Triple Flag: Too Cheap To Ignore (NYSE:TFPM)

Q4 & FY2023 Results

Triple Flag Precious Metals Corp. (NYSE:TFPM) released its Q4 and FY2023 results last week, reporting quarterly sales of ~26,200 gold-equivalent ounces [GEOs] which was just shy of its previous record of ~26,600 GEOs in Q1 2023 and Q2 2023. This strong performance helped Triple Flag to deliver into its FY2024 guidance with annual sales of ~105,100 GEOs, a 24% increase from the year-ago period. Combined with the higher gold price ($1,971/oz for the year), this also translated to record revenue of ~$204 million and operating cash flow of ~$154 million, helping Triple Flag to finish the year with just ~$40 million in net debt and leaves the company armed with ~$660 million in liquidity to potentially take down some major deals if they come across the plate.

This is a massive advantage vs. peers like Sandstorm (SAND) that emptied their proverbial chamber in a less favorable environment and don’t have the flexibility to grow in what Triple has likened to the best environment since 2014:

“The deal environment when I step back and I look at some of the issuers reporting just this period, I’m not saying it’s necessarily 2014, which was a very interesting period for the sector to deploy meaningful amounts of capital. But it’s starting to feel a little like that. I think we’re seeing a number of sectors coming under pressure from a liquidity point of view, some very big issuers who have seen substantial declines in pricing. I’m not talking precious, of course, but polymetallics and others. And it does feel to me with the equity capital markets being not the most supportive to the sector and valuations coming under pressure that, I think the opportunity set on these is actually growing. It’s growing in a way that absent some magical rebounds in the traditional markets, I think, is setting up well for the sector as a whole.”

– Triple Flag Precious Metals Q4 2023 Conference Call.

Digging into the results a little closer, the major contributors in Q4 were Cerro Lindo (~6,600 GEOs), Northparkes (~3,300 GEOs), and Moss (~1,900 GEOs), with other key contributors including ATO (~1,600 GEOs), Buritica (~1,400 GEOS), and Beta Hunt (~1,300 GEOs). And while Cerro Lindo, Northparkes and Fosterville saw lower GEOs year-over-year, smaller and new royalty/streaming assets picked up the slack including many from the Maverix acquisition, like La Colorada (Pan American Silver), Florida Canyon (Argonaut Gold), Agbaou (Allied Gold), and Camino Rojo (Orla Mining). And while it was a weaker year for its flagship Northparkes asset, 2024 is expected to be much better with Evolution, who recently acquired the asset, now mining the higher gold grade E31 and E31 North pits, translating to GEO growth in 2024 at this asset.

Unfortunately, there were two pieces of bad news, though this was already well known by the market heading into the year-end results. The first, which was revealed in Q4, was that the Renard Diamond Mine would head into care and maintenance because of low diamond prices, impacting Triple Flag’s stream on the asset. The second was that Fosterville’s days as a 300,000 ounce per annum mine were in the rear-view mirror, though this was not a huge surprise given that Kirkland Lake and Agnico had already chewed through the bulk of the bonanza grade Swan Zone. The result is that while Fosterville was briefly a 10,000+ GEO per annum contributor on an attributable basis at peak levels; it looks like it will be heading back down to an attributable sales rate of just 3,000 to 3,500 GEOs per annum in 2025/2026 based on Agnico Eagle’s (AEM) updated guidance.

Let’s take a closer look at Fosterville below:

Fosterville

While Fosterville is not nearly as critical a piece to Triple Flag’s production as other assets like Northparkes and Cerro Lindo, it was a major contributor in 2021 and 2021, with average annual attributable sales of ~11,300 GEOs or nearly $20 million in annual revenue. However, as the chart below shows of production at the mine, annual output has fallen off a cliff as grades have normalized. This is not an issue with the mine and if anything it’s in even stronger hands after being acquired by top-3 gold producer, Agnico Eagle (AEM), but it’s instead the result of the bulk of high-grade Swan Zone reserves being mined out already, which was a huge tailwind for the mine under Kirkland Lake Gold’s ownership when it was processing average grades of 23.7 grams per tonne of gold in 2021 and 33.9 grams per tonne of gold in 2020. And while 2023 was still a solid year at ~277,700 ounces despite delayed extraction of a high-grade stope from Swan in December, this was well off the mine’s peak production of ~640,400 ounces.

