International Royalty Corporation

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There are very few companies who are “recession-proof” as International Royalty Corporation’s  Chairman Mr Douglas Silver says.

Silver and President Mr Paul Zink sat down with us to explain that IRC is in a truly unique position. And through a fantastic balance of mining, geological and international investment and finance experience, the company is undeniably in great hands.

With his Masters in Economic Geology from the University of Arizona, Silver began working in the mining industry as a geologist about 30 years ago. He worked in both geology and acquisitions which lead on to a strong interest in valuations.

“I got my license as a certified general appraiser quite a while ago and have served as an appraiser for many of the major mining companies around the world assessing everything from exploration to producing assets” he recalls.

“In 2002, there were only two public mineral royalty companies, various companies had swallowed the others. I was working to appraise a royalty company for a client and in the course of this they got a takeover bid in which I helped negotiate the sale of the company. This opened my eyes to the beauty of the royalty model and I was really quite excited about it, so myself and two others set about starting a new royalty company. We went public on the Toronto Stock Exchange in February of 2005. We were the largest mining-related I.P.O. in Canada that year, raising $190 million Canadian dollars.”

Zink has a 17-year stretch working for J.P Morgan on Wall Street under his belt.

“I followed mining for about 11 of my 17 years with Morgan in New York and in London. I was doing a lot of valuation work and financial analysis as well as project finance, deal structuring and being the investment banker for UK mining houses in the first half of the 80’s” he says.

“Then I went into the gold mining business and ran acquisitions for a gold producing company in the Western United States. After a couple of years when gold prices got very low, I moved to the mid-west as the CFO for the minerals trading arm of a privately-owned big oil company. I spent the past several years here in Denver on the buy-side in the investment business doing turnaround investing with a privately-owned investment company. So I’ve had experience on the buy-side in the investment world as well as the sell-side (as analyst for mining stocks for JP Morgan in my last job there). I tracked Mr Silver and IRC down a little over a year ago when they were out looking for a president and came on board.”

“We first started by focusing on buying royalty portfolios from former clients of mine and people we knew” Silver says in order to build a diversified portfolio of projects ranging from exploration to production and to capture a variety of commodities.

“We’ve been scouring the earth for opportunities ever since. That’s how the company began. “

FOUR FLAGSHIP PROJECTS
Now IRC has approximately 85 royalties in its portfolio. To understand how diverse this company is, we need look no further than what Silver and Zink cite as their “four flagship projects.”

The first flagship is the Voisey’s Bay royalty which is a nickel, copper and cobalt project in Labrador, North Eastern Canada and this is the first large royalty that we purchased. At the time that we bought it, we set a record in the market for the highest price paid for a mineral royalty. Since then our record has been smashed multiple times but it was interesting when we did the I.P.O because we paid $150 million for it and prior to that the largest mineral royalty had been bought for $36 million. It was quite a coup for us and woke up the market for the potential size of this business” Silver says.

“Even in today’s world of much lower metal prices, Voisey’s Bay is still producing nickel and is reported to be one of the lowest cost producers in the world becauseof its exceptionally high grade nickel and copper that is mined with an open pit. The grades they are mining are equivalent to what most underground nickel mines get for grades so it’s really quite a stunning asset.”

Their second flagship is entirely different; The Pascua gold project located in Chile under development by Barrick Gold Corp.

“They’re projecting a cash operating cost of $20 - $50 dollars per ounce which would easily make this mine one of the lowest cost gold producers in the world. That mine is set to produce around 800,000 ounces a year. It has more than 20 million ounces in Reserves and Resources. So it’s a world class deposit; very low cost producer, very long life, and a superb operator that has a lot of experience operating at those elevations” Silver says.

Coming in third is their Western Australian asset which is a 1.5% NSR on three million acres around Kalgoorlie and Leonora, covering multiple gold mining districts.
“At the time we bought it there were almost eight million ounces of Resources, they’re now up to about 11.5 million ounces. There are multiple operating mines on this land and the property position covers six or seven gold mining districts. It’s a great story; very large land position with superb exploration potential. A lot of ounces have been defined but not been mined, new ounces have been found by several operators, ongoing production by several operators and other projects being prepared for production” Silver explains.

