Investors need to be always clear on a company’s unique selling proposition (“USP”) because the best time to hunt for discounted investments is during a market downturn. What is the company's strategy, and how solid is the management team? Those 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 are allocating capital efficiently.
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 Price (also known as the Market Cap of a company) is the share price multiplied by outstanding shares. The Book Value is the difference between total assets less total liabilities. To calculate the P/B per share, we divide the Market Cap by the Book Value. P/B allows an investor to understand how much they’re paying relative to the net value of assets or net capital invested. Investors typically ascribe a premium P/B multiple to companies that are able to consistently acquire high-quality assets at below-market prices.
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 the last 10 years, the average royalty & streaming mining company ROI has been greater than 2.00x, compared to a 0.17x ROI from government bonds (Source: Visual Capitalist, February 2022).
In the royalty and streaming space, when the P/B increases, it indicates a company has quality assets, acquired at reasonable prices, which will generate a premium ROI to its peers for future revenues generated vs. purchase price of the assets acquired. 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 or that its assets are overvalued.
In 1986, Franco-Nevada Corp (“Franco-Nevada”). bought a mining royalty on the Goldstrike gold mine in Nevada, USA. Since then, that single royalty has generated over 500x ROI. Franco-Nevada currently trades at a P/B multiple of 4.40x on the largest and most diverse royalty portfolio in the industry – a testament to their management team’s ability to acquire high-quality royalties at below-market prices.
This makes Franco-Nevada the benchmark in the $70 billion mining royalty industry.
The fastest-growing royalty company over the past two years has been Vox Royalty Corp. (“Vox Royalty”), which has created $145 million in equity value from total capital invested of $33 million – an equal P/B multiple to Franco-Nevada's at 4.40x. This comparable P/B multiple indicates that Vox Royalty has been able to create a similar sector-leading return on invested capital as $40B Franco-Nevada, no small feat for a $145 million company that only went public in May 2020.
Mining royalty companies have historically offered investors exponential commodity-linked returns, particularly during periods of high inflation. Their success is determined by their ability to identify the right mining projects and acquire royalties over them at disciplined prices. Companies with premium P/B multiples such as Franco-Nevada and Vox Royalty have consistently demonstrated this knack for finding deep value by acquiring interesting mining royalties.
Investors looking for commodity-linked inflation hedges within the mining royalty industry are wise to review P/B multiples as a proxy for management and asset portfolio quality, which are often indicators of potential future returns.