Portfolio Update: EMX Royalty (TSX-V: EMX) 

EMX Royalty made an interesting, unexpected, and somewhat telling move this week, announcing a US$5 million senior secured one-year credit facility with Sprott Resource Lending (C$6.25 million). It is not cheap money: the loan carries 12% interest rate payable monthly (US$50,000 per month) and EMX paid Sprott US$100,000 for the facility up front.

Seeing the news immediately raises a few questions. First, didn’t EMX raise $7 million a year ago, its first raise in eight years and an amount that, alongside its royalty and project payment cash flow, was supposed to carry it for a long time? Second, isn’t EMX supposed to reach cash flow positive this year; if so, why does it need a credit facility? And third, if it does need money why get it through a high-interest one-year loan?

The answers to all of these questions sit with IG Copper and the Malmyzh project. EMX did raise $7 million last year but it immediately put more than half of those dollars into IG Copper. The investment did two things: it slightly increased EMX’s ownership of IG Copper from 39% to 42% and it provided IG with needed funds for its portion of project costs.

Malmyzh is of course a joint venture with Freeport; the major owns 49% of the massive copper gold porphyry in the Far East of Russia. EMX is keenly maintaining its stake in and supporting IG Copper right now because the project is clearly on the market. Just in March IG announced that it had engaged Scotiabank as an advisor, which is the kind of agreement that only occurs when project deals are being negotiated. And when I talked to EMX about this loan the message was clear: EMX wants to ensure it and IG Copper are in good financial positions during any potential negotiations.

The terms of the loan make it clear EMX expects a deal soon. To paraphrase president Dave Cole: “If I thought negotiations would take more than a year I would have got a two or three-year loan.” The corollary is that a one-year loan means he and his team expect a Malmyzh deal soon.

What would such a deal mean for EMX? Some quick calculations can give us an idea. The inferred resource at Malmyzh hosts 12.5 billion pounds of copper and 9 million ounces of gold. If we assume gold in the ground is worth something like $25 an ounce and copper in the ground is worth a few pennies per pound, the Malmyzh resource carries a value of something like $600 million.

IG copper owns 51% of the asset and EMX owns 42% of IG copper, so EMX would get about 20% of the proceeds from a Malmyzh deal. That means a deal would immediately put something like $100 million into EMX’s bank account.

If that kind of cash influx really is coming, it does make sense to take on a loan – even a high-interest one – if it creates the security and ability to get a deal across the line. 

Of course EMX’s other option was to raise funds via equity. Assuming a slight discount to market and the inclusion of 1/2 warrant, raising the same amount of money in a financing would dilute EMX’s fully diluted share count something like 10%.

That of course would mean 10% more shares among which to spread the value of that massive cash injection, which is a greater loss than carrying the interest on the loan even for an entire year. In other words, it does make more sense to take the loan then to do the financing.

The risk of course is that Malmyzh doesn’t sell within a year. If that’s the case then a year from now EMX will have to tap the equity markets to pay back this loan. While there are no guarantees in life and especially none in mining deals, I have to trust those who are in the negotiating room that this deal is close to done.

As for the cash flow positive situation, that is still likely this year. The challenge is that a good amount of the payments made to EMX from project partners come in the form of shares. Since these project partners are often small companies EMX has to be careful in when and how quickly to turn shares into cash. At the end of March, for example, the company’s working capital was almost twice its actual available cash – $6.5 million versus $3.5 million – because millions of its working capital is tied up in these investments.

EMX could become cash flow positive tomorrow it decided to do so. With royalty payments and project payments, the company makes good money – but it also spends, and that is a strategic decision. The only way to grow an organic royalty portfolio is to continually seek out new projects and partners, which is why the company still spends almost all of what it earns to take advantage of opportunities to expand its project portfolio at the beginning of what it sees as a strong bull market. That makes sense, as does continuing to do that while negotiating the Malmyzh situation.

Loans are unusual in the junior mining world, especially high interest loans not tied the completion of a mine about to start producing cash. That’s why this move from EMX was, on first glance, quite surprising. Upon inspection, however, it makes sense – and in fact is quite exciting in how clearly it suggests that a very significant value event is on the horizon for EMX.