Looking at Fosterville’s mineral reserves below, we can see that total mineral reserves have held relatively steady (blue bar) but reserve grades (yellow bar) have slid since the 2018 peak. This should not be surprising given that you don’t make a new ounce one per tonne discovery every year.

That said, while grades have come off sharply, Agnico Eagle did replace reserves last year net of depletion with 289,000 ounces added, and although grades are materially lower which means a drop to ~150,000 ounces in 2025/2026 (2024: 210,000 ounces or ~4,200 GEOs for Triple Flag based on its 2% royalty), Agnico Eagle is not giving up on this asset and is working to optimize mining/milling activities to allow the asset to be a sustainable 175,000 to 200,000 ounce producer. It’s also worth noting that Fosterville may not be Agnico’s, it makes up for it in margins what it lacks in scale, with industry-leading cash costs of $488/oz in 2023 and $700/oz in 2024 which will be below that of Agnico’s 2nd-lowest cost asset Detour Lake at ~$730/oz.

Agnico Eagle commented on its declining production profile, stating that the softer outlook is related to negative grade reconciliation in the remaining area of the high-grade Swan Zone and the depletion of nearly all of this high-grade zone by 2024. That said, the company is looking to increase its mining rates once its primarily ventilation upgrade is complete which will help to offset the lower gold grades of ~6.5 grams per tonne of gold starting in 2025. And while this means that investors in Agnico Eagle and Triple Flag will have to get used to 160,000 to 200,000 ounces being the new normal, this is not an asset I would count out by any means, and Agnico Eagle seems to agree based on its comments:

“The team is working on securing a long-term production level of somewhere in the range of 175,000 to 200,000 ounces per year, and we expect to have preliminary results of that later on this year. Not too long ago, Fosterville was a site that generated before exploration expenditures that generated close to AUD 1 billion in cash flow a year for three consecutive years. So yes, we believe in the site, we believe in our team there. We believe in the exploration potential to find the next high-grade deposit.

You may say, well, look, that’s only 175,000 to 200,000. Why are you guys in Australia? The answer is, we don’t have proof, but we think there’s more than one very high grade zone to be found there. Maybe it’s not a Swan, maybe it’s a half a Swan or maybe it’s a two times Swan, but it generates a lot of cash flow. If you’re us, what do you do? You position the mine to operate well, to operate consistently between 175,000 to 200,000 if you think you can have that steady and really give you the opportunity to find that next Swan zone.”

– Agnico Eagle CEO Ammar Al-Joundi, Q4 2023 Conference Call.

As for recent exploration results, Agnico Eagle may not be pulling out drill core assaying ~7 meters at 970 grams per tonne of gold like Kirkland Lake Gold was in its heydays, but we’re still seeing solid results near-mine and to the north at Robbins Hill, with highlight results from Lower Phoenix (new Cardinal structure) including 3.7 meters at 69.1 grams per tonne of gold at 1,770 meters depth (115 meters down-plunge of reserves), as well as other decent hits in the vicinity like 1.0 meter at 290.3 grams per tonne of gold, 4.6 meters at 32.6 grams per tonne of gold, and 10 meters at 10.8 grams per tonne of gold even deeper, with these all being above current reserve grades.

Elsewhere at Robbins Hill, we saw a monster intercept out of Curie within the lower portion of reserves with 5.6 meters at 149.6 grams per tonne of gold, as well as 2.0 meters at 301.4 grams per tonne of gold at Wu at lower depths (a less explored zone). Hence, I am not worried about reserve replacement at Fosterville, and I am cautiously optimistic Agnico will make a new high-grade discovery that could turn this back into a 300,000+ ounce per annum asset given its impressive track record of growing reserves/resources at its flagship legacy assets like LaRonde, Meadowbank, and Kittila.

