In a July 5 research note, analyst Adam Schatzker reported that Research Capital Corp. initiated coverage on Empress Royalty Corp. (EMPR:TSX; EMPYF:OTCQB) with a Buy rating and a CA$0.70 per share target price. This compares to the current share price of about CA$0.37.
Schatzker presented the investment thesis for Empress Royalty, highlighting the company's business model, its potential for high returns and its imminent turning point.
Empress' strategy is to acquire small, often overlooked royalties and streams by leveraging existing partnerships, Schatzker indicated. Current partners are Terra Capital, in Australia; Accendo Banco, in Mexico; and Endeavour Financial, operating globally.
Since it debuted in March 2020, Empress has acquired two precious metals royalties (Pinos and Manica) and is in the process of adding a silver stream (Tahuehueto) to its portfolio.
Empress "has proven that its business model is achievable and differentiated from its peers such that it will try to avoid participating in the highly competitive segment of the royalty/streaming industry where investment returns are often very low," Schatzker wrote.
He described Empress' royalties.
Pinos is a 1% net smelter return (NSR) royalty on future gold and silver production from Candelaria Mining's Pinos project, of which Accendo Banco owns 9%. Pinos, located in Mexico, is expected to produce at least 13,000 ounces (13 Koz) per year on average for seven years, and the project offers upside. According to Research Capital, the Pinos royalty has a CA$1.6 million (CA$1.6M) net present value discounted at 5% (NPV5%) and a 1% internal rate of return (IRR). Empress paid US$1.5M for this royalty.
Manica is a 2.25% NSR royalty on the Manica gold project in Mozambique expected to produce 30 Koz per year for seven years. It, too, offers regional upside potential. The Manica royalty has a CA$5.8M NPV5% and a 35% IRR, as calculated by Research Capital. Empress paid US$2M for this royalty.
Tahuehueto is a silver stream delivering 100% of the payable silver in concentrates up to 1.25 million ounces (1.25 Moz) then 20% afterward from the Tahuehueto project in Mexico. Annual production is a projected 360 Koz on average. Of the US$5M purchase price, Empress has paid CA$2M. Research Capital estimates the Tahuehueto stream has a CA$27.9M NPV5% and a 105% IRR.
"Each of the royalty purchases has been relatively small ... but the expected rates of return (as per [Empress] and our estimates) are generally quite high (with the exception of one where the exploration potential is expected to provide incremental value over the long-term)," Schatzker wrote.
Schatzker noted that Empress should begin garnering cash flow in the near term, as all three of its royalty assets are slated to start production between Q3/21 and mid-year 2022. Manica is expected to be the first to go online, in Q3/21, followed by Tahuehueto in Q4/21 or Q1/22 and then Pinos in Q1/22 or Q2/22.
For Empress in 2021, Research Capital forecasts revenue of CA$389,000 and an EBITDA of -CA$2.4M, and for 2022, CA$6.6M and CA$3.8M, respectively.
"We believe 2021 and 2022 will be important years for" Empress, Schatzker wrote.
[NLINSERT]Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
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Disclosures from Research Capital Corp., Empress Royalty Corp., Initiating Coverage, July 5, 2021
RELEVANT DISCLOSURES APPLICABLE TO COMPANIES UNDER COVERAGE
1. Relevant disclosures required under Rule 3400 applicable to companies under coverage discussed in this research report are available on our web site at www.researchcapital.ca.
2. This Issuer has generated investment banking revenue for Research Capital Corp.
ANALYST CERTIFICATION
I, Adam Schatzker, certify the views expressed in this report were formed by my review of relevant company data and industry
investigation, and accurately reflect my opinion about the investment merits of the securities mentioned in the report. I also certify that my compensation is not related to specific recommendations or views expressed in this report.
Each analyst of Research Capital Corporation whose name appears in this report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the analyst’s personal views and (ii) no part of the research analyst's compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research report.
Research Capital Corporation, its directors, officers and other employees may, from time to time, have positions in the securities mentioned herein.
