Triple Flag Precious Metals Corp.

Moat: 1.5/5

Understandability: 2/5

Balance Sheet Health: 4/5

Triple Flag Precious Metals Corp. is a precious metals streaming and royalty company that provides upfront funding to mining companies in exchange for a share of future production or revenue.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Moat Assessment

Triple Flag Precious Metals Corp. (TFPM) operates within the precious metals streaming and royalty sector. Unlike traditional mining companies, TFPM does not directly engage in mining operations. Instead, it provides upfront capital to mining companies in exchange for a predetermined percentage of their future production or revenue—known as a “stream” or a “royalty”. This business model is capital-light and allows for diversification across multiple projects.

It is very important to understand that they are not a company that mines metals. They are just a financier.

Moat: 1.5/5

TFPM’s competitive advantage, or “moat,” is weak and narrow and barely exists as a moat.

  • Scale and Industry Relationships: While scale can be an advantage, there’s little evidence to support the idea that TFPM enjoys any scale advantages. Instead, the strength they have comes from being able to structure complex deals with major mining companies.
  • Limited Barriers to Entry: The streaming and royalty sector does not involve a specialized product or a technological moat, meaning that any large financial institution can easily replicate their services.
  • Financial Expertise: The business model, while seemingly simple, requires deep expertise in financial structuring, deal negotiation, and risk management. This aspect may create a very limited barrier to entry for some smaller companies or funds that lack such in-depth expertise, but large companies like Blackstone can easily replicate.

Given these considerations, TFPM’s moat can be classified as weak and very narrow. Its primary competitive advantage stems from its history, and its ability to access the top mining companies which has a “first mover advantage”, but these are not enough to defend them against new and existing competitors, leading to a low moat score of just 1.5/5.

Risks to the Moat and Business Resilience

While TFPM’s business model offers some protections, several risks could erode its competitive position:

  • Commodity Price Volatility: The revenue of TFPM is directly linked to the prices of precious metals. If these prices drop significantly, it will put heavy pressure on the company’s revenue, and ability to return capital.
  • Mine Operations: If a mine that TFPM holds a stream on performs badly (due to geological difficulties, unexpected disasters, accidents, or poor management practices) and cannot meet its obligations, the royalties might be lower or nonexistent, heavily hurting the earnings of the company.
  • Counterparty Risk: The company depends on mining companies to pay them, this puts them at risk of having issues with bad actors, or when companies go bankrupt.
  • Competition: New entrants or larger existing players can make new attractive deals that compete with TFPM for deals in the industry. Other companies that also offer similar services may be more aggressive in their bidding, putting pressure on TFPM margins and the growth.
  • Changes in Regulation: Governments can change regulations regarding mining permits, or environmental laws, or new regulations that they do not like, which would impair a mine’s value, or make it more expensive to operate.
  • Tax Law Changes: changes to tax laws in the countries TFPM operates can have a negative impact on the returns.
  • Dilution: Issuing shares for new deals can dilute the ownership of existing shareholders.
  • High Operating Expenses: The company has high operating expenses that reduce the margin on profits and value, the operating margins might also be impacted by nonrecurring items that affect profitability and returns.
  • Geopolitical risks
    • Political risk: operating in countries with uncertain governments can expose them to political risk. Any change in political will can affect profits, and if severe, can even lead to bankruptcy.
  • Economic Crisis: if a bad recession happens it will hurt mining companies’ finances and that in turn will reduce profits for TFPM.

These risks, especially the risk around the pricing of commodities, could lead to a substantial drop in revenue and profits, heavily hurting their long term business model.

Despite all these risks, TFPM can reduce their impact by maintaining a diversified portfolio, with many different companies in different geographical locations. This would also make them more resilient to a black swan event happening, like a mine disaster. The fact that they are not involved in running the mines, is also beneficial, since they do not directly bear the operational risk.

Detailed Business Explanation

Triple Flag’s revenue is derived from streams and royalties, the volume of which is determined by the production performance of the underlying mines, and the price is determined by prevailing prices of precious metals. They are exposed to various kinds of risks such as exploration, construction, operations, environment, or political. This has lead to a diverse investment portfolio and a pipeline of future streams and royalties.

They are primarily interested in gold and silver, but also have other precious metals like platinum and palladium.

They have a portfolio of over 200 assets, with 16 core producing assets, but this has a concentration risk of the main assets accounting for most of the revenue.

 Their assets are spread out across various jurisdictions such as Australia, Africa, North and South America, and Europe.

Revenue Streams:

  • Royalties: A royalty gives a right to receive a specified percentage of gross revenues or production from the miner, without any contribution to the expenses of the mine,
  • Streams: A stream grants the right to purchase a defined amount of precious metals production at a pre-determined price or a fixed percentage of the market price.

