In short: His second — and more hedged — example of a structural advantage: "A different example might be Alexandra Woodyer and her company Empress Royalty, where they in effect become the royalty arm of Endeavour Financial and at least ostensibly could involve themselves in Endeavour's deal flow." Captive deal flow is the kind of moat that would excuse deploying capital faster than the sector; the "at least ostensibly" is the test still to be proven.
Empress Royalty is a small royalty company associated with the merchant bank Endeavour Financial. Rick raises it as a possible example of the one thing that justifies buying more aggressively than competitors: privileged access to deals.
If Empress genuinely functions as "the royalty arm of Endeavour Financial," it sees financing opportunities through its affiliate that rivals never bid on — the same kind of wall around the business that makes Nations Royalty defensible. But his phrasing is careful: "at least ostensibly could involve themselves in Endeavour's deal flow." The advantage is plausible rather than demonstrated, and the way to test it is to check whether the deals it wins are ones nobody else was competing for.
44:46But in the tertiary royalty companies in particular where you're seeing much more rapid deployment of capital than in the industry as a whole, assuming that they don't have any durable competitive advantage but rather merely beating out other guys at auction, that suggests that they may be overpaying. If the commodity prices that I and I think you believe will come to pass in 5 years, this overly aggressive expansion may be a good thing.
In short: He owns it and likes it — but the discount is gone. "I bought them because they were selling at half NAV. The idea that I could buy 50-cent pieces for 25 cents with these same durable competitive advantages is no longer true. I would suggest that the company, relative to the royalties and the cash that it enjoys today, is fully priced." What has improved instead is optionality: "their debt is extinguished, they have 20 or 25 million dollars in cash and gold, and they still have access to the durable competitive advantage with Endeavour Financial… their financial flexibility now is much greater than it was when I bought them." The moat is deal flow — "they are the royalty finance arm of Endeavour Financial. Endeavour Financial's probably generated 10 or 12 billion dollars in resource financings… and deal flow is everything" — plus a niche nobody else works: "royalties in smaller transactions, often with private companies. Which means that they have a little bit of a knowledge moat." On CEO Alexandra Woodyer: an accountant from Price Waterhouse who "began working for her father… when she was 14 years of age," i.e. "fairly young with a 35-year career in mining." Execution record in frontier markets: "no failures… their track record with regards to that is better than mine."
Empress finances small mines in exchange for royalties, and it is effectively the royalty arm of Endeavour Financial, a merchant bank that has arranged "10 or 12 billion dollars in resource financings." That relationship is the moat: it sees deals other royalty companies never get to bid on, and "deal flow is everything."
Rick owns it, but is honest about the change in the opportunity. He bought at half of net asset value — "the idea that I could buy 50-cent pieces for 25 cents" — and that discount is gone: "relative to the royalties and the cash that it enjoys today, [it] is fully priced." So the easy money has been made.
What has improved is the company's ability to act: no debt, "20 or 25 million dollars in cash and gold," and continued access to Endeavour's pipeline, so "their financial flexibility now is much greater than it was when I bought them." In plain terms, you are no longer buying a discount, you are buying management's ability to keep doing small, hard deals well — and their record there is unusually clean. As he puts it, "everything that could go wrong with a big mine can go wrong with a small mine," yet they have had "no failures."
20:40Well, I bought them because they were selling at half NAV. The idea that I could buy 50-cent pieces for 25 cents with these same durable competitive advantages is no longer true. I would suggest that the company, relative to the royalties and the cash that it enjoys today, is fully priced. But their financial flexibility, which is to say their debt is extinguished, they have 20 or 25 million dollars in cash and gold, and they still have access to the durable competitive advantage with the Endeavour Financial.
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