Axcella is a clinical-stage biotechnology company pioneering a new approach to treat complex diseases using compositions of endogenous metabolic modulators (EMMs). The company’s product candidates are comprised of EMMs and derivatives that are engineered in distinct combinations and ratios to restore cellular homeostasis in multiple key biological pathways and improve cellular energetic efficiency. Axcella’s pipeline includes lead therapeutic candidates in Phase 2 development for the treatment of Long COVID and non-alcoholic steatohepatitis (NASH), and the reduction in risk of overt hepatic encephalopathy (OHE) recurrence. The company’s unique model allows for the evaluation of its EMM compositions through non-IND clinical studies or IND clinical trials. For more information, please visit www.axcellatx.com.
Robert LeBoyer, Vice President, Research Analyst, Life Sciences , Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Axcella Announced Positive Interim NASH Results. An interim analysis from the Phase 2b EMMPACT Study of AXA1125 in non-alcoholic steatohepatitis (NASH) showed improvements in measures of liver fibrosis and liver fat. The data presented was from patients who had been treated for 12 and 24 weeks of the 48-week treatment period. The study is continuing as planned, and we believe the interim data raise the probability of success for the trial.
Study Design and Analysis. The EMMPACT study was designed to test two doses of AXA1125 against placebo. Patients receive either placebo, low dose (45.2g/day), or high dose (67.8g/day) twice daily for 48 weeks. It has a target enrollment of 270 patients with biopsy-confirmed Stage 2 or Stage 3 NASH, divided into three arms with 90 patients each. The interim analysis used non-invasive tests to evaluate reduction in liver fibrosis and inflammation.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Nobel Prizes, Election Outcomes and Sports Championships – Prediction Markets Try to Foresee the Future
Who will win Nobel Prizes in 2022? Wikipedia posits a handful of contenders for Physiology or Medicine, about 20 different possible winners for the Peace Prize and several dozen potential winners of the Literature Prize. But since the Swedish Academy never announces nominees in advance, there are few insights indicating who will win, or even if the eventual winner is on a given list.
Are there ways to predict the future winners?
The Delphi approach, named after the oracle in ancient Greece, gathers multiple rounds of opinions from a group of experts to generate a prediction. Gambling firms provide betting odds on the likelihood that specific competitors will win. Crowdsourced competitions, such as the Yahoo Soccer World Cup “Pick-Em,” have participants predict individual contest winners and then aggregate the results.
Another approach is a prediction market that provides insight into what people expect will happen in the future by creating a stock market-like environment to capture the “wisdom of the crowd.” Groups and crowds often are collectively smarter than individuals when many independent opinions are combined.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Daniel O’Leary, Professor of Accounting and Information Systems, University of Southern California.
As an accounting and information systems professor at the University of Southern California, I investigate issues related to the crowd both in my research and in my teaching. Here’s how prediction markets harness what the crowd thinks to forecast the future.
The Wisdom of the Market
In prediction markets, participants buy and sell stocks. Each stock’s price is tied to a different event happening in the future. Information about the future is captured in the stock prices.
For instance, in a prediction market focused on the Nobel Peace Prize, maybe Greta Thunberg is trading at $0.10 while Pope Francis is trading at $0.15, and the stocks for the entire group of candidates add up to sum to $1. The prices reflect the traders’ aggregated beliefs about the probability of their winning – a higher price means a higher perceived likelihood of winning.
Examples of Prediction Markets
Anyone can get in on the prediction game by trading on one of these markets or even just checking out which stocks are up or down.
Prediction markets have various ways of setting stock prices. The Iowa Electronic Markets took following approach during the 2020 U.S. presidential election:
Stock DEM2020 pays off $1 if the Democratic candidate wins, and $0 otherwise,
Stock REP2020 pays off $1 if the Republican candidate wins, and $0 otherwise.
The stock prices capture the probabilities of each candidate winning, in two mutually exclusive events. If the price of DEM2020 is $0.52, then that is treated as the probability of that event occurring – a 52% chance. If DEM2020 is $0.52, then REP2020 is $0.48.
