After a sharp rally in commodity names and many general market names over the past year, there are less obvious deals out there, with investors being quick to scoop up the best opportunities while the iron was hot.
However, in the smaller-cap space, which often has lower liquidity and receives less coverage, there are often disconnects for those willing to comb through the rubble carefully.
Typically, it’s best to avoid these stocks since smaller companies are often there for a reason, with the best companies graduating to the mid-cap space after being public for a few years, even if they did start at micro-cap status.
However, occasionally there are disconnects with great companies that have been missed, and this can provide a phenomenal opportunity to start positions in future market leaders at a deep discount as they fly under the radar of most investors.
A Diversified Royalty Company On The Sale Rack
EMX Royalty Corporation (EMX) is a $250 million diversified royalty company exposed to lead, zinc, copper, and gold. It has a portfolio of 160+ royalties and nearly 100 properties, which includes five currently producing assets.
The company is unique in the diversified royalty space, given that, unlike its peers, EMX generates its own royalties in many cases.
This means that instead of going out and buying royalties and paying more than 1.0x their estimated NPV (5%), the company purchases projects for a low price, spends to drill them, and then develops partnerships with companies to advance these projects with EMX retaining a royalty interest and or pre-production payments, or selling them outright.
This strategy can take quite considerable time and can rack up higher G&A costs than the average royalty/streaming company, given that most royalty/streaming companies simply pay upfront for royalties/streams and then do not have any further cash requirements as operators take care of drilling and project advancement.
However, despite this differentiated business model, the company has been quite successful, amassing a huge portfolio of royalties and properties with its revenue. Plus, EMX’s portfolio is finally beginning to hit its stride.
In fact, the company is at an inflection point from a cash-flow standpoint, with its Balya royalty online, its Gediktepe royalty now online, its Caserones royalty being increased and paying consistent revenue, and its Leeville royalty that it’s held for years also being a steady contributor.
Finally, the company is working to resolve its dispute on Timok, which could result in a lower royalty rate, but still upwards of $2.0MM in revenue per annum.
The result of these new assets coming online and the resolution of a current dispute with Zijin is that EMX’s annual cash flow should jump from ~$8MM in FY2022 to upwards of $25MM in FY2023.
Typically, growth in scale for royalty companies leads to a higher cash flow multiple as they become more relevant, and this is exactly the position EMX has found itself in today.
Hence, there’s rarely ever been a better time to own the stock ahead of this transition to it being a cash flow machine starting next quarter.
The Fundamental Case
While EMX may not have any direct peers, given that it’s a royalty generator and not a pure-play royalty company, its peers in the pure-play royalty/streaming space regularly trade at between 15-25x cash flow, with Franco-Nevada (FNV) being the clear leader with a ~$26BB market cap.
At a current share price of $1.93, EMX trades at just ~10x FY2023 cash flow estimates, roughly two-fifths of FNV’s multiple at ~25x FY2023 cash flow.<,/p>
Obviously, FNV should trade at a premium due to its scale and diversification, but I see room for EMX to close some of this gap, and even moderate multiple expansion would place the stock above $2.50 per share.
The Technical Setup
EMX has seen a significant fall from grace over the past two years, declining from a high of $3.80 in Q1 2021 when the stock benefited from elevated copper/gold prices and news that development had begun on its Balya Royalty Property in Turkey and another rally in the stock after acquiring a royalty portfolio from SSR Mining (SSRM).
These were both positive deals, but they were overshadowed by delayed production at Balya, weak metals prices, and a dispute on its Timok royalty asset in Serbia.
Fortunately, the intermediate downtrend in the stock has shifted to an uptrend over the past month, with EMX reclaiming 20-day and 20-day moving averages and making a new high above its October high this week.
This suggests that we could be seeing a positive change in momentum, and this rally has been coupled with increasing volume – another positive development.
So, with EMX trading at a deep discount to fair value and now swinging back to positive momentum, I would not be surprised to see stock make a run at its next resistance level that doesn’t come in until $2.50.
The Bottom Line
Based on the fact that EMX should generate at least $25MM in cash flow in FY2023 from its diversified portfolio of producing gold, copper, and other base metals assets and what I believe to be a fair multiple of 14.0x cash flow, I see a fair value for EMX of $350MM.
If we divide this figure by ~127MM fully-diluted shares, this translates to a fair value of $2.75, representing a 43% upside from a current share price of $1.93.
Meanwhile, if we value the company from a P/NAV standpoint and assume a total net asset value of $380MM for its 200+ assets (-) minus net debt at a 0.90x P/NAV multiple, this would translate to a fair value of $342MM ($2.69 per share).
This also represents over 40% upside and places a relatively conservative value on the company’s property portfolio and no value on its equity investments.
So, no matter how you slice it, EMX is significantly undervalued, but with this view based on gold prices remaining at $1,700/oz and copper prices remaining below $3.80/lb.
Hence, if we do see further upside in metals prices ($1,875/oz gold, $4.25/lb copper), I would not be surprised to see EMX trade well above its price target at $3.00 per share or higher.
In summary, for investors comfortable with more speculative names, I see EMX as a steal at below US$1.85, but I would size positions accordingly due to its relatively low market cap ($250MM).
The above analysis of EMX Royalty Corporation (EMX) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one’s portfolio.
Is EMX Royalty Corporation (EMX) A Buy or Sell?
Based on MarketClub’s technical analysis tools, EMX Royalty Corporation (EMX) is in a strong uptrend that is likely to continue. While EMX is showing intraday weakness, it remains in the confines of a bullish trend. Traders should use caution and utilize a stop order.
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