Silver Crown Royalties, unique, compelling 100% silver leverage

Silver juniors have had a terrible six months, truly awful. I argue the carnage is unwarranted, but it is what it is. Of the 150 Ag-heavy names I follow, roughly two-thirds are down more than 50% from 52-week highs!

The underlying silver price is down more than 50% from nearly $122/oz in January to today’s $59/oz. I say the devastation is unwarranted simply because I continue to believe the medium-to-longer term outlook for silver is bright.

We’re in year six of mined silver deficits, as stagnant mine supply lags robust industrial demand. Growth is driven by usage in solar panels, EVs, 5G, AI/data centers, power-grid expansion, electrification, high-tech electronics, and defense applications, where silver has little-to-no viable substitutes.

Silver’s byproduct nature, and China’s reclassification of it to a strategic material, further constrain supply and restrict exports. Analyst targets have come down in the past several months, but there are numerous bullish outlooks (from reputable financial firms, not online coin dealers). Targets ranging from $75 to $100/oz over the next 6-12 months are easy to find.

A company I continue to love for its very rare 100% Ag leverage is Silver Crown Royalties. Silver Crown’s latest transaction is one of the primary reasons its share price has held up far better than Ag-heavy companies and royalty/streaming peers.

In early June, management, led by CEO Peter Bures, announced the acquisition of two existing 1% net smelter return royalties (“NSRs”) on Titiminas Silver Inc.’s Madre Sierra project in central Peru for US$6M in cash, plus US$1M to the holder of each royalty upon first royalty payment. The US$6M was satisfied by cash on hand.

Madre Sierra is a past-producing mine with numerous surface access points and working faces targeting small scale (70 to 100 tonnes per day [“tpd”]) production starting as soon as next quarter. Titiminas Silver’s target production rates are 1,000 to 1,100 tpd in 18 to 24 months.

This is a fairly high-grade mine (~140 g/t Ag), with solid reported recoveries in the mid-to-high 80’s percent. Silver Crown anticipates run-rate annual revenue equal to ~60,000 ounces/yr within two years.

Readers should note that Titiminas Silver controls a significant land package in a past-producing camp, so the NSRs could potentially produce cash flow for decades. Silver Crown Royalties had ~C$15M in cash before paying out the US$6M.

A prior royalty, on PPX Mining, really moved the need, but this latest deal will generate a similar amount of cash flow, for a longer duration. At an assumed US$70/oz Ag over the next several years, the IRR on PPX would approach 100%. Notably, when the PPX royalty was signed, the Ag price was < $31/oz, about half the current level and a quarter of January’s ATH Ag price.

Minimum deliveries (the cash equivalent of) 14,062.5 ounces of Ag/quarter, commenced last quarter. At the front-month Ag price of ~$59/oz, this single royalty equates to ~C$4.6M/yr. in cash flow.

PPX runs through early-2030. As a reminder, SCRI holds a 15% royalty on PPX’s Igor 4 project in Peru. CEO Bures has over 10 deals like this one under careful review at any given time.

Important shareholder Michael Gentile participated in a long interview with Crux Investor about multiple investments, but he was most excited about two companies, including Silver Crown.

Mr. Gentile is the largest shareholder in over 25 juniors, sits on several company boards, and is a valued strategic advisor. In 2021 he co-founded Bastion Asset Management, Montreal-based hedge fund managing over C$700M.

While he appreciates the royalty model and would buy royalties at attractive prices, he has major issues with the micro-cap junior royalty space. He says many junior royalty companies claim they will be “the next Franco Nevada.” Yet Franco Nevada succeeded largely because it was essentially the only company creating royalties.

It had first pick of deals, wrote high-IRR (20–30%) perpetual royalties, and the market rewarded it with a 2× P/NAV multiple and very low cost of capital (~4–5%). By contrast, most junior royalty companies face the opposite problem. They have high costs of capital (over 20%). Gentile believes that Silver Crown’s model is superior.

Roughly 70-75% of the world’s silver comes as a byproduct. In a gold or copper mine, silver might be only a few percent of revenue — just a credit to production cost, with no formal resource/reserve estimate. Therefore, many projects don’t even bother valuing contained silver.

Gentile explains that Silver Crown approaches such producers, and creates a royalty specifically on that small silver “stub.” What Gentile likes most is that this creates an essentially unlimited acquisition runway in a niche where management does not compete head-on with much larger royalty companies.

He sees a 10–20 year runway of M&A where CEO Bures can possibly build a 10–20 million troy ounce/yr, pure-silver royalty company, via many smallish (but growing) deals, and some larger ones later.

Unlike most so-called “silver” companies that might be only 30–40% silver, Silver Crown has 100% pure-play silver exposure. Generalist investors like pure-play silver exposure, low operational risk, and open-ended growth. But, it’s hard to find.

In prior articles on Silver Crown Royalties, I’ve pointed out that the past year has not been smooth sailing. The Company has had a few setbacks, but new transactions coming in, like the latest one for Titiminas Silver’s existing royalties, are far larger than the troubled deals.

Of course, if new (larger) deals run into trouble, management will find itself playing defense (growing more slowly) instead of offense. To be clear, there’s room for problems, just not too many! Simply put, the IRRs management gets are strong enough to allow for a few disappointments.

Michael Gentile is a highly experienced, incredibly savvy, and hard-working junior mining investor. Readers are encouraged to listen to this webinar from the 36-minute mark to hear his thoughts on Silver Crown.

If one believes Mr. Gentile is overly bullish, rest assured that the Company could be less successful than he describes, and the investment would still be a very good one. He said in the webinar his long-term goal (over years, not months) is 20x+ returns on his investments.

In my view, that goes to show the serious potential here, albeit with commensurate high risk.

Disclosures/disclaimers: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER] ) about Silver Crown Royalties, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market-making activities. [ER] is not directly employed by any company, group, organization, party, or person. The shares of Silver Crown Royalties are highly speculative, and not suitable for all investors. Readers understand and agree that investments in small-cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was posted, Silver Crown Royalties was an advertiser on [ER] and Peter Epstein owned shares in the company.

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