Finding future value

Investors need to be always clear on a company’s USP, because the best time to hunt for discounted investments is during a market downturn. What are the company's objectives, and how solid is the management team? That would be two things Warren Buffet asks. Another metric we might consider is the Price-to-Book ratio (P/B), as it helps highlight companies that may be trading below value.

To calculate P/B we need to know 3 things. The current share price of a company, the Book Value, and the number of shares outstanding. The Market Cap of a company is the share price multiplied by outstanding shares. The book value is the net assets of a company. To find the Price-to-Book ratio (P/B) we divide the Market Cap by the Book Value per share. P/B allows an investor to understand how much they’re paying relative to the net value of assets. So, this metric is best used for companies that have tangible assets, rather than earnings from proprietary technology.

It is important to track a company's value over time and to compare it to the rest of the industry. Investors are paying a premium when the P/B ratio exceeds 1.00, as they believe the company’s assets will deliver positive returns on investment (ROI). Over 10 years the average Royalty company ROI is greater than 2.00x, compared to a 0.17x ROI from government bonds.

If all goes wrong and assets need to be sold off, a company with a P/B below 1.00 has a better chance of giving investors back their money. As net assets would be worth more than the market is currently pricing the value of the company. When P/B falls or turns negative it is a red flag, as it can indicate that investors are less confident about the company's ability to continue to generate revenue from its assets.

In 1986, Franco-Nevada Corp. bought a royalty on Goldstrike, a project in Utah, USA. Since then, that single royalty has generated 500x ROI. Over the last 12 months (LTM), Franco-Nevada has returned a P/B of 4.40x on the largest and most diverse portfolio in the industry. This makes them a great benchmark. At the other end of the producing asset scale, Metalla Royalty & Streaming have 1 producing asset and a P/B (LTM) of 2.70x. The fastest growing royalty company is Vox Royalty Corp. who have demonstrated that they can help a mine increase production, expand resources, and extend a mine's life. Their P/B (LTM) is equal to Franco Nevada's coming in at 4.40x with 5 producing assets set to increase significantly during 2022.