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Star Royalties (STRR) - Innovative Carbon Credit & Green Investing

March 30 2021, 07:48 GMT+01:00

Star Royalties

  • TSX-V: STRR
  • Shares Outstanding: 67.3M
  • Share price C$0.53 (19.03.2021)
  • Market Cap: C$36M

Star Royalties, a Canadian precious metals-focus royalty and streaming company based in Toronto, Ontario, is fresh off its $24M IPO listing on the Toronto Stock Exchange (TSX). We recently spoke with Kevin MacLean, the chief investment officer of Star Royalties, who shared with us some of the firm’s most recent exciting news.

Company Overview

Star Royalties has assets in North America, Asia, and Australia. The firm’s main purpose is to provide wealth creation through accretive transactions and asset life extension for the benefit of its shareholders. It is a bit different from other precious metal-focused royalty companies in that it also invests in mineral sands and green investments that include carbon offset. The investment split is 80% metals and 20% green investments.

Its main assets include the Cornerstone gold project in Arizona, the Keysbrook mineral sands project in Western Australia, and a royalty-based carbon offset project in Ontario. The firm has raised over $40M over the last 12 months. The company expects to generate nearly $7M in free cash flow next year. Star Royalties is listed on the TSX under the symbol STRR. They are apparently thinking about a potential US listing to increase liquidity, presumably an OTC listing at this point.Star Royalties (STRR) - Innovative Carbon Credit & Green Investing

From Private Firm to Listed Enterprise

Prior to its recent public listing, Star Royalties was private since its start in mid-2019. The founders, including MacLean, were interested in forming a company with 'the best' business model in the precious metals space, which they believed was royalty and streaming. They favoured a low-risk venture, with heavy emphasis on cash flowing or near cash-flowing projects in safe jurisdictions (eg. places where you’d like to take a family vacation) across the globe. So, back in 2019 the firm began with $18M and built up a portfolio of 5 initial investments: 4 royalty and 1 streaming.

Why Royalties as an Investment?

At the core of the decision, MacLean believes that the wealth creation capacity of the precious metals space is best handled by the royalty and streaming business model.

He and the leadership are familiar with the royalties and streaming model. Interestingly, however, he admits that prior to Star Royalties, he had never transacted in royalties. Therefore, the company has hired the best legal and audit help to make sure everything is conducted up to spec: All contracts assembled properly with no omissions.Star Royalties (STRR) - Innovative Carbon Credit & Green Investing

Tapping into Gold: Wealth Creation Using a Modest Risk Profile

MacLean is well aware that, over the decades, the mining industry has not been a consistent provider of free cash flow yields. The trick, says MacLean, is participating in precious metals enterprises for wealth creation using a modest and controlled risk: “You can grow up by investing in exploration stock and hope for the best. You can buy an operating company with excellent geology and benefit as they extend reserve life. Or you can get the best of both worlds by investing in providing capital to an opportunity to expand or develop an asset that will generate cash flow for you”. And to do that with even less risk, he says, it best to be self-funding but that can take time.

Who’s on the Star Resources Team?

Clearly there will be a learning curve along the way. Star Resources has assembled a team that they believe will mitigate problems stemming from mistakes made along the learning curve. The CEO is Alex Pernin. Before coming to Star Royalties, he was in corporate development at Barrick Resources and heavily involved with royalty financing.

The Chief Business Development officer is Peter Bures, whose longtime work as a precious-metals analyst brings needed expertise to the firm. The Chairman is Tony Lesiak, who was an investment banker at Canaccord Genuity where he was involved in the royalty sector and its financing.

The Copperstone Asset

The Copperstone precious metals asset, owned by Arizona Gold Corporation, is located in the Walker Lake gold trend, which has a known gold endowment of over 40Moz. In 2020, Star Resources purchased the Copperstone Royalty for $18M. Star owns a gold stream of 9.9% of gold produced until a cumulative 21,000 ounces are delivered, then 3.3% of gold produced until a cumulative 27,200 ounces are delivered, then and 1.2% of gold produced subsequently.

