Natural resources, including metals and mining, are a vital component of the global economy, but it is also an industry that is subject to significant volatility and risk. One way for companies in this industry to mitigate these risks is through the use of a royalty business model. This model, which involves the sale of a share of future revenue from a mining operation, mineral deposit or intellectual property in exchange for upfront financing, provides a range of benefits for both mining companies and investors.
Special purpose acquisition company (SPAC), American Acquisition Opportunity, Inc. (NASDAQ: AMAO), and its proposed acquisition target, Royalty Management Corporation, are focused on generating steady cash flow through the acquisition, development, and investment into near-term income-producing natural resource assets.
Let's take a deeper dive into the royalty business model, the potential benefits, and how AMAO & Royalty Management plans to build a robust natural resources-focused royalties business.
Breaking Down the Royalties Business Model and Potential Benefits for Shareholders
A royalty business model involves the sale of a share of future revenue from an underlying asset in exchange for upfront financing. The assets can be anything that generates cash flow, such as your favorite band's music to natural resources. For this article, we will focus on natural resources and mining royalties.
In this arrangement, the mining company retains ownership of the asset, while the royalty holder receives a percentage of the revenue generated by the mine. The percentage can vary depending on the terms of the agreement, but it typically ranges from 1-7%.
The benefits of the royalty business model for mining & natural resource companies are numerous. First and foremost, it allows them to raise capital without incurring debt or giving up ownership of their assets. This can be particularly useful for smaller mining companies that may not have access to traditional financing sources, such as banks or equity markets.
In addition, a royalties business model provides mining companies with more flexibility than traditional financing sources. For example, they can use the funds to expand existing operations, explore new projects, or invest in research and development. This can help them remain competitive and adapt to changing market conditions.
For investors, the royalties business model can offer a range of benefits as well. First and foremost, it provides exposure to the metals and mining industry without requiring them to take on the risks associated with owning a mining operation outright. Instead, they can benefit from the upside potential of a successful mining operation while minimizing their downside risk.
Furthermore, royalties can provide investors with a predictable stream of income over an extended period. This can be particularly attractive for those looking for stable cash flows or a source of passive income.
Example Mining Royalty Transaction
An example of a royalties transaction in the metals and mining industry is the sale of a gold royalty by Franco-Nevada Corporation (NYSE: FNV) to Kirkland Lake Gold Ltd (acquired by Agnico Eagle Mines (NYSE: AEM) in February 2022). In 2020, Franco-Nevada sold its royalty interest in the Detour Lake mine to Kirkland Lake Gold for $60 million in cash and $20 million in Kirkland Lake Gold shares. In exchange, Franco-Nevada will receive a 1.5% net smelter return royalty on gold production from the Detour Lake mine, with a maximum payment of $10 million per year.
The benefits of this transaction for both parties are clear. For Kirkland Lake Gold, it provided them with the financing necessary to acquire the Detour Lake mine, while also reducing their overall financing costs. For Franco-Nevada, it allowed them to monetize a portion of their royalty portfolio while retaining exposure to the upside potential of the Detour Lake mine.
American Acquisition Opportunity & Royalty Management Corp Business Combination
In June 2022, American Acquisition Opportunity announced the signing of a definitive agreement to seek a business combination with Royalty Management Corp. (RMC), which would result in RMC becoming a publicly-traded company on NASDAQ. Upon closing of the transaction, American Acquisition Opportunity will change its name to Royalty Management Corp and will trade under the ticker symbol “RMCO.”
The all-stock business transaction provides RMC with an implied pro forma enterprise value of $111 million. Existing RMC investors will hold 45.9% of the pro forma equity, assuming no redemptions.
RMC seeks to develop long-term reoccurring revenue streams under its three-pillar plan: natural resources & land assets, sustainable assets, and intellectual property & digital assets. More specifically, RMC's investment targets include the acquisition of assets, rights, and land resources for the development of critical and rare earth elements, metallurgical carbon for steel and specialty alloy metals, and traditional resource deposits that can be proven and monetized for current and long-term cash flow streams.
Additionally, investments in sustainable revenue streams that have the potential to monetize unique aspects of property and land through innovative approaches, such as water, agriculture, sustainable timber, and sustainable building solutions. Lastly, acquire intellectual property rights, patents, and sponsor or develop data centers that capitalize on the digital and data-oriented transition of many industries, with a focus on generating long-term cash flow streams from new and existing technology.
How Does AMAO Differ From Other SPACs?
Special purpose acquisition companies (SPACs) have been around for decades but saw their popularity surge to a new all-time high in 2020 amid the COVID pandemic. While 2020 and 2021 were generally seen as very rewarding years for SPAC investors, 2022’s sell-off exposed the hefty dilution and lack of shareholder-friendly features that most SPACs carried.
The important factor to understand with AMAO is that the management team has specifically developed the SPAC to be more shareholder-friendly than your average SPAC. AMAO has achieved this by electing redemptions for technical hedge funds, which are largely in to see a quick return from their early investments in the SPAC. As a result, AMAO has helped reduce the trust balance to $7 million from $16 million, which will limit extra dilution from investors that may not be interested in the long-term outcome of the proposed business transaction.
Another key factor that makes AMAO more friendly to shareholders is the lack of Private Investment in Public Entity (PIPE) financings. PIPE financing is a type of private placement in which a company raises capital by selling its shares to a select group of institutional or accredited investors, typically at a discount to the current market price. This type of financing is often used by companies that are already publicly traded and need to raise capital quickly.