Although the dip in production from Fosterville is undoubtedly disappointing for Triple Flag for the time being, it’s worth noting that over 85% of the investment is already paid back from 2018, the mine likely has at least another ten years of mine life under Agnico Eagle albeit at a more conservative 180,000 ounce per annum rate assuming no new major discovery, and this is not a huge deal for Triple Flag. In fact, this is the beauty of the highly diversified royalty/streaming model, with other assets across the portfolio able to pick up the slack and allow for ~5% growth year-over-year even in a year where it’s staring down a ~6,000 GEO headwind with lower production from Fosterville and the cessation of mining at Renard.

2024 Outlook & Other Developments

Moving onto the 2024 outlook, Tripe Flag has guided for 105,000 to 115,000 GEOs which would imply ~5% growth and another record year for the company in 2024, while on a path to growing to “more than 140,000 GEOs on average from 2025 to 2029.” The growth in 2024 will come from higher-grade pits at Northparkes and higher production at Beta Hunt which is working to increase mine production to 2.0 million tonnes per annum at Beta Hunt, in addition to a full year of contribution from Agbaou, and a higher royalty rate (additional 2.65% NSR) at Stawell.

Overall, I would not be surprised to see Triple Flag beat the midpoint of 110,000 GEOs given the favorable environment with the potential to add a new producing royalty at year-end, and the recent announcement that Newmont (NEM) will be selling several assets could certainly set up some asset purchase related royalty/stream deals for one or more of the larger royalty/streaming companies.

As for other developments, Hope Bay continues to exceed Agnico Eagle’s expectations, and at multiple deposits. In 2021 and 2022, Agnico focused on Doris, where it continued to hit high-grade mineralization at depth below the dike in the BTD Extension and BTD Connector zones, as well as above the dike in the West Valley Zone. However, Agnico has now matched this success at Madrid, which is south of Doris, with a stream of impressive drill results filling in the massive gap between Patch 7 and Suluk. The most recent highlight intercept was a thick hit of 16.3 meters at 28.6 grams per tonne of gold below current resources at Patch 7, and adds to already solid intercepts like 4.6 meters at 15.9 grams per tonne of gold, 1.4 meters at 33.7 grams per tonne of gold, 4.6 meters at 12.7 grams per tonne of gold, and 3.30 meters at 8.8 grams per tonne of gold either outside of resources and or at further depths. Meanwhile, although it’s just a single hole for now, 3.0 meters at 12.1 grams per tonne of gold at ~800 meter depths below reserves at Madrid North is also quite encouraging.

Given the consistent exploration success, Agnico has continued to increase its drill programs at Hope Bay, with the hope being that this asset will replace Meadowbank which is likely to headline off between 2029 and 2030 after a ~20-year mine life assuming it makes it until 2030. And while Agnico was previously targeting 300,000 to 400,000 ounces, it noted in its Q4 2023 release that it’s now looking at a larger production scenario (technical evaluation by 2025) that could mean 400,000+ ounces and closer to 430,000 ounces in peak years. This is based on soft guidance from Agnico’s comments of “5,000, 6,000 tonne per day at 6, 7 grams per tonne of gold,” with 6,000 tonnes per day and 6.5 grams per tonne gold with ~87.5% recoveries translating to 400,000 ounces per annum, suggesting peak years at ~7.0 gram per tonne grades closer to 430,000 ounces.

“The teams are doing the tradeoffs about the tonnage. There’s two aspects into it. First is how could we use as much as we can the current infrastructure and to minimize the capital expenditures. So this is bringing us to a certain tonnage. Then how could we expand from those infrastructure and to bring it to higher tonnage? I will say, I see Hope Bay as a Meliadine project in term of 6, 7 gram per tonne. If we could bring it also at the tonnage of Meliadine 5,000, 6,000 tonne per day, that could be interesting. That might be the sweet spot, but we’re still doing tradeoffs.”

