What do you look for in a potential investment or acquisition? What are the key criteria?
We are committed to sticking to our proven, pure play streaming and royalty business model. Our core focus is on identifying, attracting, and executing upon high-quality opportunities where our owners can expect sustainable returns, while offering miners competitive, highly-customized financing to meet their strategic priorities.
Essentially, we are looking for great partnerships where we can secure appropriate returns on good assets, which will have the support of their local stakeholders to operate over the long term, typically in established mining jurisdictions. Precious metal by-products (on base metal or platinum group metal orebodies) that can offer attractive precious metal streaming opportunities, that are not strategically interesting to the mining partner, represents a synergistic financing opportunity that we particularly favour. At this time, around 70% of our ounces come from mines with these attributes, which is largely responsible for our long portfolio life of more than two decades.
Sustainability is a particular focus that is core to our investment criteria, as these are long-life investments that can span many decades, so you need to be partnered with mining operators that understand the importance of investing in their privilege to operate over the long-term with their local stakeholders. We typically invest alongside them in their community and employee support programmes to enhance their social licence and protect our investment. We have a very strong due diligence team in place. It is our firm belief that ethical mining provides an essential good and drives operational and reputational performance.
We prefer long duration assets that allow for exposure to multiple price cycles, along with good potential for ongoing reserve replacement, mine life extension, and possibly expansion.
Today, our portfolio is approximately 80% located in the Americas and Australia, based on consensus net asset values (NAV). However, we will also look outside these areas, when we are convinced of the quality of the asset, the management team, and can ensure we have suitable contractual protections, with returns adjusted for any risk we believe we are taking on.
One of our objectives is embedding optionality into our portfolio; our investment framework favours assets that are amenable to expansion, have a demonstrated track record of extending mine life, and yielding new discoveries. Maximizing the prospective land packages associated with our streams and royalties is critical to provide the optionality we seek, and this is reflected in our existing portfolio.
Key to our capital allocation framework is our commodity exposure to gold and silver. We are more than 90% exposed to these two metals based on consensus NAV and revenue; however, we do review opportunities for exposure to base metals and bulk commodities based on our investment criteria. We feel there are opportunities to add exposure here, at the right points in the cycle, but we will not go overweight and dilute our precious metals exposure in the portfolio, nor will we invest in fossil fuels like oil, gas, or coal.
Diversity and inclusion, climate change, and supporting local communities will remain our key areas of focus in 2023
Overall, the projects we invest in tend to be advanced when we are committing to large funding amounts — either already producing, or at a stage where they are ready for construction and have full permitting in place for development, for the purpose of near-term cash flow generation. We have also made prudent investments in projects at an earlier development stage to balance our longer-term portfolio pipeline, with strong prospects for free cash flow growth. At the end of the day, we are working to grow value in terms of both net asset value and cash flow per share, so it’s important that our orientation is skewed towards high-probability, visible cash flow generation with good optionality offering upside to our investors over time.
How does the growing focus on ESG in investments play into this? What are key areas of due diligence work for Triple Flag?
It’s important to dissect what is meant by “ESG” versus “sustainability”. We view “sustainability” as actions that result in specific outcomes where we aim to have positive impacts, while ESG metrics are used to measure performance. To that end, my response will be framed from a “sustainability” perspective.
Our key belief, that underlines our commitment to sustainability, is that optimal ESG performance in the mining and metals business drives operational and reputational performance, benefitting all our stakeholders. Triple Flag plays an important role as a financial partner to mining operators by supporting their sustainability initiatives and the renewable energy transition, wherever possible. It is simply good business for a large-capital commitment industry with fixed assets and long-time horizons to manage this aspect of the business to a high standard. We want to partner with miners who get that and help where we can to further enhance their social licence to operate. Unlike manufacturing or the services sector that can relocate if they run into problems with their local stakeholders, the extractive sector is bound by their mineral endowments in the ground, and therefore need to prioritize this if they are to be allowed to operate mines over the long term and maximize the economic potential of the orebodies they are generating value from. Our aim is to be a valued finance partner, facilitating development and expansion of mining projects that deliver value for our mining partners, host communities, and countries.
