Star Royalties ($STRR) is a precious metals and carbon credit royalty and streaming company. The company's green assets are held within its 61.9%-owned subsidiary, Green Star Royalties. At the end of May 2022, Green Star closed a strategic private placement and co-investment partnership with Agnico Eagle Mines.
Star’s management and board come from senior companies including Barrick Gold, Franco-Nevada, Newmont, and Lundin Mining. Their focus is on originating cash-flowing royalties and streams in safe jurisdictions and with industry-leading partners.
Star has royalties or streams on five mining assets: two in production, one nearing a financing package and construction decision, and two in exploration. The two assets in production are on track to generate over US$1M of revenue in 2022. The asset nearing construction is estimated to generate over US$7M of revenue in its first year of full production.
Star’s green subsidiary recently closed a significant capital partnership and private placement with Agnico Eagle Mines. Through this agreement, Star converted their C$7.8M of green investments into an equity stake in Green Star worth C$25M. Management has since followed this up with a quadrupling of their flagship regenerative agriculture ("regen ag") investment in the United States.
It is apparent that Star’s 2022 is likely to be a milestone year consisting of growth, advancement on its first mover status, and an increase in valuation:
Growth: I expect Green Star to deploy US$5M in its regen ag program (plus another US$15.6M in 2023) and announce new deals from its C$76-119M pipeline of green opportunities.
First mover status: In 2020, Green Star created the world's first carbon credit royalty on a forestry project in Ontario, Canada. Now they are introducing the royalty model to regen ag projects, and it’s catching on quickly. I expect Green Star to dominate the regen ag space through its right of first offer (“ROFO”) to fund all of Bluesource’s regen ag projects in the United States. This is significant, as Bluesource is the largest developer of carbon offset projects in North America.
Valuation rerate from Green IPO and Copperstone news: Star should rerate materially later this year upon the IPO of its green subsidiary, Green Star Royalties. I expect that the value of Star's holdings in Green Star will cover its current market cap, and as a result, shareholders will receive the growing gold royalty business for free. I also expect the mining side of the business to rerate when Sabre Gold announces a financing package for its Copperstone project, in which Star has a gold stream.
Star has 73.2M shares currently outstanding and 119.8M fully diluted. Using a $0.62 share price from June 1, 2022, this corresponds to a basic market capitalization of C$45.4M.
While I normally do not invest in companies that have a large percentage of their share structures in warrants, I have used these overhangs (or perceived overhangs) in the past to build positions in companies with strong fundamentals, having conviction that the share price would rally once the warrants expired or got exercised. For example, this strategy worked for me in 2019 with Minera Alamos (MAI.v). Minera's share price chart below shows what happened after their C$0.10-C$0.15 warrant overhang expired in April-June of 2019:
In Star's case, the share price can still see an increase of 61% (C$0.62 to C$1.00) before the warrants get in-the-money and potentially become an overhang. If Star successfully manages to trade above C$1.00 and get its warrants exercised, over C$40M of cash would enter the company at a premium to its current share price of C$0.62. Otherwise, these warrants will expire in February 2024.
Turning to the balance sheet, in Q1-2022 Star had US$2.9M of cash and no debt, resulting in an enterprise value (EV) of C$41.7M. Subsequent to Q1-2022, Green Star closed a C$15M private placement led by Agnico Eagle Mines. I expect Star’s cost of capital on the mining side to improve as Copperstone enters construction and Green Star completes its IPO.
Star has a large institutional shareholder base for a sub-C$50M company, which includes ICM Limited, Stephens Investment Management, Adrian Day's Euro Pacific Gold Fund, and US Global Investors:
Star's loyal shareholder base has kept it insulated from the recent market turmoil, as seen in its share price performance compared to peers in the trailing 3 months:
Management and Board
I am comfortable having 80% of my resource portfolio in Star because of the management team and board. The CEO Alex Pernin and Head of Investor Relations Dmitry Kushnir have their direct contact information available in their corporate presentation, and they have been quick to reply and always with detail. Star's CIO Kevin MacLean is an award-winning portfolio manager and has elected to never take a salary. Insiders are significant shareholders, and they haven't sold a single share.