Prediction markets may use real money, or they can use play money. Google’s market used what it called “Goobles,” while the Hollywood Stock Exchange uses Hollywood Dollars. The Iowa Electronic Markets and PredictIt, both sponsored by universities, use real money. Researchers have found that there are no differences in the performance of markets using real money versus those using play money.
Although using play money makes it possible for many people to participate, one potential challenge for prediction markets that don’t use real money is gaining and maintaining interested participants. Despite using different devices to keep up engagement, such as leader boards indicating who has accumulated the biggest portfolio, there is literally no money on the table to keep participants interested in the market.
Market participants who know more about the game might better predict winners. Image Credit: Marco verch (Flickr)
Participants Bring Their Knowledge to the Market
Prediction markets and crowdsourcing do not function in a vacuum.
Researchers have found that information about events finds its way into the prediction processes from various sources. For example, when I analyzed the relationship between the betting odds and the Yahoo Pick-Em crowd’s guesses for the 2014 FIFA World Cup, I found that there was no statistical difference between the proportion of correct guesses in each. My conclusion is that either the crowd’s guesses incorporated the betting odds information or the crowd’s guesses added up to the same result by some other means.
Generally, prediction markets use play money or are run by non-profit universities to study markets, elections and human decision making. Although gambling houses can take bets for many activities, external prediction markets are more restricted in the activities they can be used to investigate, and are typically limited to elections. However, internal prediction markets – run within a corporation, for instance – can explore almost any topic of interest.
Typically, prediction markets function better with informed participants. Although using so-called inside information is illegal in some markets, including the New York Stock Exchange, there generally are no such limitations in prediction markets, or other crowdsourcing approaches. If those with inside information were to participate in a prediction market, it would likely lead to more accurate stock prices, as insiders make trades informed by their knowledge. However, if others find out that a participant has inside information, then they may very well try to gain access to that info, follow the insider’s actions or even decide to leave the unfair market.
The accuracy of prediction markets depends on many factors, including who is in the market, what their biases are and how heterogeneous the participants are. Accuracy can also depend on how many people are in the market – more is generally better – and the extent to which they are informed about the events of interest.
Researchers have found that prediction markets have outperformed polls in presidential elections roughly 75% of the time. But accurate results are not guaranteed. For example, prediction markets did not correctly predict that Donald Trump would win the U.S. presidency in 2016.
Who Will be in Stockholm for the Ceremony?
In 2011, Harvard University economics faculty had a real-money prediction market site, referred to as “the world’s most accurate prediction market.” The site had been used for predicting the Nobel Prize in Economics, but Harvard advised the site to shut down.
I couldn’t find any current public prediction markets active for the 2022 Nobel Prizes.
For the moment, perhaps the closest to participating in a Nobel prediction market would be to place a bet at one of the gambling houses that takes bets on the Nobel Prizes. Or find a Nobel Prize Pick-Em site, propose such an event to an existing prediction market or build your own prediction market using some of the available software.
Inflation Still Surprisingly Strong and Economy Weak
Two important numbers were released on the last day of September. One was based on old news but significant in its finality; it’s the final revision to GDP for the second quarter. The next is viewed as the Fed’s preferred inflation gauge, the PCE deflator. The final GDP number will make it more difficult for public officials or pundits to suggest we can avoid a recession in 2022, and the second did not give any hope that the Fed will have any reason to change course on tightening.
A Recession By Any Other Name
Gross domestic product (GDP) is the indicator that reflects the amount of output produced quarterly in a country. In the U.S., the Bureau of Economic Analysis (BEA) releases two estimates of quarterly GDP, known as the advance and preliminary estimates, in the two months before the release of the final number. So until the final number prints, the number GDP measure is subject to revision.
On September 30, 2022, the Final GDP report for the second quarter was released by the BEA. The report shows that GDP decreased at an annual rate of 0.6 percent in the second quarter of 2022 (table 1). This decline in economic output follows a decline of 1.6% in the first quarter of 2022.