The Copperstone asset was bought by Star Royalties during the COVID crisis when prices were collapsing. So, they were able to buy it at about a 1/3 discount to their intended purchase price. One of the biggest concerns when initially evaluating the asset when purchased was reserve life. Due diligence by consulting with several outside evaluators gave them the confidence that the proffered reserve statement was valid, and we weren't going to be met with surprises upon purchase.

The Copperstone asset will be flowing cash by the first quarter of 2022. It is currently an unleveraged asset and Star Royalties intend to keep it that way.Star Royalties (STRR) - Innovative Carbon Credit & Green Investing

The Keysbrook Asset

In Western Australia, Star Resources owns a 2% gross revenue royalty on the open-pit mineral sands mine operated by Keysbrook Leucoxene Pty Ltd, a subsidiary of Doral Mineral Sands. Keysbrook posses a unique heavy-mineral suite, including zirconium, leucoxene, titanium, ilmenite, and zircon. The Keysbrook asset is already cash-flowing.

Star Royalties sought out third-party help in deciding on the Keysbrook deal. They hired TZMI, a world-class mineral consulting group, to help with the initial evaluation of Keysbrook. According to MacLean, “We couldn't go personally but we sent the experts, they wrote us a very detailed report, which we discussed at length with them and with a vendor of the asset and decided to buy that particular Royalty opportunity. Interestingly, since that transaction, Keysbrook themselves have hired TZMI to help them optimise their asset”.

Furthermore, MacLean indicated that Star Roya has “budgeted about US $525,000 this year, for mineral sands, our cash overheads are about a CAD$1M. So, it'll pay a good chunk of our cash overheads. We've actually just received our first cheque for that, which came into the last quarter. And the product pricing we're seeing is about 15% to 20%, higher than we budgeted”.Star Royalties (STRR) - Innovative Carbon Credit & Green Investing

Limited Competition for Valued Assets

With the exception of 2 assets, Star Royalties has seen limited competition for their projects. In one of these cases, they had what was initially thought to be an exclusive $3M interest in a cash flowing gold asset in the United States just before the COVID event broke out. The pandemic caused the price of gold to spike and eventually another firm acquired the asset at a much higher price.

Star Royalties Competitive Edge

The firm believes that there are several synergistic components to their competitive edge. One is that they conduct business in a non-threatening, mutually beneficial manner: They try to think as if they were shareholders of the counter-party, and as shareholders what can they do to advance their company and make the share price go up.

Secondly, they believe that flexibility in deal making is also critical to their edge. When they like an asset, they propose several solutions. According to MacLean “We’re here because we're interested in your upside, geologically speaking. So we'll give you the flexibility. Would you rather sell the upside? Would you rather sell the current cash flow?”

Thirdly, they are constantly analyzing what their competitors are doing. MacLean notes that they see many players overpaying for assets. He indicated that they prefer paying at least $100 below spot for gold. They focus on what the geology is saying and don’t overpay so as to obtain a profitable return. MacLean recounts one moniker that was given to him by a business development manager shopping deals: He was named “Doctor No.”

Finally, they prefer approaching deals that have low competition and possessing existing or about-to-exist cash flow.

An Innovator in the Green Offset Space

A cutting-edge, potentially lucrative component of the Star Royalties portfolio is the carbon-offset asset. The firm believes that the carbon-offset market, although new and politically confusing, is “here to stay”. They plan to maintain up to 20% of the portfolio in this emerging sector.

To that end, Star Royalties has created the first forest carbon credit royalty. The Lac Seul First Nation forest pilot project adds a unique dimension to the company: It is focused on forest carbon sequestration opportunities on the Nation’s Reserve lands and Traditional Territory that will deliver carbon offset credits that can be sold to Canadian regulated industrial emitters. This asset is expected to produce cash in 2023. According to MacLean, “Yes, we've done something new”. Additional carbon-offset evaluations are in the works.

Star Royalties is a another new entrant into a burgeoning and ever expanding royalty & streaming sector, but have hedged themselves in the green economy so we look forward to seeing how they get on and how the market reacts to their story. 

To find out more, got to  the Star Royalties Website


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