And fourth, but not least, Zink and Silver mention their Las Cruces copper royalty in Spain.

“They just produced their first copper cathodes last month. The mine has a plus 15-year life, high- grade copper and again it is projected to be a low-cost producer. The initial operation is a big open pit and then hopefully they will be able to go underground sometime in the distant future” Silver says.

“Add to that the dozens of other royalties we have, including more than 25 at the feasibility stage or later, or the royalties we have in energy such as coal and uranium and frac sand, and one can see that it is a really diversified portfolio” Silver says.

A rich, diverse portfolio containing various long-life projects? That’s just the beginning.

DIVERSITY & TIMING
“Most other royalties companies really emphasize precious metals only whereas we emphasize a diverse portfolio. One reason we do that is because our product is really designed for the lay investor. If someone wants to invest in commodities and they don’t know how or do not have a technical background, they can buy our stock and they get exposure to all of these different commodities and a full pipeline of opportunities from exploration through to production. We have a very large, organic growth path in our company” Silver says.  IRC is not at the whims of one commodity price.

Silver and Zink have the experience, business model and timing to continue their growth pattern for the foreseeable future.

“In many cases we got in at the bottom of the price cycle and since then the prices have gone up tremendously” Silver says.

“This first mover advantage to get to the scale we have is really a long-term advantage in the royalties industry” Zink says.

Their precise timing is not a thing of the past either. In fact, International Royalty is poised to adapt to any unforeseen market downturn, economic disaster or change in market trend, should such a hiccup strike.

“Given all of our experience in the mining business, we focus on low cost mines as well. We want to be well down in the cost curve for times just like today when commodity prices slip back and things get tough for the miners” Zink says.

The company is equally aware of the finite amount of royalties available.

“The ability to penetrate this market is very difficult, especially right now when there are only a dozen major royalties in the world and all of them are either owned by one of the big three or they’re just not for sale” Silver says.

“Unlike our peers, being diversified gives us more opportunities to buy royalties in the non-precious metals space.   I don’t know how the other companies are going to continue their growth path when essentially there are no super large gold royalties around anymore. Maybe they can grow through mezzanine financing and merchant banking business but in terms of buying existing royalties off the shelf, they have a much more difficult path ahead of them than we have ahead of us.”

THE ECONOMICAL EDGE
And so we return to our introduction. How have Mr Silver and his co-founders managed to create a “recession-proof” company?

“The royalty business does extremely well when the markets are down because our operating margins are so high; we have operating margins in excess of 70% and it’s a scalable business because as we grow our revenues we don’t need to add more staff so these margins increase” he says.

“Even when times are bad (like this year with the metal prices collapsing), almost all of our overhead is paid with the revenue we get in the first quarter of the year. We have three quarters of cash to reinvest and given how hard it is for mining people to raise money in the credit crisis now and how they really don’t want to raise it with equity because their share prices are down, we’re a wonderful alternative with mezzanine financing.  So we’ve been stepping into the breach and helping out those better opportunities.”

“Of course when metal prices go up, it is also good for the royalty business because we’re generating greater revenues but again we still have a very low-cost structure.”

So what is next for the diverse, economical, built-to-last company with their portfolio of enviable royalties, a stellar reputation and a trend for being that step ahead of the rest?

“Our goals are always the same; obtain long-life assets with superior returns. But the royalty business is different from many other industries. You don’t always get to choose what you want to buy. You might have to wait for a particular royalty to become available. Our short and long term goals are to continue to grow our revenues and create superior returns for our investors so that they’ll continue to hold on to our stock” Silver says.

“When we designed this company it was for the generalist. One of the great things about the royalties business is because we’re not subject to capital calls or operating costs like mines; we’re a lower risk way to invest. We wanted to create an investment vehicle for the generalist who might not have the time or background to understand the technical aspects of the mining business. We could be called a turbo-charged ETF.  ETFs only benefit from rises in  commodity prices.  Royalties benefit from rising metal prices,as well as future exploration discoveries, new production and expansion possibilities from the royalty lands.  Like ETFs though, we have no further capital or mine operating costs calls.”

And that is exactly what International Royalty Corporation has done, is doing and will undoubtedly continue to do.

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