Do two-quarters of a receding economy, based on GDP, indicate the U.S. is in the recessionary part of the business cycle? Most textbooks would agree with that definition. However, there is a Business Cycle Dating Committee within the National Bureau of Economic Research (NBER) that determines and labels where the nation is within the economic cycles; they have not made any declaration.
So far, in 2022, the economy has not experienced any economic growth. If the six months of contraction is eventually deemed an official recession, it will thus far have been a shallow one, characterized by strong employment.
Price Increases Higher than Expected
Inflation is still on many investor’s radar. The Fed is targeting reducing inflation to its 2% target. The inflation measure they use for this target is the PCE Deflator. That measure was released this morning, and it validates the aggressive actions being taken by the Federal Reserve. And suggests the Fed has a lot more work to do.
The personal consumption expenditures price index (PCE), which the Fed targets at 2%, rose 6.2% in August from a year earlier, the Commerce Department reported. Underlying inflation, as measured by a core reading that excludes food and energy prices, rose 4.9% from 4.7% previously.
These numbers are well in excess of the Fed’s target and seemingly trending upward. Expectations are the Fed will provide up to another 150 bp increase (1.50%) over the coming months. This would cause the Fed Funds rate to trade near 5%. There is nothing in today’s release that would likely cause expectations to change.
Stagflation?
High inflation and negative growth have many repeating the word “stagflation”. Stagflation has one more element missing, which is high unemployment. The current economic conditions in the U.S. include high demand for workers, this shortage actually helps feed into the inflation the Fed is trying to tame.
Take Away
The economy contracted slightly in the second quarter of 2022. The decline in production was smaller than measured during the first quarter. Federal Reserve policymakers saw one more reason to keep applying the economic brake pedal by taking money out of the economy, increasing upward rate pressures. The Fed caused rates to rise from 40-year lows faster than any time since the 1980s.
Stock market participants are factored into the Fed’s policy only to the extent that market moves may impact inflation or employment. The markets (stocks, bonds, real estate, gold) are negative on the year. There are some who suggest the Fed will use this as a signal to alter policy, if the Fed bowed to any of the markets listed here, the sign of weakness might actually cause a market collapse in stocks and bonds.
It’s a small world, and as we’ve seen, if something happens with one trading partner, it impacts them all.
Rapid moves and turnarounds in the U.S. Treasury market, considered the bedrock of all other markets, have increased the volatility in equity markets, commodities trading, and, more directly to, currency exchange rates across the globe. The uncertainty has caused investment capital to gravitate to U.S. markets; however, prolonged gyrations, especially in “risk-free” U.S. Treasuries, could put many investors on the sidelines and weaken asset prices globally.
The U.S./U.K. Example
At the end of 2021, the ten-year U.S. Treasury note was yielding 1.5%. Earlier this week a ten-year U.S. Treasury (backed by the same entity that backs the U.S. Currency) rose to yield 4%. That’s a 270% rise in the yield – for bondholders, prices of bonds decline as yields rise. So while the stock market frets over what a Federal Reserve increase in rates may do for equities, bond market investors can usually pull out a calculator and get a fairly precise answer as to how bonds will reprice. If the reaction is radically different, an important foundation is lost. The reaction has been unpredictable.
While the ten-year did hit 4% this week, after lingering around 3.50% the prior week, the yield abruptly dropped after news from across the Atlantic that England’s central bank, the Bank of England (BOE), was taking steps to halt rate increases, effectively implementing quantitative easing. The BOE buying bonds puts pound sterling into their economy and adds to inflation pressures. The immediate reaction was for rates to come down, there, in the U.S., and in other economies that have been tightening. This provided a feeling of relief from equity markets, as it was a sign that the central banks may one by one abandon their plans to fight inflation, choosing instead to fuel it.
The BOE’s move to buy bonds “on whatever scale is necessary” to stabilize its bond market, a move that followed large tax cuts last week by the U.K. government, despite double-digit inflation, many believe indicates a possible problem with a major financial institution or pension fund.
The world’s markets don’t trade in a vacuum. The sudden reversal in the U.K. to stop interest rate hikes and perhaps lower rates brought a positive tone to stocks and bonds in U.S. markets, each having historically challenging years. The conversation in the U.S. is that the Fed may have to pause its own aggressive direction. This would be either because increased rates would further strengthen the dollar, or because the U.S. may have its own underlying time bomb(s), institutions that would fail or bubbles that could burst.
