Inflation is the boogeymanIt is essential for today’s investor. It has a profound impact on the investment landscape. However, adaptable investors can still be successful if they have the right mindset.
In particular, I am referring specifically to the inflation Milton Friedman described in this quote:
InflationIs always and everywhere a monetary phenomenon in that it can only be created by an increase in the amount of money faster than the output.
After the U.S. M2 money supply increased in Q2 2020, I set my portfolio up for inflation. I increased my exposures to energy, commodities and agriculture, as well as real estate and precious metals.
History has shown that inflation doesn’t move in a straight line.
Inflation is indeed temporary.
Below is a chart showing the population-adjusted growth in M2 money stock compared to changes in the Producer Price Index. Because it measures increases in costs more directly, the PPI is a better indicator of inflation than CPI. PPI growth tends not to follow declines of M2 growth without a lag. M2 growth has already fallen. Two conditions are almost certain for the future, even if inflation falls: 1. money stock will continue growing, and 2. Inflation will be back.
These are the conditions that make this the ideal environment for an inflation hedge:
- Inflation drives revenue growth.
- Inflation is not a threat to expenses.
- Different inflation cycles can affect cash flow.
- Inflation can cause stagnation in growth and longevity.
- Political risk is reduced
This is why the streaming business model and precious metals royalty are a good fit. This is especially true given the many signs that we are entering a period of stagflation that harms industrial commodities. I own several names in this sector, including Royal Gold Inc. (RGLD). Wheaton Precious Metals Corp. They are all great businesses. If I had to choose one, it would be Maverix Metals Inc. (NYSE:MMX).
Inflation boosts revenues
Hard assets perform best during inflation due to currency devaluation. WisdomTree – ResearchIt is clear that gold has a strong beta against inflation, just behind commodities. Gold performs well when inflation is high or falling. Data from IncrementumThere is also evidence that precious metals outperform commodities in times of falling inflation.
Maverix is a precious metal Streaming and royalty (R&S) Company. R&S companies provide upfront funding and liquidity to mining operations, in exchange for a portion of the mine production. This share can come in the form of a royalty on gross revenues, or a stream arrangement to purchase a portion of production at discounted prices. Maverix’s most popular asset is Net SmelterReturn(NSR) Royalties on Gold These royalties give MMX a share (usually 1-3%) in gold gross revenues less refining cost. These royalties are often applicable to entire land properties and all resources on them, even those that have not been discovered. With increased mine gross revenues and production, company revenues rise. This is often due to higher metal prices.
Royal Gold (RGLD), one the largest R&S companies has returned more than 2,100% since 1995. This is 5 times more than gold.
MMX is a younger company, but it has also outperformed gold in the last four years.
Inflation-resistant Expenses
Because most company expenses are fixed, MMX is immune to cost inflation. After MMX has paid upfront for R&S contracts, they have very low overhead costs and a small staff of only 9 employees. MMX does not have responsibility for the operation of the mine and does not pay operating expenses. MMX enjoys high revenue per employee, net profit per employee, and profit margins. Below, you can see how MMX compares with AAPL, GOOG and XOM. MMX is thus one of the most resistants to wage inflation.
Inflation has increased by 6.7% and CPI by 7% respectively, so the return on equity for companies is somewhat related.
Over the past 5 years, MMX operating costs have increased gradually while the cost of goods sold is increasing significantly. This is actually a good sign, as it is due to higher streaming costs as a consequence of higher metal prices. The company’s Q4 2021 financial statement explains:
Inventory is first recorded when refined gold or silver is received by the Company under a Stream arrangement. The cash payment and depletion associated in the underlying Stream interest are both included in inventory. Once inventory has been sold, the inventory amount is recorded as cost and depletion.
As you can see from the graph, operating expenses are more important than revenues during high inflation. This is what I seek.
Many profit margins have shrunk due to inflation, but MMX has experienced the exact opposite. The company anticipates that revenues will increase. They are a major contributorGet to the bottom.
Robust Through Cycles
R&S companies can leverage the gold and silver prices, which results in significant outperformance during periods of rising price. Underperformance is reduced during times of falling prices. During the bear market 2012-2015, gold lost 30%. Comparatively, the average decline for the three largest R&S firms was 23%. Because of the low expenses, the business model can be more profitable and maintain profits.
During low metal prices, mining operations may be temporarily suspended. R&S companies do not lose revenue if production is suspended. delayedThey still have rights to the resources that will be mined if economic conditions improve.
2021 was the year that MMX was added. VanEck Vectors Junior Goldminers ETF (GDXJ). This increased company exposure and liquidity. MMX performed better than GDXJ over the correction period of 18 months, a difference of 28%
Maverix stands out from its peers due to its 8.39% relative insider ownership. Additionally, 55% of shares heldBy the stalwart mining companies Newmont and Pan American Silver. Ross Beaty and Eric Sprott are among the shareholders. These industrial giants have a vested stake in MMX, which is a vote to confidence in the company.
Growth and Longevity
MMX has a portfolio that includes 125 streams and royalties14 are included in the production. Those 14 produced 32.026 gold equivalent troy ounces(GEOs), for the company in 2021. The company has a gross margin of 90% and is planning to guide 32-35,000 GEOs for 2022. Over the last five year, MMX’s GEO production has grown at a 21.7% CAGR. If the silver and gold markets remain favorable, I anticipate several years of GEO product growth. For the foreseeable future, exploration of existing assets and newly acquired ones should be used to replace resource depletion.