– Agnico Eagle Q4 2023 Conference Call.

While Agnico Eagle repurchased a portion of this royalty on Hope Bay off Maverix (Maverix was acquired by Triple Flag which scooped up a 1.0% NSR on Hope Bay), a ~400,000 ounce per annum production profile would translate to attributable sales of 4,000 GEOs per annum ($8+ million in annual revenue to Triple Flag), and Agnico has a strong track record of extending mine lives and growing reserves at its core assets, like it did with Meadowbank. And while investors will likely need to wait until at least 2029 to see commercial production from this asset, Hope Bay is now looking like a when, not if type of pipeline project, especially with it benefiting from some infrastructure already in place given that this was a past producing operation under TMac Resources before it was acquired.

Finally, one of Triple Flag’s development-stage royalties (Kone – 2.0% NSR) got some good news this week, with Montage Gold (OTCQX:MAUTF) getting a new CEO with several years of experience spent at Endeavour Mining, a new board member in Ron Hochstein (Lundin Gold CEO), and an investment from the Lundin Group to bring their ownership to ~19.9% with a ~$15 million investment. This strong vote of confidence and upgrade in leadership at Kone suggests that this isn’t an asset that’s going to collect dust like many other development stage assets have in the past two years in a tougher financing environment. As it stands, permit approvals are expected by year-end, suggesting commercial production could start as early as Q2 2028 (32-month construction period to be conservative and 6-month ramp-up period), translating to ~6% GEO sales growth for TFPM vs. 2023 levels.

Plus, given the strong backing in place, I would not be shocked to see this asset in production by 2028. Overall, this is great news as Kone is a ~350,000 ounce per annum asset in its first three years based on its new Feasibility Study (7,000 GEOs or $14 million in revenue to Triple Flag), and with a stronger team I wouldn’t rule out further optimization work to maintain a ~250,000 ounce per annum production profile (LOM production: ~220,000 ounces), similar to what we saw from Fruta del Norte that has massively outperformed its expectations from its initial mine plan when it went into production.

Obviously, I am not implying that this is anything near a Fruta del Norte given that the two assets could not be less similar from a grade, overall deposit type and throughput standpoint, but Kone is a very solid open-pit asset with a very attractive strip ratio (~1.2 to 1), and strong backing makes a world of difference which is excellent news for Triple Flag here.

Valuation

Based on ~202 million shares and a share price of US$12.20, Triple Flag trades at a market cap of ~$2.46 billion, leaving it trading at a slight discount to its estimated net asset value of ~$2.64 billion ($1,875/oz gold price assumption and $23.00/oz silver, 5% discount rates except RBPlat at 8%), which I view as a very reasonable valuation relative to its three largest peers which trade at over 1.60x P/NAV.

Obviously, the top-3 royalty/streaming companies benefit from greater scale, superior diversification (a larger number of producing assets for RGLD/FNV vs. TFPM), and a larger number of world-class assets in their portfolio. Still, Triple Flag has one of the best jurisdictional profiles among the mid-tier and large-scale royalty/streaming companies, and I think this can easily justify a P/NAV multiple of 1.30x to 1.60x as it continues to grow.

Looking at Triple Flag from a cash flow standpoint, the stock is now back to a very reasonable valuation, with it sitting at just ~15.2x FY2024 cash flow estimates. This may seem expensive at first glance for a commodity stock, but it’s important to remember that Triple Flag has a diversified portfolio of royalty/streaming assets, is insulated from inflation, and it has discovery optionality at its assets with no extra cost to it (its partners pay for drilling, not Triple Flag). Finally, it has extremely high margins vs. the average precious metals stock with ~73% cash flow margins, and royalty/streaming stocks have regularly traded at 20x-36x cash flow (WPM currently trades at ~29x FY2024 estimates). Hence, I don’t think a cash flow multiple of 18.0 to 20.0x cash flow is unreasonable at all for this business when offsetting for its lower scale vs. the big three royalty/streaming companies, and this points to a fair value of US$15.40 at the midpoint of this range (19x).

