This Silver Co. Does Things Differently

Source: Peter Krauth 04/11/2024

Peter Krauth of the Silver Stock Investor explains why he believes Silver Crown Royalties Inc. is unique.

You already know how much I love silver. But I also really love royalties. So, today, I’m going to talk about a company that I think you’re unlikely to find anywhere else. It’s a unique blend of silver and royalties: my favorite metal and my favorite business model rolled into one.

I have been following this company closely for some time. Now, I feel that the stars have aligned, and the time is right to bring this to your attention.

I love royalties because:

They offer most of the upside of mining and discoveries, yet they’re typically not subject to the same downside risks as the rest of the mining sector. There aren’t many royalty companies, and these deals don’t come along often.

As well, royalty deals can have catch-up provisions. That applies mainly to mine development or restart projects. If the vendor can’t meet the minimum agreed deliveries, they are obliged to make up for them from future metal sales (not necessarily just from silver).

Royalties have to be the world’s best business model. You raise funds, lend them to miners, and then collect cheques. If all goes well, you collect those cheques for years, possibly decades. I know that’s over-simplifying it. There’s a lot of very hard work in each one of those steps, especially if you want to do things right to maximize returns and minimize risk.

Silver Crown Royalties Inc. is doing just that. It’s a private company that’s planning to go public within the next few months. It’s also a royalty company that’s doing things differently, improving the royalty model to better protect investors’ capital.

Essentially, they buy silver royalties. Only silver.

Why?

Because it’s a small portion of many mining projects (silver is often less than 5% of a project’s overall economics), this is good for Silver Crown and for the mining company since they uncover and unlock value others simply don’t recognize. That leaves a lot of opportunity to make deals.

By monetizing the silver from a mining project, Silver Crown helps the miners realize inherent value for their silver while minimizing Silver Crown’s own economic impact on the company. By doing this, one deal at a time, Silver Crown’s goal is to create the world’s premier silver-only royalty company. And they are well on their way.

Management

Ok, before I go on about the business model, let’s look at who’s behind Silver Crown.

Peter Bures is the founder, chairman, and CEO and the company’s driving force. He’s a geological engineer with over 25 years of experience in mining, starting at Placer Dome and then in capital markets. Bures was a Co-founder of Star Royalties, Director of Global Mining Sales at BMO New York, and co-managed funds at Sentry Investments.

Management’s 31% ownership is well above the industry average, suggesting a lot of skin in the game and high motivation towards ensuring future success.

Patrick Sullivan is the corporate secretary and a lawyer in mining, M&A, and securities at Osler, Hoskin & Harcourt LLP. He’s acted on big mining deals like South32′s US$2.1 billion buyout of Arizona Mining, Washington Companies’ US$1.2 billion purchase of Dominion Diamond, and Hudbay Mineral’s US$555M acquisition of Augusta Resource.

Frank Balint (P. Geo) is a technical advisor with 35 years of experience across the mining industry life cycle (Inmet, Wolfden). Mitchell Lavery (P. Geo) is also a technical advisor with 48 years of experience in exploration and development and was involved in multiple resource discoveries.

Business Model

Like I said, Silver Crown does things differently.

The big guys, like Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), commit a pile of cash upfront to a miner, then wait for the mine to produce to collect their royalty. If all goes well, everyone’s happy.

However, there are risks, as we saw recently with the Cobre Panama mine, which represented as much as 18% of Franco’s revenues in 2021. Franco took a big hit, as a large investment and chunk of income were put on hold indefinitely when Cobre Panama was forced to shut down due to protests and, ultimately, a court decision.

Silver Crown has built in a number of safety measures aiming at mitigating just such risks.

It commits capital to a royalty on a gradual basis rather than all at once. The miner must meet agreed milestones to receive contingent payments. That could mean obtaining a permit or achieving a specific level of delivered ounces. Silver Crown makes ongoing payments up to the agreed total commitment until the full level of annual deliveries has been met. Every deal has built-in minimum deliveries. If a mine runs into difficulties but is still operating, Silver Crown will receive at least a portion of the agreed royalties.

These royalty agreements assign Silver Crown a right to up to 90% of the silver on a project, no matter who is operating the mine. Management will build out the portfolio with diversification across geography and mining companies. Its stated goal is for no single royalty to represent more than 10% of revenues.

Silver in the ground is registered on title, meaning Silver Crown has partial legal ownership of the asset, as opposed to simply having the assets pledged as a security. As well, royalty deals can have catch-up provisions. That applies mainly to mine development or restart projects. If the vendor can’t meet the minimum agreed deliveries, they are obliged to make up for them from future metal sales (not necessarily just from silver).

Accomplishments

In 2023, Silver Crown raised CA$5 million. They created two silver-only royalties on producing mines and generated initial revenues. Management grew silver equivalent payments from zero to 10,000 ounces annually and grew revenue to a +CA$300,000 annual run rate (pro forma, based on minimum deliveries) from deploying CA$3.7 million of capital.