The rallies in the U.S. stock and bond markets gained momentum after the BOE move as the Chicago Mercantile Exchange (CME) data showed reduced expectations of a terminal or neutral Fed Funds rate of 5%, with expectations now for the policy rate to top out around 4.25-4.5%.
Take Away
While the Fed taking its foot off the brake pedal would be a remarkable turnaround after Chairman Powell’s efforts to be clear about his intent to tighten, the reasons for the CME data shift are twofold. First, the Fed won’t be able to keep aggressively raising rates ad simultaneously reducing bond holdings (shrink its balance sheet), because the strong U.S. dollar is disrupting global markets. Secondly, as mentioned before, checking the health of major institutions, housing, and pension funds in the U.S. may be prudent before administering more economic medicine.
Uncertainty has the effect of investors pulling assets out of markets and businesses acting with more caution. Hopefully, clarity, one way or the other, soon presents itself so volatility is reduced and investors can better understand the playing field.
Voyager Digital Ltd.’s (TSX: VOYG) (OTCQX: VYGVF) (FRA: UCD2) US subsidiary, Voyager Digital, LLC, is a fast-growing cryptocurrency platform in the United States founded in 2018 to bring choice, transparency, and cost-efficiency to the marketplace. Voyager offers a secure way to trade over 100 different crypto assets using its easy-to-use mobile application. Through its subsidiary Coinify ApS, Voyager provides crypto payment solutions for both consumers and merchants around the globe. To learn more about the company, please visit https://www.investvoyager.com.
Joe Gomes, Senior Research Analyst, Noble Capital Markets, Inc.
Joshua Zoepfel, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Auction Completed. Voyager announced the completion of the Company’s auction process. The Company has selected West Realm Shires Inc. (“FTX US”) as the highest and best bid for its assets. The Official Committee of Unsecured Creditors supports FTX US’s winning bid.
The Winning Bid with a Caveat. FTX US’s winning bid for Voyager’s assets was for $1.422 billion, which comprises the fair market value of all Voyager cryptocurrency at a to-be-determined date in the future, which at current market prices is estimated to be $1.311 billion, and additional consideration that is estimated as providing approximately $111 million of incremental value. However, FTX US has the potential to be outbid over the next couple of weeks, as the objection deadline is the final day of allowing higher bids to be placed.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Lee Enterprises, Incorporated provides local news, information, and advertising primarily in midsize markets in the United States. It publishes 49 daily newspapers, as well as offers 300 weekly newspapers and specialty publications in 23 states. The company also provides online advertising and services; and online infrastructure and online publishing services for approximately 1,500 daily and weekly newspapers and shoppers. In addition, it offers commercial printing services. The company has a strategic alliance with Yahoo!, Inc. to provide its classified employment advertising customer base the opportunity to post job listings and other employment products on Yahoo!�s HotJobs national platform. Lee Enterprises, Incorporated was founded in 1890 and is based in Davenport, Iowa.
Michael Kupinski, Director of Research, Noble Capital Markets, Inc.
Patrick McCann, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Non-Deal Roadshow Highlights. CEO Kevin Mowbray and CFO Timothy Millage were in St. Louis to host meetings with investors. The duo highlighted that for 11 consecutive quarters Lee has been the fastest growing digital subscription platform in local media, the company has a favorable debt arrangement with debt that has been significantly reduced over the last 2 years, and a favorable runway for margin and revenue expansion.
Digital Transformation. Digital advertising now accounts for 51% of total company advertising. In addition, Total Digital revenue accounts for 31.5% of total company revenue. Importantly, its Digital business grew a strong 26.8% year over year in the latest quarter. We project that its Digital business should continue strong double digit revenue growth for the foreseeable future.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Musk’s Lawyers Call SEC Agreement a “Government Imposed Muzzle”
Elon Musk has had enough of being gagged. It has been over four years since he tweeted to his 22 million Twitter followers that he could take Tesla private, at $420 per share (a substantial premium to its trading price at the time), and that funding for the transaction had been secured, adding the only remaining uncertainty was a shareholder vote. On September 27, 2018, the SEC charged Musk, CEO of Tesla Inc., with securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla (TSLA) private.