When a company engages in PIPE financing, it may issue new shares of common stock or securities that are convertible into common stock. The investors who participate in PIPE financing typically receive these securities at a lower price than the current market price of the company's stock, as an incentive to invest. However, this can lead to the dilution of existing shareholders' ownership in the company.
Dilution occurs when a company issues new shares of stock, which increases the total number of shares outstanding. As a result, each share represents a smaller percentage of the total ownership in the company. In the case of PIPE financing, the discount at which the new shares are issued means that the existing shareholders' ownership percentage is reduced even more than it would be if the company issued new shares at the market price.
In addition to dilution, PIPE financing can also lead to other issues, such as the potential for conflicts of interest between the company and the investors who participated in the financing. These investors may have different priorities or goals than the company's existing shareholders, which can create tension and affect the company's decision-making processes.
As a result of these efforts by AMAO, the SPAC management team has developed a beneficial capital structure for shareholders once the merger is completed. The lack of PIPEs and associated dilution will also allow the combined entity to trade more like a regular pubco.
Royalty Management’s Current Portfolio & Synergistic Relationships
As of March 2023, RMC maintains a robust, diversified portfolio of revenue-generating assets across its three pillars: natural resources & land assets, sustainable assets, and intellectual property & digital assets. RMC’s mandate is to develop long-term revenue streams that support the company’s environmental and social goals.
Currently, RMC’s portfolio is composed of the following entities:
- Eko Housing & Farms: focused on ecological structures to replace legacy inefficient and ineffective methods of living, growing food, and working (sustainable asset royalty)
- The Vault: Data center services and solutions (IP & digital asset royalty)
- HeartWater: focused on ethical and sustainable capture of rainwater, which is purified and bottled in a fully-aluminum container (sustainable asset royalty)
- FUB Mineral, LLC: production of metallurgical coal cash flow (land asset royalty)
- Pollinate: organic bee and bee products company (sustainable asset royalty) Ferrox Holdings: producing mine & processing titanium, iron, and vanadium assets, 100% offtake secured (land asset royalty)
- RMC Land Holdings: ethical timber sourcing (land asset royalty)
- LBX: digital mining and blockchain technologies (IP & digital asset royalty)
- Other assets include forestry development, infrastructure resource permits, and digital mining
RMC has several synergistic relationships that help the company attract deal flow, investment opportunities, and more. American Resources Corporation (NASDAQ: AREC) is a key synergistic relationship for RMC, as AREC's focus on rare earth and critical elements and met coal provides opportunities in the land asset royalty space.
Land Betterment is another close synergistic relationship with RMC, which has provided several opportunities and deal flow across its sustainable asset royalty pillar. Other notable relationships include T Squared Partners LP, the Center for Advancing Sustainable and Distributed Fertilizer Production (CASFER), and Land Resources & Royalties LLC.
RMC: Recent News
1/3/23: RMC announces the expansion of its investment in Ferrox Holdings to over 10% ownership.
Tom Sauve, CEO of RMC said: “With this expanded investment, we are able to gain further upside in Ferrox, while at the same time, offering its long-term shareholders upside through our future public presence in the United States. We look forward to continuing to help Ferrox grow its business through execution that will generate value for all of its stakeholders, including the local communities in South Africa by paying good wages and utilizing safe, modern-day operating practices."
12/20/22: RMC completes investment into Heart Water, Inc., and announces a royalty financing structure.
“We are excited to partner with Heart Water on this exciting opportunity to transform not only how water is sourced but also how sustainable royalty interests are generated from transformed infrastructure and facilities. More and more we hear about the contamination of water sources, and the Heart Water system ensures that water is captured, processed, and purified prior to being contaminated from the ground and related infrastructure,” noted Mr. Sauve.
12/16/22: AMAO files Form S-4 registration statement with the U.S. SEC in connection with the proposed business combination with RMC. The S-4 filing holds a preliminary proxy and prospectus.
12/13/22: RMC becomes a member of Texas Tech University’s Center for Advancing Sustainable and Distributed Fertilizer Production (CASFER). As a gold member of CASFER, RMC will gain access to certain technologies and IPs developed within CASFER. Particularly, the technologies to produce, capture, and recycle nitrogen-based fertilizers from farming activities. This will help prevent the nitrogen from the fertilizers to leak and contaminate municipal water sources and other environmentally sensitive resources.
10/6/22: RMC’s portfolio holding, Ferrox Holdings, Ltd., announces it is preparing for commercial production to begin during the fourth quarter of 2022. The low-cost producer of titanium, vanadium and iron in South Africa launching commercial production comes at a time when minerals like vanadium are in high demand amid the growing electrification trend.
Overall, American Acquisition Opportunity and Royalty Management Corporation are laying the foundation for a potentially-lucrative royalties business that will benefit from a diversified portfolio covering land, sustainability, and IP & digital assets. These markets are also very important and vital to the global economy. As the drive for electrification and further sustainability takes hold, RMC and AMAO look to answer the rising demand for these minerals, materials, and solutions. Furthermore, the digitalization of the economy gives leverage to RMC's growing IP and digital mining portfolio.
Unlike other SPACs, AMAO is taking a more streamlined and shareholder-friendly approach to its proposed business combination with RMC. Rather than relying heavily on dilutive PIPE financings, AMAO is electing to maintain an attractive capital structure, which will be favorable for RMC and its shareholders post-merger. As the tailwinds continue to roar for critical metals, sustainable living, and digitalization, RMC, and AMAO are very well-positioned to leverage their royalty business model to help provide real solutions to these markets, while also providing a potentially attractive investment opportunity.
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