In addition to Alex, Kevin, and Dmitry, Star has management and directors with experience as senior managers, consultants, executives, or directors of billion-dollar companies, including Lundin Mining, Seabridge Gold, Franco-Nevada, Barrick Gold, Newmont, and Fortuna Silver Mines. See the table below for the education, experience, 2021 cash earnings, and share ownership of each executive/director:
Star and Green Star want to be the royalty and streaming companies of choice in the precious metals and green sectors, respectively. From their portfolio management and equity research days, management are aware of the typical red flags seen in resource companies: egregious compensation, overpromotion, capital mismanagement, etc. Because of this, Star wanted to start from the ground up and be top-quartile in all governance metrics: that meant they went public with a fresh company, didn't have a 1-cent founder round, incorporated in Canada with no offshore tax havens, set below-market compensation that is equity-driven, appointed a majority independent board, and the list goes on. If you read through their MD&As and corporate presentations you'll see what I mean: excellent financial disclosure, clear guidance and goals, a history of every financing, and detailed asset information.
On the precious metals side, Star's strategy is to originate royalties and streams with a 70/20/10 framework: 70% to projects already generating cash, 20% to projects that will generate cash within a couple of years, and 10% to projects in advanced development or exploration. Star also focuses on originating or creating their deals rather than buying existing royalties because it allows them to do thorough due diligence and incorporate custom terms to protect their investment.
On the green side, Star works with leading developers such as Bluesource to originate carbon credit projects in the voluntary and compliance carbon markets, generating 20%+ IRRs.
What are carbon credits and why are they getting so much attention from the market?
Star says, "Carbon credits are generated from any activity that either prevents or reduces carbon emissions or improves carbon sequestration." One carbon credit is equal to one tonne of carbon dioxide-equivalent emission reduction. These credits are sold to buyers who wish to (or must) meet emissions reduction targets.
To date, Green Star's investments have focused on regenerative agriculture and forestry projects. Their recent partnership and financing with Agnico Eagle unlocked significant value: Star’s C$7.8M of green investments was converted into an equity position in Green Star worth C$25M – that’s a 3x ROIC in short order. This financing enabled Green Star to quadruple the size of its flagship asset in regenerative agriculture, from US$5M to US$20.6M. This program will adopt 1.32 million acres of US farmland into regenerative agriculture practices and create carbon credits to sell in the voluntary market.
At first, Green Star's partnership with Agnico surprised me, as I was expecting their capital partner to be a financial institution. However, upon further reflection, it’s clear to me how this deal benefits each party. Agnico, one of the largest gold mining companies (C$32B market cap), has a net zero target for the year 2050 and is aggressively looking for ways to reduce emissions and find sources of quality carbon credits. By forming this partnership, Agnico can originate carbon credits and participate in the equity appreciation of Green Star, which should act as a hedge for rising carbon prices. Green Star benefits by having a deep-pocketed capital partner and end buyer for its premium carbon credits at fair market value.
Star has five mining royalties/streams:
Copperstone is a fully permitted, past-producing gold project in Arizona that is operated by Sabre Gold Mines (SGLD.to). Star originated a stream that consists of a US$18M payment to Sabre, made in three tranches, in exchange for the following gold deliveries, which Star can purchase at 25% of the LBMA spot gold price:
- 9.9% of gold produced until a cumulative 21,000 ounces are delivered
- 3.3% of gold produced until a cumulative 27,200 ounces are delivered
- 1.2% of gold produced thereafter
So far, Star has made two of the three US$6M payments to Sabre. The last payment will be released upon completion of certain conditions, including Sabre's sourcing of the remaining capital required to restart the mine. When financed, Sabre is expected to have a 9-month construction build before producing 40,000oz per year. At US$1,800 gold, a full year of production would deliver to Star 3,960 ounces, generating US$7.1M in revenue at a cost of US$1.8M. This will result in Star receiving more than its invested capital (1.6x) before the stream steps down from 9.9% to 3.3% of gold deliveries.2. Elk Gold
Elk Gold is an operating gold mine in BC, Canada run by Gold Mountain Mining Corp (GMTN.to). Star paid US$10M cash, 1.7M shares, and 0.8M warrants (C$0.70 strike, Sept. 2023 expiry) to Almadex Minerals to acquire an existing 2% NSR on the property. Elk is expected to produce 19koz per year for three years while they conduct an environmental assessment to increase production rates. If and when the assessment is approved, Elk is expected to produce 65k-100koz per year. Elk sells its ore to New Gold's New Afton mill and receives 89% of the metals payable. Therefore, at US$1,800 gold, I expect Star to receive ~US$600k/year before ramping up to US$2M-3.2M/year. While the Elk deal takes longer than Copperstone to recoup its investment, I am particularly interested in the exploration potential. Elk has recently increased its resource estimate twice after doing two phases of drilling.