Part of the resolution with the Commission was that the CEO and chairman would not use Twitter and mention business without each tweet being vetted by a lawyer. Apparently, the provision restricting open communication with followers is difficult for Elon, who is quite active on the social media microblog platform. The easier part is the $40 million in cash that was part of the settlement ($20mm Musk, $20mm Tesla), and his resignation as Chairman of the Board.
In a brief filed with the 2nd U.S. Circuit Court of Appeals in Manhattan, on the fourth anniversary of the SEC’s charges, Musk’s lawyers called the pre-approval mandate a “government-imposed muzzle” that inhibited and chilled his lawful speech on a broad range of topics. The brief also said the requirement imposed by the SEC violated the U.S. Constitution and undermined public policy by running “contrary to the American principles of free speech and open debate.”
The SEC is expected to respond by filing its own brief with the appeals court.
Elon had filed an appeal previously to terminate the settlement agreement he had as CEO of Tesla with the SEC. That request was denied in April of this year. The denial was awkward as Mr. Musk was moving forward to acquire Twitter for $44 billion.
When on November 6, 2021 Musk asked Twitter followers whether he should sell 10% of his Tesla stake to cover tax bills on stock options, the SEC opened a probe and subpoenaed documents related to his compliance with the earlier settlement.
It’s time to rein in the SEC, according to the filing by Musk’s attorneys. It said the ruling is keeping Musk under “constant threat” as the Commission might reject his view as to which tweets require pre-approval from legal staff.
“Under the shadow of the consent decree, the SEC has increasingly surveilled, policed, and attempted to curb Mr. Musk’s protected speech that does not touch upon the federal securities laws,” the lawyers wrote.
In other events related to Twitter and the Tesla founder, Twitter has sued Musk to complete his purchase of the company. A nonjury trial is scheduled for October 17 in Delaware Chancery Court.
Ark Invest’s New Disruptive Technology Fund has a Unique Value Proposition
Not all companies worth owning are publicly traded. Yet, many still need capital, and some could serve smaller investors well. Cathie Wood’s latest fund, which launched on September 27, is intended to bring venture investing to those with $500 or more to invest. The focus is on private companies.
The fund’s launch is on a platform provided by Titan which itself is a young disruptive company, providing advantages to many investors and potentially disrupting the old methods.
About the Fund
The Ark Venture fund will be an interval fund. This means it is a closed-end fund that doesn’t trade on a stock exchange. Interval fund restrictions are most often used when many of the holdings in a fund are illiquid (i.e., don’t trade on the open market). The restrictions make it easier for the fund to focus on return without worrying about managing inflows and outflows.
The ARK Venture Fund will invest in early to late-stage private tech companies and venture capital funds. Public tech companies are also permitted. Access to the fund investments will occur on Titan. Titan is a disruptive platform on phone apps and tablets that allows investors to curate strategies created and managed by popular investors.
As with other Ark Invest funds, the fund’s investment theme is disruptive innovation. ARK defines “disruptive innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the world works. The platform Titan itself is an example of disruptive technology.
Image Source: Titan.com
About Titan
The first thing you see on Titan’s home page is a line that reads, “Investment management, made modern.” It invites you to use its platform to, “Build a portfolio of managed stocks, crypto, real estate, private credit, venture capital & more.”
The innovative idea behind Titan is it uses technology to provide an investment platform that enables individuals to orchestrate a portfolio made up of “titans”: a set of curated investment strategies, spanning public equities to real estate to credit to crypto, each created and managed by professionals or “titans” like the CIO of ARK Invest.
The overriding purpose of Titan is to provide access to investments retail investors had been held away from.
About Venture Capital
Venture capital is a form of non-public capital provided to companies by investors that have enough confidence in management and the company’s business model to expect above-average earnings. Because these companies don’t trade on public exchanges, investments, usually from family offices, well-off investors, and investment banks, have been the traditional sources of capital.