However, it’s important to note that this fair value estimate of US$15.40 on cash flow alone does not give any value to organic growth across its portfolio, multiple assets that aren’t cash-flowing today. And when we look across these opportunities, we have Hope Bay that’s likely to be a ~4,300 GEO per annum contributor in its first five years, Kone that is expected to be a ~7,000 GEO per annum contributor in its first three years, and other assets in Tier-1 jurisdictions like Cove, South Railroad, Gemfield, Mother Lode, Eskay Creek and DeLamar that could combine for 15,000+ GEOs per annum, and further contributions from copper assets like Gunnison and Pumpkin Hollow.

Hence, with an extra 30,000+ gold-equivalent ounces in the wings or ~$50 million in annual cash flow not reflected in its 2024 estimates (never mind significant upside if Fosterville can make a new high-grade discovery and upside from exploration assets that are further out), one can see why valuing Triple Flag on 2024 cash flow doesn’t do the stock justice.

So, What’s a Fair Value For the Stock?

Using what I believe to be fair multiples of 1.40x P/NAV and 19.0x cash flow and a 65/35 weighting on P/NAV to P/CF, I see a conservative fair value for Triple Flag of US$17.30. This translates to a 42% upside from current levels, or a ~44% upside on a total return basis. I would argue that this is a very attractive return potential for a company with one of the lowest-risk business models sector-wide. With ample liquidity, a favorable environment for transacting, and a renewed buyback program, I would expect further growth in NAV per share, with the potential to accelerate this growth with a couple of new acquisitions and opportunistic buybacks to claw back some shares from the Maverix deal. Hence, while I see a fair value of US$17.50 today, I ultimately would not be surprised to see Triple Flag trade up to new all-time highs at US$18.50 within two years.

Finally, it’s worth noting that Triple Flag is paying a competitive ~1.7% dividend yield at current levels and has raised its every year since its IPO, so I would not be surprised to see another raise to US$0.225 – US$0.23 this year. This would give it a higher dividend yield than the average mid-cap producer but with a far superior business model, and Triple Flag is a company that can consistently grow without dilution, as it’s proven in the past. Plus, as for the longer-term picture, I would not be surprised to see Triple Flag’s dividend at US$0.36 by 2030, which would still represent a very modest payout ratio. So, for investors buying at US$12.25 or lower, they are getting a future yield on cost of nearly 3%, a far more attractive yield than holding gold itself with the benefit of discovery optionality and consistent growth.

And as we’ve seen from the major royalty/streaming companies, owning them in their infancy has paid off massively for investors, with investors that bought some of the royalty/streamers near their IPO prices now enjoying a ~10% dividend yield on cost 15 years later. Hence, for investors that missed names like Wheaton Precious Metals (WPM), I see Triple Flag as one of the best opportunities for a repeat, with a disciplined and experienced management team, a solid portfolio of assets, but with a silver kicker given Triple Flag’s superior percentage of silver revenue relative to peers. In fact, if we look out across the precious metals space, Triple Flag’s percentage of revenue from silver is higher than most of the “silver” producers, and well above that of names like Pan American Silver (PAAS), Fortuna Silver (FSM), and similar to that of First Majestic (AG).

Summary

Triple Flag had another record year in 2023 despite a weaker year at Renard and Fosterville, a tough year at Cerro Lindo because of Cyclone Yaku, and another mediocre year for the silver price. Meanwhile, the company has continued to augment its pipeline in a disciplined manner, adding to exiting royalties at Stawell and Gunnison and adding a new producing asset in Agbaou. This has set up the company up to grow annual GEOs to 140,000+ in 2028 when combined with organic growth across its portfolio and new assets coming online that are already bought and paid for by Triple Flag. So, with the stock’s attractive valuation today (~15x FY2024 P/CF), I see this pullback in Triple Flag below US$12.20 as a buying opportunity, and it’s nice to see that insiders agree, with insider purchases at or near current levels.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.