So far this year, the company executed a definitive agreement to add 7,000 ounces to annual minimum deliveries and executed a letter of intent on a royalty to add 50,000 ounces annually of minimum deliveries.

Existing Deals

Right now, Silver Crown has four deals in its portfolio, which I’ll detail for you below: two (Elk Gold & PGDM) generating a minimum of 10,000 oz., growing to a maximum of 80,000 oz silver annually.

There is one deal (Tucano), which is a Definitive Agreement, which will generate a minimum of 7,000 ozs (starting in 2025) up to 15,000 oz annually. And there’s a Letter of Intent with PPX Mining for a minimum of 50,000 oz annually over five years starting in 2025.

Beyond this, its pipeline is wide, with ten-plus additional active ongoing discussions to add royalties.

Gold Mountain Elk Gold Mine
4K – 20k ozs/pa minimum deliveries over ten-plus-year LOM

Pilar Gold’s PGDM
16K – 32K ozs/pa minimum deliveries for ten years in two tranches

So far in 2024 I’ve watched Silver Crown execute with rapid progress. In January, it finalized a Definitive Agreement with Tucano Gold with the following parameters:

Tucano Gold
7K – 10K ozs/pa minimum deliveries for ten years.

And just recently, Silver Crown signed a Letter of Intent with PPX Mining to complete project financing for their 350 tpd CIL and flotation plant. This will entail US$2.5 million in cash for a 15% silver royalty.

The royalty expires after 250,000 ozs of silver or five years from closing, whichever is later. As of June 1, 2025, PPX must deliver 50,000 ozs silver, but can elect to increase to 100,000 ozs minimum, upping the cap to 500,000 ozs for an additional US$2.5 million payable in Silver Crown shares at CA$0.50/sh.

As you can see, each royalty is somewhat different but clearly accretive to the business. It’s an excellent model that can be tailored to suit new royalty opportunities.

Capital Structure

There will be just 35.5 million shares outstanding (with the closing of Tucano), implying a market cap CA$14.2M.

Management’s 31% ownership is well above the industry average, suggesting a lot of skin in the game and high motivation towards ensuring future success.

Future

Silver Crown plans to go public in the next few months. Bures explained to me that it will happen either through a reverse takeover of a currently listed shell company or a direct listing of the TSX Venture Exchange.

Once its shares are publicly listed, management can “leverage up” the business model and execute larger deals more quickly and efficiently.

Here’s what I mean. The company will be able to use its publicly traded shares as a “currency” along with cash to buy royalties rather than just having to use cash. That’s a win-win. Silver Crown can leverage a growing share price to lower its cost of capital, raise funds in the market, and/or use those shares to acquire royalties.

On the flip side, royalty vendors will find this attractive. Rather than accepting shares of a private company, the royalty seller gets future liquidity through owning publicly traded Silver Crown shares and instant diversification through Silver Crown’s ownership of multiple royalty agreements. And unlike most other royalty companies, it will get a steady and growing dividend to boot.

All in all, the public listing will provide more flexibility to both Silver Crown and the royalty vendors, increasing the attractiveness of doing deals with Silver Crown and multiplying the potential for more and larger deals.

There are several small royalty companies out there, but almost none pay dividends from cash flow, prioritizing growth instead. Silver Crown plans to both grow and pay dividends, setting it apart from its peers and making it more appealing to investors. It views royalties as an investment of investors’ capital that needs to generate a minimum return.

If all goes as currently planned, Silver Crown could pay a dividend as early as Q4, which would yield about 5% on an annual basis. That’s about twice as much as its closest competitor and could well lead to a significant re-rate of shares.

In doing my due diligence on Silver Crown, I spoke to two of their largest and savviest investor groups, who together own a large portion of outstanding shares. Both are pleased with management’s work, and both stated a commitment to allocate more capital to the company as it grows. I see that as a big vote of confidence.

There is a big pool of potential silver royalty deals out there, and Silver Crown plans to tap many of them. The beauty of listing their shares publicly is they can then start to pay for those transactions in equity, just as many other smaller public royalty companies do. It plans to do a lot of small deals but will also start to have the ability to do bigger deals, ranging up to 50,000 – 100,000 ounces annually.

Given how Silver Crown carefully forges royalty agreements, its deals provide better shareholder protections against risks than most of its peers. And thanks to the nature of the royalty model itself, downside risks should be considerably less than with a typical junior explorer. Silver Crown will grow through royalty generation. It will also benefit from exploration; as miners discover more silver ounces and eventually bring those into production, Silver Crown collects higher and/or longer royalty payments.

Given my outlook for silver and the general market appetite for royalty companies, I expect Silver Crown to trade at a premium to NAV before long. I also expect much higher silver prices to drive shares well higher as the market clues into the truly unique opportunity Silver Crown offers investors.

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Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Silver Crown Royalties Inc. and Franco-Nevada Corp.
2. Peter Krauth: I, or members of my immediate household or family, own securities of: Silver Crown Royalties Inc. I determined which companies would be included in this article based on my research and understanding of the sector.
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