Though it is deemed risky for investors to commit funds to VC, the potential for above-average returns is an attractive inducement for investors. For new companies or ventures that have a limited operating history, this is the market they often turn to.
Take Away
ARK’s step into less-liquid assets departs from Wood’s earlier strategies, the success of which elevated her to all-star investor status as the value of ARK ETFs like the ARK Innovation ETF (ARKK) soared last year. ARKK has plummeted 60% so far in 2022, a much steeper decline than the 21% decline in the S&P-500-tracking ETF, the SPDR S&P 500 ETF Trust (SPY).
ARK has struggled on offerings this year. The firm announced the closure of its Transparency ETF (CTRU) at the end of July, and its eight remaining ETFs, including the ARK Innovation ETF (ARKK) have dramatically underperformed broader markets.
Related Information
Information on private offerings available through Noble Capital Markets may be available to you. Are you a qualified investor? Learn more by going here and discovering the various qualifiers and what may be obtainable by you.
Sierra Metals Inc. is a diversified Canadian mining company with Green Metal exposure including increasing copper production and base metal production with precious metals byproduct credits, focused on the production and development of its Yauricocha Mine in Peru, and Bolivar and Cusi Mines in Mexico. The Company is focused on increasing production volume and growing mineral resources. Sierra Metals has recently had several new key discoveries and still has many more exciting brownfield exploration opportunities at all three Mines in Peru and Mexico that are within close proximity to the existing mines. Additionally, the Company also has large land packages at all three mines with several prospective regional targets providing longer-term exploration upside and mineral resource growth potential.
Mark Reichman, Senior Research Analyst, Natural Resources, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Activities at Yauricocha mine suspended. Following a mudslide at its underground Yauricocha mine, activities remain suspended and will resume once conditions are deemed safe and appropriate. Following the mudslide incident, a group of residents illegally blocked the main access road and the company, along with local authorities, continue to seek a resolution.
Company financial guidance suspended. Due to the timing uncertainty associated with resolving the road blockage and the restart of production at the mine, Sierra Metals suspended 2022 production and financial guidance.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Mark Reichman, Senior Research Analyst, Natural Resources, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Mapping program sets up for a productive drilling program. The “Anaconda method” mapping program at the company’s Tatasham and Awacha porphyry copper targets has revealed indications of porphyry-style mineralization at both locations. Highly prospective porphyritic felsic intrusive rock was discovered at Tatasham, while mapping confirmed diorite and other intrusive rock with local hydrothermal breccias in the Awacha target area.
Drilling to commence soon. While the mapping program at Awacha continues, it has been completed at Tatasham. Drilling at Tatasham is expected to begin in the fourth quarter of 2022 followed by Awacha.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Investors have many options to gain exposure to gold. They may purchase gold bullion, gold coins, gold exchange-traded funds (ETF) and mutual funds, gold mining companies, or gold futures and options. Publicly traded equities of gold producers and royalty companies may offer an attractive way to invest given the disproportionate percentage impact higher commodity prices may have on a company’s bottom line and valuation for a given percentage increase in the commodity itself. While most investors are likely familiar with mining companies and how they operate, royalty companies may be less familiar.
What is a Gold Royalty?
A gold royalty is a contract that gives the owner the right to a percentage of gold production or revenue. Since royalties typically cover the life of a mine, gold royalty companies benefit from the exploration upside that may extend the life of a mine and thus increase the amount of gold or revenue they receive from the mining company at no additional cost.
There are several ways to generate royalties. First, royalty businesses may help finance a development project in exchange for a royalty. Second, a royalty business may purchase existing royalties from third parties, and 3) a royalty company may take a property that they already own, sell it to a mining company, and retain a royalty on the property.
There are several types of royalties. The two most common are NSR and NPI royalties. A net smelter returns (NSR) royalty is an agreement where the mining company agrees to pay the royalty owner a percentage of the revenue, less refining and smelting costs. A net profit interest (NPI) royalty entitles the royalty owner to a percentage of the profit from a mine.
