EMX Royalty: Higher Prices Likely Ahead (NYSE:EMX)

The Q1 earnings season for the precious metals sector has finally ended and one of the most recent companies to report its results was EMX Royalty (NYSE:EMX). Like many other royalty/streaming companies that benefited from being insulated from inflation, EMX had a phenomenal year, reporting record adjusted revenue and other income of $37.1 million (+46% year-over-year), and record sales of ~15,800 gold-equivalent ounces (GEOs). This is a massive figure relative to its peers in the sub $250 million market cap royalty space, benefiting from catch-up payments at Timok following the temporary royalty dispute (since resolved).

However, the company will have another robust year despite the difficult comparisons from Timok catch-up payments, with a slightly higher royalty rate at Caserones, with the potential for $33 million-plus in adjusted royalty revenue and option/other property income this year and leaving it trading at just ~6x FY2024 adjusted royalty revenue estimates. Let’s dig into the company a little closer below and the recent developments.

Q4 and FY2023 Results

EMX Royalty had a transformational year in 2023 as the below charts highlight, reporting adjusted revenue and other income of $37.1 million (+46% year-over-year) and sales of 15,800 GEOs (+100% year-over-year). This significant increase was related to the resolution of its dispute at Timok with Zijin Mining (OTCPK:ZIJMF) and EMX agreeing on a 0.3625% royalty rate, as well as a significant increase in contribution from the Gediktepe Mine in Turkiye, and the ramp-up in production at Balya (Serbia). Meanwhile, the company benefited from a higher average realized gold price of $1,976/oz in Q4 (FY2023: $1,945/oz), resulting in the best year in the company’s history by a wide margin.

Just as importantly, EMX entered 2024 with six producing assets and much stronger assets overall, a meaningful improvement from prior years, which is a big deal because one attribute that makes royalty/streaming companies superior to their producer peers is increased diversification. And the improved cash generation over the past two years has helped EMX to pay down some of its debt ($10 million early repayment in Q4), ending the year with ~$21 million in cash and cash equivalents, ~$35 million in outstanding debt, and ~$10 million in investments (including ~$4.0 million in marketable securities). As for its assets, the company finished the year with 282 properties (~2% producing, ~4% advanced, ~53% exploration, 41% royalty generation), up from 268 in the year-ago period.

Looking at the results a little closer, the most significant contributor to royalty revenue was Timok (~$8.6 million), benefiting from more than 2,500 GEOs in catch-up payments during the dispute period while the royalty rate was being re-negotiated. Coming in close second to Timok was royalty distributions after taxes from Caserones of ~$7.0 million, with payments received related to copper and molybdenum production between Q4 2022 and Q4 2023. Finally, Gediktepe Oxides had a solid year with contribution to EMX of ~$6.7 million (FY2022: ~$3.7 million), and contribution from this Turkish asset has continued to trend higher, coming in above $1.0 million per month in November and December (Q4 2023: ~$2.64 million). As for its other assets, Balya had a tough year and Q4 because of unfavorable weather that impacted throughput, but still contributed just shy of $1.0 million in royalty revenue, with Gold Bar South and Leeville in Nevada combining for ~$3.4 million in revenue for the year.

While this improvement in its financial results makes EMX one of the higher growth names in the sector and it screens very well for companies offering growth in the sector, the on-the-ground developments are far more important than any single year of financial results. And when it comes to developments across EMX’s portfolio in 2023, I would argue that few companies received as much good news as CEO David Cole and his team last year. For starters, the company successfully renegotiated attractive terms at Cukaru Peki to take this uncertainty off the table. However, EMX also got the great news that Zijin will be investing up to $4.0 billion at Timok to develop the massive Lower Zone, which could push the mine life here into the 2070s. Meanwhile, its other top asset got a new owner in the very well-respected Lundin Mining (OTCPK:LUNMF), and subsequently increased its royalty rate here to ~0.831% from ~0.778% to increase its exposure to this asset.

Timok

Beginning with Timok, the news that a super-major (~$60 billion market cap) that even dwarfs Newmont (NEM) in capitalization is looking to ~$4.0 billion on an asset where you hold a royalty is about the best news one could hope for and especially for a company of EMX’s size. To put this in perspective, this figure is 20% more than Newmont is expecting to spend on its top three growth projects combined (~$3.15 billion: Tanami Expansion 2: ~$1.80 billion, Ahafo North: ~$1.0 billion, Cerro Negro District Expansion #1: ~$400 million), with the plan being to build a caving operation, with Zijin stating that the “Pre-Feasibility Study design for the large-scale development of the Lower Zone of the Cukaru Peki Copper and Gold Mine has been completed, and the licensing process is being accelerated.”

