In an April 19 research report, Red Cloud Securities analyst David Talbot reported that Empress Royalty Corp. (EMPR:TSX; EMPYF:OTCQB) acquired a silver stream on Telson Mining's Tahuehueto project in Durango, Mexico, for US$5 million. Production is expected to start there around year-end 2021.
"We view the agreement as an important stepping-stone for Empress, representing almost three quarters of its early cash flow," Talbot wrote "The deal should also highlight its ability to provide nondilutive funding solutions for junior miners, particularly those with near-term gold and silver production.
Talbot outlined how the transaction will benefit Empress. Over the 10-year term of the stream, he noted, about 183,000 ounces of silver should be attributable to Empress each year, according to Red Cloud's estimate. Initially, stream payments to Empress will be at 100% for the initial 1,250,000 ounces of silver production then will drop to 20%.
This projected production equates to annual cash flows for Empress of US$3 million, Talbot noted, reflecting a US$24.6 million net asset value discounted at 5% and a roughly 84% internal rate of return, Talbot noted.
"The deal speaks to Empress' strategy of creating royalty/streams to reduce risk and ensure near-term cash flow, rather than buying third party royalties," wrote Talbot.
He described how Empress is to pay the $5 million for the stream. The company will pay the first tranche, US$2 million, as part of a US$25 million financing package that Accendo Banco and Endeavor Financial are offering Telson.
Empress will remit the second tranche, US$3 million, following completion of a US$12 million Accendo Banco loan and a refinancing package, both due in Q2/21. This loan must close for the stream to go into effect. If it does not, the stream agreement will be terminated, and Empress' first tranche of US$2 million will be converted to shares.
Given the arrangement surrounding this stream, Talbot wrote, "Empress offers a unique value proposition with exclusive access to Mexican royalties and streams through an alliance with Accendo Banco and Endeavor Financial."
Empress has two other pending deals, both on existing gold production, and the closing of each is a potential upcoming catalyst for the stock, Talbot indicated. One is a US$10 million gold stream/royalty on production from a project in Peru. The other is a US$2.5 million gold stream on production from a Kenya project.
Red Cloud does not have a rating or target price on Empress, but Talbot purported the stock should rerate from its current CA$0.41 per share given the company's deal pipeline and relative valuation.
"The company is focused on closing several deals in its current pipeline this year, and we believe the next few months will reflect the corresponding increases to bottom line revenue and ultimately bolster its share price," he added.
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Disclosures from Red Cloud Securities, Empress Royalty Corp., Exploration Update, April 19, 2021
Part of Red Cloud Securities Inc.'s business is to connect mining companies with suitable investors. Red Cloud Securities Inc., its affiliates and their respective officers, directors, representatives, researchers and members of their families may hold positions in the companies mentioned in this document and may buy and/or sell their securities. Additionally, Red Cloud Securities Inc. may have provided in the past, and may provide in the future, certain advisory or corporate finance services and receive financial and other incentives from issuers as consideration for the provision of such services.
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