A stream is a purchase agreement that provides the owner of the stream, in exchange for an upfront payment, the right to purchase all or a portion of one or more metals produced from a mine at a negotiated price for the life of the agreement. The negotiated price is generally at a significant discount to the spot price.
Advantages of Owning Equity Shares of a Gold Royalty Company
Compared with investing in gold production companies, royalty businesses generally benefit from low overhead costs, geographically diversified asset portfolios, and exposure to multiple operators. Additionally, they avoid costly exploration expense which is borne by operators while sharing the benefit and upside of exploration investment in properties where they retain a royalty interest. Like mining companies, royalty businesses offer greater leverage to changes in gold prices than investing in bullion. Lastly, royalty businesses generally seek to build portfolios of producing royalties that support dividend payments to shareholders. It is important to keep in mind that revenues increase with rising gold prices, increasing production on its royalty properties, and a growing royalty portfolio, while costs remain relatively fixed and stable. This scenario positions royalty companies to thrive in good markets and weather more challenging sets of circumstances.
As a royalty company grows, it offers the potential for multiple expansion, dividend payments, and the ability to execute larger transactions which could accelerate its growth. Junior royalty companies generally perform well in their early years since they can grow rapidly based on an increasing capacity to transact larger deals. Additionally, junior royalty companies may become attractive acquisition candidates for a larger royalty company seeking to enlarge its royalty portfolio.
Investor Considerations:
It is important for investors to keep several factors in mind when conducting due diligence on prospective royalty company investments. These include: 1) management, 2) asset portfolio, 3) asset quality, 4) jurisdiction, and 5) valuation.
Management
Should you bet on the horse or the jockey? It is important to evaluate management’s history and track record of creating value for shareholders. Does the management team reflect a balance of technical, financial, legal, and capital markets expertise? Is the board of directors comprised mostly of independent directors who provide a diversity of relevant experience and perspectives? Do they articulate clear objectives, and is their business model sound? Most importantly, do they focus on areas they know and employ a disciplined growth strategy, or are they seeking growth at any price?
Asset Portfolio
How is the company’s asset portfolio balanced between royalties that are producing cash flow streams versus royalties that are expected to produce cash flow within five years and/or longer?
Asset Quality
Because royalty companies have little control over the decisions of the mining companies that control the properties on which the royalty interest is held, it is important for investors to evaluate the operators associated with the properties in the royalty portfolio. Are they well-capitalized major mining companies or small start-ups? Additionally, it is helpful to evaluate mineral resource estimates associated with properties in the portfolio and the operators’ plans for development.
Jurisdiction
While geographic diversity is a selling point for most royalty companies, it is often helpful to consult the Fraser Institute’s Annual Survey of Mining Companies to check if royalty interests are in favorable mining jurisdictions versus high-risk areas.
Valuation
Royalty companies are often valued based on price to net asset value. Net asset value is the net present value (NPV) or discounted cash flow (DCF) of all future cash flow of a mining asset, less any debt plus cash. Price to net asset value is the company’s market capitalization divided by the net present value of all mining assets minus net debt. For those that pay a dividend, investors may also compare dividend growth rates and yield. Larger companies generally trade at higher valuation multiples which generally increase with scale due to lower perceived risk due to greater asset diversification and a proven track record of growth. As royalty companies grow, they may be able to establish and grow dividends to shareholders, offer greater liquidity due to listings on major exchanges, and benefit from broader research. Some may also benefit from their inclusion in stock indices. For those that pay a dividend, it is important to know whether the dividend is paid from operating cash flow or whether the company is borrowing to pay the dividend.
Take Away
Investors have many options to gain exposure to gold. Royalty companies may be worth considering as a vehicle for exposure to gold. However, it is important for investors to understand their risk tolerance and return objective. The universe of royalty and streaming companies represents a broad range of market capitalizations, and many differences exist among their asset portfolios. Channelchek offers a starting point for investors to conduct due diligence and dig deeper.