Key Financial Metrics

  • Revenue Growth: Their revenue is driven by growth of operations of their mining partners, or price increase in precious metals.
  • ROIC: As explained above, return on invested capital reflects the success of a company and is determined by the net operating profit relative to the invested capital in the company.
  • Debt: The level of debt a company uses to create wealth by comparing to the equity it holds to operate.
  • Liquidity: The ability of a company to generate profits to cover its obligations and debt.
  • Valuation Metrics: Used to compare a company to other peers and assess the market’s expectation of the business.
  • Increasing Demand for Precious Metals: Demand for precious metals is always high as these are seen as a safe-haven asset, which protects from economic shocks and currency volatility. The rising inflation is further increasing this demand.
  • Volatility: Metal prices have high price volatility, which adds to earnings unpredictability.
  • Environmental, social, and governance (ESG) considerations: Both investors and consumers increasingly demand high ESG standards, which can affect the ability of mines to operate efficiently, and have added costs associated with maintaining those high standards.
  • Geopolitical instability: Rising global instability means more uncertainty in the financial and the metal markets.
  • Increased M&A activity: As companies want to consolidate operations, the competition between metal producers is going to increase as larger entities can have the most benefit from synergies.

The current trend indicates that precious metals market will remain in demand because of high instability and uncertainty in the market, but also the economic downturn might make things volatile.

Competitive Landscape

TFPM competes with other streaming and royalty companies, including those that are much larger than them. In addition to other financial companies that are competing for deals. Key competitors include:

  • Franco-Nevada Corporation (FNV)
  • Wheaton Precious Metals Corp. (WPM)
  • Royal Gold, Inc. (RGLD) Also, they compete with private equity and debt funds who seek to invest in the mining sector.

What Makes TFPM Different

  • Diversification: The company is well diversified and operates in many geographical locations, this means that one single market fluctuation will not hurt it too much.
  • Management Team: They have experienced management with experience in mining and the financial markets.
  • Stream and Royalty Focus: While other companies have many different forms of royalties, TFPM focuses only on precious metals, that leads to very predictable cash flows with a clear pricing mechanism.

They focus on a simple, and easy to understand business plan with clear targets and vision.

Financial Analysis

The company’s revenue in the most recent quarter (2023-Q4) increased year-over-year to $109 million. The strong result was mainly driven by higher realized prices of gold and silver as well as an increased production of the mines it operates in. However, its Net Profit was reduced significantly from $54.77 million in 2022 Q4, to just 5.12 million in the most recent quarter, due to a $74 million write-down in one of their investments, which they had to adjust because of a decrease in value in gold and silver production as they were not able to extract as much as they thought they would.

The company said that they don’t have any exposure to Russia or Ukraine, but that a slowdown in the global economy as a result of the conflict could create challenges.

While the Net Income fell drastically in the most recent quarter, this does not really affect the operations of the company as it’s non-recurring and not related to the day-to-day workings of the company.

The operational expenses in the most recent quarter increased to 27.2 million, compared to 18.5 million a year prior. Most of this increase came from higher G&A expenses. The company said it had increased staffing in its team, which led to higher personnel expenses.

The gross margin of the company is around 80%, which shows that they can produce a good enough margin for their business model.

The company has historically increased revenue and profitability by acquiring more streams and royalties, and that seems like it will continue going forward. The main factors influencing its future financial performance are the price of precious metals and the performance of the assets they hold a stake in.

The company is heavily leveraged, with a debt of more than $500 million, but they have shown a good record of debt management. In the earnings calls, they have mentioned that they are actively looking to repay the debt, and reduce the leveraging of the company to lower their risk profiles.

They are actively targeting leverage of at least 0.75 times the market value of equity, which should put them in a good place financially for the years to come.

The company has been paying dividends to shareholders for years, and seem keen to continue paying dividends in the future. The current yield is at almost 4%, which shows a good ability to return profits to investors.

The company is still in its growing phase, so profitability is not consistent throughout the quarters, and they have to continue to reinvest in new assets in order to maintain and increase revenues, that can mean short term losses and increased risk of over leveraging.

In the longer term, the company is well positioned to grow revenues and profits with the rising demand of precious metals, as well as an ability to get great deals because of its in-depth knowledge of the mining sector.

Understandability: 2/5

TFPM’s business model is relatively straightforward, the company makes deals with mining companies and then gets a return from them. It’s easy to understand in concept, but the complexities of royalty and streaming, and the valuation metrics that make a company attractive or not, requires in-depth knowledge of accounting and finance making it moderately hard to understand. A company that buys production of metal as it goes through the mining process is complex to grasp for lay people. Given the nature of their business, their finances do not adhere to normal business standards making comparisons harder. This leads to a rating of just 2/5.

Balance Sheet Health: 4 / 5

The company has a decent balance sheet, even with a large amount of debt. The company has consistently positive cash flow from operations and the ability to cover expenses, while increasing the amount of revenue and profitability in recent years. It seems the management is aware of the risks associated with leverage and is actively trying to lower it. These, among other things, make for a good, stable position, resulting in an above average score of 4/5.