Keysbrook is an operating mineral sands mine in Western Australia run by a subsidiary of a large Japanese conglomerate. While an unusual commodity for a precious metals company, Star wanted to have a cash-flowing royalty out-the-gate to cover most of their general and administrative expenses. Star purchased this existing 2% GRR from Resource Capital Fund VI L.P. for US$3M in cash. In 2021, the Keysbrook royalty generated US$692k of revenue to Star.
4. Baavhai Uul
Baavhai Uul is an early-stage lithium exploration property in Mongolia operated by Ion Energy (ION.v). Star purchased this 1.5% GRR for US$188k.
5. Bayan Undur
Bayan Undur is an advanced copper-silver exploration property in Mongolia operated by Aranjin Resources (ARJN.v). Star purchased this 2% NSR for US$200k and has a right of first refusal (ROFR) on any future silver stream.
Green Star Royalties
Green Star has four royalties:
1. Regenerative Agriculture
Regenerative agriculture is Green Star's flagship asset. Green Star has partnered with Bluesource to adopt 1.32 million acres of US farmland into regenerative agriculture practices and create carbon credits to sell in the voluntary market. They expect to invest US$5M in 2022 and US$15.6M in 2023 for a total of US$20.6M. Farmers will improve their water management, reduce or eliminate the use of nitrogen-based fertilizers, and implement low/no tillage and cover cropping practices. Additionally, farmers will use Locus AG's soil probiotic to enhance the sequestration rate of carbon into their soils. Bluesource expects 50-75% of the carbon credits generated to be "removal" credits, where carbon is sequestered, and 25-50% to be "reduction" credits, where emissions that would have occurred under status quo practices are prevented. Using US$20 per regen ag credit, Green Star expects to generate the cash flow equivalent to over 220k carbon credits in 2024 (US$4.4M), which will increase to 560k credits per annum starting in 2025 (US$11.2M). The investment has a 11.5-year term.
2. Elizabeth Métis Settlement (EMS)
The EMS forestry project is in Alberta, Canada and managed by Bluesource. As the trees in this forest grow and sequester carbon, credits are generated and sold to federally regulated industrial emitters. The proceeds from credit sales, net of expenses, will be split with the majority going to EMS. For C$900k, Green Star acquired a 40.5% GRR on EMS's revenue, which it expects to be the equivalent of ~9,000 credits per year at Canada's federal carbon price (C$50/t in 2022, ramping up to C$170/t in 2030). The investment has a term of the earlier of 10 years from first revenue or until 225k credits are issued and sold.
3. Lac Seul First Nation Forest (LSFN)
The LSFN forestry project is in Ontario, Canada and also managed by Bluesource, this time in partnership with Big Tree Carbon Inc. This project operates similarly to the EMS project, except the financial terms are different: Green Star paid C$155k for a 16% GRR on Big Tree Carbon's revenue, which it expects to be the equivalent of ~2,500 credits per year at Canada's federal carbon price.
Green Star's first renewable technology royalty is on a Toronto-based company called Mobismart. Mobismart develops mobile solar power generation systems with integrated battery storage. For C$300k, Green Star acquired a 2.5% GRR on all Mobismart revenues. The investment has a term of 15 years. Mobismart can repurchase the royalty for C$10M in cash in connection with a potential go-public event.