Great Lakes Dredge & Dock Corporation is the largest provider of dredging services in the United States. In addition, Great Lakes is fully engaged in expanding its core business into the rapidly developing offshore wind energy industry. The Company has a long history of performing significant international projects. The Company employs experienced civil, ocean and mechanical engineering staff in its estimating, production and project management functions. In its over 131-year history, the Company has never failed to complete a marine project. Great Lakes owns and operates the largest and most diverse fleet in the U.S. dredging industry, comprised of approximately 200 specialized vessels. Great Lakes has a disciplined training program for engineers that ensures experienced-based performance as they advance through Company operations. The Company’s Incident-and Injury-Free® (IIF®) safety management program is integrated into all aspects of the Company’s culture. The Company’s commitment to the IIF® culture promotes a work environment where employee safety is paramount.
Joe Gomes, Senior Research Analyst, Noble Capital Markets, Inc.
Joshua Zoepfel, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Awards. Awards continue to come Great Lakes’ way. Since the Company’s August 24th press release detailing several recent awards, the Department of Defense contract awards reports three additional significant wins totaling a cumulative $55.6 million of new business. The DoD daily announces awards in excess of $7.5 million.
The Details. On September 8th, the Company was awarded a $14.8 million contract for dredging the Mississippi River. On September 15th, Great Lakes was awarded a $16.4 million firm-fixed-price contract for dredging in St. Marys, Georgia. Lastly, Great Lakes was awarded a $24.5 million firm-fixed-price contract last Friday for construction of the Fire Island Inlet to Montauk Point dredging Moriches and Shinnecock Inlets. Work on the contracts is expected to be completed by mid-May 2023.
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The benefit of a recessionary economy is it helps to correct supply-demand imbalances. An obvious negative to this is it does so in a way where demand drops, causing supply to be more closely matched. This brings about downward pressure on prices. The price of oil is now where it was in January, before the Russian invasion of Ukraine, and before the partial ban on Russian oil by many large consumers.
The nine-month lows are a market response to an expected decline in economic activity as rising interest rates increase the potential for a deeper global recession – with further price pressure coming from a surging U.S. dollar.
Contracts for both Brent crude and WTI are up near 2% to start this final week of September, but are in part bouncing after a drop of 5% on Friday.
Another factor working against oil price increases is the strength of the dollar. The dollar index measures the $USD against a basket of major currencies; it has climbed to a 20-year high. Dollar-denominated oil has become much more expensive around the globe as oil is transacted in $USD. This pricing also has helped reduce demand for crude.
Five Reasons Oil and Energy May Tick Back Up
Yields on Eurozone government bonds are now rising. This may slow or reverse the strengthening of U.S. dollars as higher yields make them more competitive with U.S. government bonds. This could slow or reverse foreign exchange considerations and stem the rising cost of oil (after conversion to $USD) and help put upward pressure on demand.
Winter is approaching in Europe, and demand naturally picks up in the colder months for petroleum products. This additional demand would begin about the time that Europe has planned a full embargo on imports from Russia. A full embargo would halt the current 1.3 million barrels a day reaching the West. This supply would then have to be filled from other sources which would be expected to put upward prices on oil.
The Biden administration is proposing to replenish crude pulled from the Strategic Oil Reserve under a plan that is likely to see it order 60 million barrels this fall for delivery at an unspecified time in the future. That leaves at least another 100 million barrels to bring the country back to where we were in March 2022 – over two hundred more to bring us back to the peak. This promises to keep demand up well past any current crisis.
It has been a quiet hurricane season for the Gulf states, but there are at least two months left before Florida, Texas, and Louisiana, can let their guard down. These months are known for the strongest, most powerful hurricanes. The shutting of offshore oil wells or production in preparation (or repair after any storm) could cause rapidly rising prices.
Data last week showed OPEC-plus missed its target by 3.58 million barrels per day in August; this is a bigger shortfall than in July. Prices trend with expectations, if OPEC-plus continues to fall short, this could provide for prices to rise.
Take Away
Oil price increases and the concomitant strength of the energy sector has been a standout among other investments in 2022. There has been a slide in both since early June. A recipe for higher levels may be coming together in the months ahead as a multitude of factors come together that may reduce supply just as demand is building in the Northern hemisphere.