We have very strict performance standards in place and conduct robust due diligence in all of our investment decisions with the objective of selecting well-managed projects and operators to ensure sustainable, responsible returns that protect our own investment and reputational interests, alongside the interests of our shareholders and other stakeholders. Our due diligence process extends well beyond our initial investment decision, and we continue to track our partners’ ESG metrics on an ongoing basis. Ultimately, we believe it is crucial for Triple Flag to only partner with people who conscientiously prioritize sustainability.
The broader scope of our due diligence focus areas includes, but is not limited to:
- Environmental and social impact analysis
- Labour, human rights, and working conditions
- Stakeholder engagement
- Workforce and community health, safety, and security
- Tailings dam design and management practices
- Sustainability
- Biodiversity and conservation
- Indigenous peoples and cultural heritage
- Corporate governance
Looking ahead, we recognize that sustainability is a journey that requires continuous iteration and improvement. Diversity and inclusion, climate change, and supporting local communities will remain our key areas of focus in 2023.
In July 2023, we published our 2022 sustainability report, which presents detailed disclosures on our sustainability approach and performance highlights for the year.
Royalties and stream financing only makes up a small fraction of financing for the industry, with the majority of it focused on precious metals. Where do you see this industry growing and how? How does portfolio diversification play into this?
We believe that stream financing is a significant opportunity for mining companies seeking flexible financing that is both patient, highly customizable, and partnership-focused compared to traditional sources such as debt and equity. We are currently seeing high levels of margin compression at operating mining companies, which is driven by cost inflation and commodity price volatility, as well as steep increases in capital expenditure for development stage opportunities. Decades-high inflation and supply chain problems are likely to make mine building delays and cost blowouts far worse than historical norms, therefore choosing funding structures is crucial for when projects do not go according to plan. For example, with stream financing, these structures have a longer payment period and no fixed payment obligations, and therefore are less risky during periods of lower metal prices or production versus debt financing.
In addition, we expect a constrained environment for access to traditional capital to be positive for the outlook for streaming and royalty opportunities — as miners face the twofold dilemma of unreliability, conventional funding solutions, and higher liquidity requirements. You only have to look at how global interest rates are trending to see how traditional lines of debt financing for mining companies are becoming more expensive, making royalty and streaming deals more attractive. Therefore, a mix of capital sources is imperative for success.
We have a disciplined focus on the precious metals streaming and royalty model. However, we also believe that our capital can contribute meaningfully towards enabling the energy transition by potentially investing in polymetallic orebodies, which have precious metals by-products that are more valuable to our investors than to the miners targeting battery or base metals exposure for their own investor base. In other words, by working with a precious metal focused royalty and streaming company, copper and battery metal operators have a real opportunity to finance their development, share risk, and unlock value not otherwise realized to drive the renewable energy transition.
What is your near-term outlook across the precious metals’ spectrum?
We structure our investments to work well under a range of commodity price outcomes, as opposed to one particular thematic or price level, as we seek long term investments that are robust through commodity price cycles.
Gold
While we have seen strength in the gold price over the past quarter, reaching near record highs above US$2,050/oz, the commodity has since pulled back below the US$2,000/oz level as recessionary concerns have (partially) abated with market expectations for rates cuts by the US Fed pulling back. That said, we see the gold price remaining well supported through the near-term at current levels, which continues to remain historically robust, as the USD strengthens, and higher treasury yields appear to be balanced with continued uncertainty from geopolitical risk, the longer-term impact of the current rate-hiking path, and a potential economic recession. We are also structurally bullish long-term on gold, given the sustained and excessive money printing by central banks that we’ve witnessed for decades now, and the devaluation of currencies it drives. Gold is a proven long-term store of value for investors and should be an obvious consideration as part of their overall portfolio construction in our view.
Silver
For similar reasons as gold, we believe the silver price should remain well supported through the near-term at current levels. However, beyond traditional investment demand, we expect longer-term silver demand to improve from the building of infrastructure for both solar power grids and 5G cellular networks, amidst the expected backdrop of limited primary mine supply growth.
PGMs
The concentration of primary mine supply between both South Africa (where producers have experienced operational challenges linked to infrastructure limitations that impacts supply response) and Russia, should be supportive of prices for PGMs in the near-term. Longer-term, demand for platinum is expected to be driven by a burgeoning zero-emissions hydrogen industry, and we expect this to be potentially bullish for the industry.