There are several small cap royalty and streaming companies in the precious metals and green sectors. To assess their competitiveness and identify the companies positioned for greater success, I recommend comparing the resumés and track records of management between various companies. As cliché as it may sound, the people make the business, and in the small cap royalty sector, this is especially true. I believe it is fundamental for a company to have management with skin in the game and come with a proven background of success.
When assessing a gold royalty and streaming business and its ability to source accretive deals, I pay attention to cost of capital and management’s expertise, alignment, and industry prominence. While the sector is competitive, companies that make it past the junior stage tend to realize premium valuations. As seen in the table below, the average intermediate/senior precious metals royalty company currently trades at a 12x enterprise value (EV) to next twelve months (NTM) revenue multiple, 30x EV to NTM EBIT multiple, and 35x price to NTM earnings ratio.
As for the green side, I've found it to be about establishing quality partnerships with leading project developers. In Green Star's case, they have partnered with Bluesource, which is North America's leading carbon credit project developer. Green Star has a ROFO on all Bluesource regenerative agriculture projects in the US. Green Star is also sticking to North America and gaining recognition and expertise, while peers are investing broadly all over the world. I believe it’s harder to forge the necessary relationships, customized terms, and clout without a focused approach.
While I am incredibly bullish on the outlook for Star, there are some aspects to consider:
- Carbon credits are part of a nascent industry, and carbon prices are influenced by social and political pressures and uncertainty.
- Copperstone is taking longer than expected to secure the rest of the financing it needs to restart the mine. Having Star's Executive Chairman on Sabre's board eases some of my concerns. Also comforting is that, as stated in the Copperstone Stream Agreement filed on Sedar, Sabre can only spend the US$12M it has received to date on the "payment of Project Costs in accordance with the Development and Mine Plan." Project Costs exclude things such as general and administrative (G&A) expenses.
Green Star IPO to surface value while Star’s consolidated revenues ramp up above US$20M.
Star generated US$692k of revenue in 2021, all from the Keysbrook royalty. With their current deals, management expects this to rise above US$5M in 2023, US$15M in 2024, and US$20M in 2025.
To build on this revenue, I expect Green Star to expand its regen ag program even further. In a recent panel discussion with TD Securities, the company said there are ~900M acres of farmland in the US. Of that, ~250M acres are cropland. Around 90% of that cropland can have carbon programs, or ~225M acres.
Star invested US$20.6M to have a royalty on 1.32M acres that is expected to generate US$11.2M in revenue per year at its peak (using a US$20 carbon credit price). The company has a target to reach 5M acres with Bluesource and Locus Ag (soil amendment company). Scaling up the metrics from their current program, this would result in a US78M investment for 5M acres and US$42M in peak revenue generated per year.
A US$78M investment would be significant, as every dollar invested by Green Star to date has resulted in a 3x valuation uplift to Star (C$7.8M of green investments turned into a C$25M equity stake). Even if this 3x metric decreases by half, you can see how an upsize in their regen ag program from US$20.6M to US$78M would result in an equity stake that is multiples of Star’s current market cap.
Even without this potential expansion, Star and Green Star have lots of room to run. In a recent interview, the company said that as Green Star invests the proceeds it raised from Agnico, the value of Star’s equity in Green Star will increase to C$0.88 per share. Furthermore, if you add the book value of Star’s mining royalties, this adds another C$0.43 per share. Together, this gives Star a current fair value of over C$1.30.
If the market doesn’t appreciate Star’s equity holding in Green Star as a private company, this will soon-be addressed through Green Star’s IPO. Post-IPO, I expect that Star’s equity position in Green Star will cover their current market cap, and as a result, shareholders will receive the growing and cash-flowing gold royalty business for free.
Disclosure: I have a beneficial long position in the shares of one or more of the companies discussed in this article, either through stock ownership, options, or other derivatives. I wrote this article without external assistance, and it expresses my personal opinions. I was not compensated for this article, and I have no business relationship with any company whose stock is mentioned in this article.
My resource portfolio is weighted ~80% to STRR at an average cost of C$0.55 per share. I plan on holding/adding for the long term and throughout cycles.