GEO production growth has been on average 30% over the last four years, revenue growth 40% and CFO growth 81% over the past four years. CFO growth has been 2.6x faster that GEO growth. This is a sign of the R&S model’s leverage.
Maverix has an average of 3-4 new R&S dealsEach year, the sector acquired three new royalties in 2022. Attractive acquisitions in this sector are becoming more difficult to find because of high sector competition and the fact that mining companies are more profitable than others and are less interested in financing.
I expect revenue growth to MMX to be driven by expansion of existing assets and the development of assets that are not yet in production. Agnico Eagle is one example. Drill 80,000 MetersAt the Hope Bay mine to search for additional mineralization. MMX is entitled to a 1% NSR royalty on the property and will not incur expenses for exploration.
Mitigating Political Risk
As the public experiences lower standards of living, assets that are inflation-friendly come under increased scrutiny. Voters are concerned about energy, shelter, food, and other issues. Politicians are often pressured to take action. This can lead to policies that harm investors like price controls, rationing and nationalization.
Due to climate change and environmental degradation, the energy sector is at risk of political instability. The U.S. government is working to combat energy inflation. Ethanol rules not enforced Oil from the strategic reserve was releasedStates have been suspending gasoline taxesPoliticians, Energy companies in the spotlightIncludes Proposed windfall taxes.
Mining is generally viewed negatively by the public. Voters have the power to convince their representatives to tax, seize or seize resources they believe belong to them. Local communities can protest mining operations, Blockading roads to stop operations. Many countries are seeing movements gain momentum, including in the United Kingdom. Peru Chile.
Gold is not immune to these risks. In 1933, President Roosevelt signed Executive Order 6102The United States confiscated gold from citizens of the United States. The reason was “An Act to provide relief for the existing national emergency banking, and other purposes.” This could be repeated to “control inflation.”
Even real estate can have weaknesses. Rising rents are Politic condemnation was met. Rent control may be an option for governments. Eviction moratoriums. The situation has been Many landlords are facing dire financial circumstances.
These are the main issues with R&S, but they also have some benefits. Geographically diversified R&S portfolios limit risk to any one jurisdiction. Each R&S agreement has a small resource interest, which reduces risk to any mine.
The model is protected against government intervention since the mining operator acts between taxes and regulations and R&S. Investors are not allowed to take gold from the miner, which protects them against gold confiscation. After the passage of EO 602, investors still had the right to own shares in gold mining companies.
The R&S model has been largely hidden from the public. Precious metals are not available for purchase. Visible Everyday necessity and the price of little direct impact on living standards. The average person is familiar with the existence of silver and gold mines, but not aware of R&S.
Contract risk can be a problem for R&S businesses. Mining operators might refuse to deliver assets to the R&S firm, which could have a serious effect on profitability and NAV.
Below is a analysis of the political risks of MMX assets based upon data from the Annual Survey of Mining Companies, Fraser Institute, 2021. The Policy Perception Index ranks each jurisdiction among 84 to assess political risk. Overall, I think the portfolio is above-average for jurisdictional risks. The Omolon Hub in Russia, which was Maverix’s second highest-paying asset, is also owned by Maverix. 14.5% of CFOs by 2021. This is a significant new development that will likely impact share price. Operation currently runs normally.
Jurisdiction | # of assets | % of NAV 2022 | 2020: % of Revenue | Fraser Institute Policy Perception Index 2021 Average Ranking |
United States | 47 | 45% | 23% | #11 |
Australia | 10 | 12% | 25% | #19 |
Mexico | 11 | 8% | 16% | #54 |
Canada | 19 | 7% | 14% | #29 |
Other | 28 | 29% | 22% |
See below |
Other Jurisdiction | Fraser Institute Policy Perception Index 2021 Average Ranking |
Chile | 38 |
Russia | 46 |
Argentina | 47 |
Ghana | 47 |
Burkina Faso | 60 |
Brazil | 68 |
Peru | 69 |
DRC | 78 |
Honduras | Not rated |
Guatemala | Not rated |
Cote d’Ivoire | Not rated |
Dominican Republic | Not rated |
Armenia | Not rated |
French Guiana | Not rated |
MMX Valuation
MMX trades at a low price multiples compared to its peers and historical averages. Forward EV/EBITDA/Price to Cash Flow is 12.7 and 15.7, respectively. The charts do not include data for RGLD. Its current P/CFO multiple of 18.1 is the case and its forward EV/EBITDA number is 18. The company estimated its revenues at the end of 2021. NAV price at 1.1It is also one of the lowest-valued sectors.
MMX is the peer group with the lowest market cap. It is easier for smaller R&S firms to grow at a strong rate, as evidenced by the increase in revenue per shareholder over the past few decades. Shareholders will be looking forward to MMX’s continued success. Future re-rates for the companyas it transitions into an R&S company.
Summary
Everyone is concerned about inflation. Inflation has become a common concern. I am always suspicious of consensus and the data supports that disinflation is possible. But, a higher money supply and higher inflation over the long-term is a good thing. near guarantee. As such, I always have inflation-oriented assets in my portfolio. I’m not always long real estate. Neither energy nor agriculture. The last thing that needs to be cut is precious metals royalty and streaming businesses. The alpha is just to good.