Looking at Cukaru Peki (Timok) in detail, this is a generational asset for Zijin Mining, sitting just south of its massive Bor Mining Complex in Serbia. And while the current footprint may look modest relative to Bor, the potential mine significantly exceeds that of Agnico Eagle’s (AEM) best two assets, Detour Lake and Canadian Malartic, with total resources of ~12.8 million ounces of gold and ~41 billion pounds of copper in the Lower Zone, translating to 50 years of mine life according to Zijin Mining for the Upper Zone (currently in production) and Lower Zone (set to be developed later this decade). So, while EMX’s royalty rate of 0.3625% on the Upper and Lower zones may pale in comparison to Franco-Nevada’s 2.0% NSR at Detour Lake and Osisko Royalties’ (OR) 5.0% NSR at Malartic, this relatively small royalty will be a cash flow machine once the Lower Zone is developed and it’s already a meaningful contributor while the higher-grade Upper Zone is in production currently.

However, while this is very exciting news, it’s important to remember that EMX may have a 0.3625% royalty rate on the current mineralized footprint, but mineralization gets higher-grade at depth and looks to be continuing down-plunge onto EMX’s 1% (copper + other metals) and 2% (gold, silver) NSR royalty ground. And if Zijin were to develop this resource, which is the highest-grade (as highlighted by the pink (1.00% – 2.00%) and red (0.75% – 1.0%) grade shells for copper grades, this would be a game-changer for EMX given that production in a caving scenario would increase materially at the same time as EMX’s royalty rate would triple from current levels. Hence, there’s enormous upside on this asset for EMX Royalty even after the higher-grade Upper Zone years, with a better case of higher production in the Lower Zone and an best case of higher production on more valuable royalty ground if we see continued growth in the reserve base onto Brestovac West ground.

It’s obviously quite early to try and wrap numbers around this potential, but it’s certainly looking like this asset could contribute upwards of $600 million in cash flow to EMX Royalty over its mine life and that assumes gold and copper prices don’t continue to trend higher from current levels. And while some of this value is lost when discounted out over the long mine life, I would argue that this is the most valuable royalty in the sector today held by a junior royalty company, and it’s not just held by any company, but one that is aggressive to develop it, is well capitalized, and it’s on an already producing asset. Hence, the news that the Lower Zone is set to be developed is a huge upgrade in the EMX investment thesis, yet the market doesn’t appear to have caught onto this yet, and it certainly isn’t pricing in if ounces start to pile up on the nearby 2.0% royalty ground (Brestovac West) or if another porphyry is delineated on the property, with EMX’s royalty applying to over 120 square kilometers, including Durlan Potok north of the Bor Mine on the Timok Magmatic Complex.

Caserones

The news at Timok could not be more exciting for EMX and it’s no surprise that the company’s CEO David Cole can hardly contain its excitement when discussing this asset, and it’s even announced a buyback to potentially take advantage of the dislocation between the company’s true value and where it trades today. However, the news at Caserones also is overwhelmingly positive, with Lundin Mining taking over a 51% ownership of the asset with an option to add another 19%. This is a significant development for this ~130,000 tonne per annum producing copper asset in Chile, which makes up part of the Vicuna district, with Caserones lying south of the company’s massive flagship Candelaria Mine and north of the development-stage Josemaria Project. Plus, Lundin is wasting no time when it comes to looking at resource expansion, noting that it will be conducting the largest exploration program in over a decade this year ($14.7 million).

The 2024 exploration program will focus on defining higher grade mineralization at the base of the current Caserones Mineral Resource, as well as testing for a potential sulphide deposit that may exist beneath the Angelica oxide deposit. The planned exploration program is comprised of 12,900 m of drilling. Geophysical surveys consisting of ground (induced polarization/resistivity) and airborne audio frequency magnetics are planned to identify and prioritize future drill targeting. The total planned exploration expenditure is approximately $14.7 million for 2024.

– Lundin Mining, 2024 Report

As noted above by Lundin and in its initial acquisition presentation, the company hopes to “achieve similar exploration success as Candelaria,“ with multiple targets that include Angelica which lies just south of Caserones, deeper targets including Caserones Deep Sulphide beneath the current pit, and additional porphyry copper-gold mineralization at targets like Cerro Sur, Sur de Cerro Sur, and Vegas del Obispo. And given Lundin Mining’s incredible track operational and exploration record, I would not be shocked to see significant resource growth here and reserve growth already is off to a good start with ~350,000 tonnes of copper reserves added since the acquisition or an additional ~2.7 years of mine life assuming a constant ~130,000 tonne per annum production rate.

Other Assets

Finally, as for other assets, EMX noted that it should have an additional producing asset this year in Sisorta, an open-pit heap leach project in Turkiye that could contribute up to 1,000 GEOs per annum depending on scale (most recent resource I’m aware of was ~300,000 ounces of JORC compliant gold resources), with EMX having a 3.0% (on-site processing) to 5.0% (off-site processing) NSR. In addition, other assets in the portfolio continue to progress well, with the potential for Viscaria (Sweden), Parks Salyer (Arizona), San Marcial (Mexico), Kaukua (Finland), and Diablillos (Argentina) all having the potential to be in production by the end of the decade. Hence, even if EMX does not acquire any new royalties, it’s in a great position to see the number of producing royalties grow materially over the next few years, helping it to grow its annual royalty revenue per annum, and it will benefit from milestone payments like $7 million by July 31, 2025, and $3 million at Berenguela which was deferred to May 2025.

