07 on April 28, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.  

One-Year Price Chart (as on April 28, 2021). Source: Refinitiv (Thomson Reuters)

Diversified Royalty Corp

Diversified Royalty Corp (TSX: DIV) is a multi-royalty company engaged in the business of acquiring royalties from multi-location businesses and franchisors in North America. The major revenue of the company comes from the receipt of royalties and management fees from its Royalty Partners.

Key Highlights

• Growth Strategy: The company has majorly six royalty partners catering to different industries having exposure in different geographies. The company is focusing on building brand strength, identifying potential acquisition targets, and expanding in different range of products. Additionally, DIV targets to increase its Cash flow per share by making accretive royalty purchase and by growth of purchased royalties.

• Amendment to ML LP Agreement: Under this agreement ML Royalty Rate on non-tire sales at flagship locations would be increased by 0.5% from 7.45% to 7.95% effective May 1, 2021. Additionally, under this agreement, the ML Royalty Pool would be adjusted to include royalties from 13 additional Mr. Lube Locations effective May 1, 2021. Although, the ML Royalty Rate on tire sales will remain unchanged at 2.50%. 

• Strengthened liquidity: The Company focuses on strengthening its liquidity. Recently, the company lowered its payout ratio to 85.5% in Q4 2020 as compared to 93.2% during Q4 2019. However, on an annual basis payout ratio for FY 2020 reduced to 104.1% as compared to 108.5% for FY2019.

• Cash Dividend update: On 6 April 2021, company has declared a cash dividend of CAD 0.01667 per common share for the period of April 1, 2021 to April 30, 2021, which is equal to CAD 0.20 per common share on an annualized basis. The stock is offering a lucrative dividend yield of ~8.03% amid a low interest rate environment.

Financial Overview of FY2020 (In millions of CAD)

Source: Company

• For 2020, the company posted revenue of CAD 30.496 million, against CAD 30.463 million in the previous corresponding period. The adjusted revenue reported was CAD 35.332 million for 2020 against CAD 31.078 million during 2019. Revenue remained flat due to the slight decrease in Royalty income, partly offset by mild increase in the Management fees. The decrease in royalty income was due to the negative same store sales growth (SSSG) related to the COVID-19 pandemic, partially offset by the additional royalty income from the four Mr. Lube locations added to the Royalty Pool on May 1, 2019
• Total expense registered was CAD 29.816 million in 2020 against CAD 4.115 million in pcp. The surge in the total expenses was mainly attributed to the impairment loss of CAD 25.901 million while the other components i.e., Salaries & Benefits, Compensation expenses witnessed decline as compared to previous period.
• In 2020, the group posted a negative EBITDA of CAD 4.720 million against an EBITDA of CAD 25.795 million in the previous corresponding period.
• In 2020, the group posted an EBIT of CAD 0.680 million against an EBIT of CAD 26.348 million in the previous corresponding period. The decrease was mainly caused by higher expenses.
• The company reported net loss of CAD 8.885 million in the reported period, against CAD 14.044 million in pcp. Net loss reflected due to fair value adjustments of DIV investment in NND Royalties LP followed by higher interest rate from exchangeable partnership units and income tax expense. 

Risks associated with investment

The Company streamlined its business from several Royalty partners; closure of any franchise location or temporarily closure due to Covid-19 pandemic could hamper the business. Some other risks are also present, such as financial condition, trade policy, increased competition, political instability, interest rates, foreign currency fluctuations, etc.

Valuation Methodology (Illustrative): EV/EBITDA based

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company has diversified business across varied geographies. The group operates through several franchise, which consists of mid to large size. Additionally, the company is seeking for potential acquisition targets for business expansion. The company is also focusing on myriad products and services and trying to increase their adoption across brokers and agents. Furthermore, the group is providing consulting services for assessing various growth opportunities. The company’s distributable cash increased to CAD 23.747 million in FY 2020 against CAD 22.322 million in FY 2019. The group is focused on maintaining its liquidity position and hence reduced its dividend. Despite a reduction in dividend, the stock is offering a lucrative dividend yield. We have valued the stock using the EV/EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Crown Capital Partners Inc, Guardian Capital Group Ltd etc. Based on technical analysis, the stock has support at CAD 2.0 level. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of DIV at the last closing price of CAD 2.49 on April 28, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on April 28, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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