Finally, it’s worth noting that while the company is set to be up against tougher comps this year due to the Timok catch-up payments, it’s benefiting from record gold prices and recent strength in copper prices. This will help the company to lap these tougher comparisons and ensure we don’t see a meaningful drop off in revenue after what was a record year in 2023. So, for investors on the sidelines that were waiting to get past the tougher year-over-year comparisons, I don’t see this being nearly as significant given the recent gold/copper price strength, with Leeville, Gediktepe, Timok and Gold Bar South (plus Sisorta once in production) set to see much higher revenue than I previously expected with an average realized gold price at or above $2,200/oz in Q2 and closer to $2,100/oz year-to-date if gold prices can hold up near current levels.

Valuation and Technical Picture

Based on ~120 million shares (outstanding + options, excluding far out of the money warrants) and a share price of US$1.80, EMX trades at a market cap of ~$216 million. This leaves it trading at a deep discount to its estimated net asset value of ~$400 million (~0.54x), and an even more significant discount to its upside case estimated net asset value of ~$450 million if mineralization continues on its Brestovac West royalty ground (Timok). In fact, in the upside case with Brestovac West, EMX could see up to $600 million in revenue at a gold-equivalent price of $2,100/oz and $4.00/lb copper, and the value of this royalty alone would cover ~65% of its current market cap with a value for this royalty asset of ~$140 million (6.5% discount rate). Hence, with an asset this valuable in the portfolio in addition to another asset likely to produce into the 2060s in Chile (Caserones), EMX could be a takeover target, similar to Great Bear Royalties which was scooped up for ~$150 million in 2022 for a single Tier-1 scale royalty asset in Ontario, Canada.

Using what I believe to be a conservative multiple of 0.80x, I see a fair value for EMX of US$2.70, but this is based on more conservative metals prices of $1,950/oz gold and $3.80/lb copper which are looking like very conservative estimates given gold’s recent breakout and follow-through above the $2,070/oz level. So, while I see meaningful upside from current levels (50%), I think there’s a good chance that the stock easily surpasses this fair value estimate and trades back above US$3.00 per share in the next 18 months. And based on the upside to its fair value and the quality of its top-2 assets (major assets held by large-scale operators), I see EMX as the most attractive investment opportunity among its precious metals focused junior royalty peers for three reasons:

1. A superior upside to fair value
2. Three assets with $10+ billion market cap operating partners, including Leeville (Carlin Complex), Caserones, and Timok
3. A successful royalty/generation business that makes it less sensitive to competition, as it can create its own royalties.

EMX’s valuation today reveals meaningful upside to fair value, but just as important is the technical picture for the stock. With EMX, the stock has one of the best setups among its peer group highlighted in the below fractals, building a massive cup and handle base on its yearly chart, and recently breaking out of a cup and handle pattern on its weekly chart. Given the size of these patterns and the fact that the recent three-year decline in EMX has completely reset sentiment in the stock, I believe the stock could be headed for significantly higher prices, and it’s encouraging to see this recent breakout occurring on well above average volume. In summary, while the fundamentals point to significantly higher prices, the technicals are in alignment as well.

Summary

EMX Royalty is an under-the-radar name in the precious metals sector that benefits from the best of both worlds: Significant gold exposure and a significant copper kicker, which has an even more favorable supply/demand picture relative to precious metals. Meanwhile, the company has an impressive track record of creating shareholder value and sniffing out great assets early, acquiring its stake in Timok for ~$200,000, with the potential for this royalty to return well over 2000x its investment as this looks like an asset that could generate over $400 million in cash flow over its mine life attributable to EMX. Just as importantly, its royalty generation model, significant cash flow generation and partnership with Franco-Nevada (FNV) makes it less susceptible to competition, meaning it doesn’t have to hunt for growth at any price as it’s able to create its own royalties, partner with a major like Franco-Nevada, and can even look at buying back stock vs. having to dilute to get new deals like some of its smaller peers.

The latter point is a very important consideration for investment in junior royalty names within the precious metals space because competition is not cooling off, as evidenced by companies like Franco-Nevada regularly moving into the ~$5 million deal space (recent deal with Scottie Resources for a 2.0% GSR) which is typically populated by the smaller names. Hence, I believe those junior royalty companies with a royalty generation model will be the winners longer term, and EMX (formerly Eurasian Minerals) certainly has significant experience here, and multiple exploration managers focused on the more prospective regions of focus. So, for investors looking for a low-risk way to gain exposure to copper and precious metals, I continue to see EMX as deeply undervalued, and I would view any weakness in the stock as a buying opportunity.