Prelude

On August 24th, Nomad Royalties (NSR.TO) announced it was acquiring Valkyrie Royalty, a private royalty company that was created just a few weeks before (the US$0.20 investment was settled on June 30th) in an all-stock deal. Great news for Valkyrie, you’d think, as it acquired its asset for US$3.5M just two months earlier and is now selling the company for a total consideration of US$7.4M. This consideration is based on a Nomad share price of C$1.37. Since then the Nomad share price has appreciated and although that makes it an easier pill to swallow, the share price performance since the announcement is irrelevant as we never disagreed with the valuation of the royalty).

However, this is where the perverse effect of founders shares comes into play. 83% of the capital gains (based on the Nomad share price at the announcement) will be taken home by people owning the founders shares, which represents just a few percent of the capital contributed.

Valkyrie was intended to remain a private company while growing its asset portfolio, and the management’s explanation about improving liquidity is therefore a non-argument. Any shareholder investing in a private company in June knew very well what they were getting into.

The email below was sent to the three main people listed on the Valkyrie Royalty website, Rick Van Nieuwenhuyse, Sorin Posescu and Daniel Schieber at 2:05 PM PST on Monday, August 24th. There was no return email to discuss the points below, calls to Daniel Schieber on Monday August 24th and Tuesday August 25th remained unanswered, and in a call with Rick Van Nieuwenhuyse on Tuesday, August 25th at 8:30 AM PST, Van Nieuwenhuyse commented ‘the share structure is what it is’.  Upon enquiring what the founders shares were priced at just to make sure we are providing the correct information, Van Nieuwenhuyse ‘couldn’t remember’ the price paid for the founders shares. We are using the assumption these founders shares were priced at US$0.01 but this remains with reservation and we are happy to correct this information the moment anyone can remember what they paid for the founders shares (side note, we skimmed through the Management Information Circular but couldn’t find the exact price either).

To be perfectly clear, we don’t object to the deal itself or the purchase price and have nothing but the deepest respect for Vincent Metcalfe and his team at Nomad Royalties. But our opinion on the three gentlemen running Valkyrie Royalty has now fundamentally changed if they don’t realize there’s something fundamentally and ethically wrong.

The letter

Rick, Sorin, Daniel,

Much to my surprise I read about the sale of Valkyrie to Nomad Royalties. While this sale makes sense, I was flabbergasted to see no reservations were made to bring the founders ownership more in line with a reasonable ownership to account for the lack of execution and the sale of the company less than eight weeks after closing the US$0.20 round.

First of all, about your announcement it is fundamentally wrong to use a 20 day VWAP to calculate the gain on a buyout (and tout a 32% gain on a VWAP which is substantially higher than the share price upon announcement) if one of the two companies is not listed. It is a valid comparison if both companies are listed and would be subject to the same market conditions. This basically also means you acknowledge there were no capital gains to be expected from the private round at US$0.20 considering you deemed that to be the fair value of the Valkyrie shares.

Secondly, I don’t have an issue with the deal, I have an issue how the Valkyrie management deals with the smaller shareholders.

Given the current share count of 32.2M shares and assuming the 13M founders shares were issued at a cent (please correct me if I’m wrong), and the 19.2M shares at US$0.20, the founding shares have contributed 3.3% of the capital raised (US$130k on US$4M) but own about 40% of the outstanding shares.

Given the total acquisition value of around US$7.6M, a total capital gain of US$1.16M was generated considering the 32.2M shares of Valkyrie have a basis of US$0.20/share, which means the implied capitalization was US$6.44M. This means the founders shares, which contributed 3.3% of the capital are taking home 83% (!) of the capital gain here (US$2.86M profit on the founders shares, while the US$0.20 round creates total capital gains of just US$580,000). The 13M shares have a cost basis of US$0.01 but are being sold at a value of US$0.23, 2200% higher. Whereas the investors that actually put the money up that allowed the founders shares to get any value, only take home less than 15% based on the Nomad share price of C$1.30/share (and that is before the C$0.90 round becomes tradeable so some pressure on the share price could be expected).

This is fundamentally wrong.

While I acknowledge founders shares are a compensation for management time and should be seen as sweat money, I’m baffled you don’t see how outrageous this is. The original plan was for Valkyrie to grow whereby the amount of founders shares was to be diluted by adding new royalties to the company’s asset base. This hasn’t happened yet, and the founders shares basically provide a free ride. Of course the Valkyrie management was happy to sign off on the sale to Nomad Royalties as it means a huge cash-out for little efforts and a small investment.

Don’t get me wrong. I am not protesting the sale to Nomad in se. I am protesting that management is taking the easy way out and acts in its self-interest as 3.3% of the contributed capital will take the bulk of the capital gains (83%) home while not incurring any monetary risks given the low cost basis of the stock.

Rick, Sorin, Daniel, I would like to implore you to do the right thing, as I am confident you also understand how bad this looks for the optics of the deal, and the reflection on your reputations.

Rather than just complaining, I would also like to offer a proposed solution. A solution I think will work in everyone’s best interests.

The 13M founders shares could be consolidated at a 2.5:1 basis. That would reduce the share count by 7.8M shares to 24.4M shares. This would mean every Valkyrie shareholder will receive 0.303 shares of Nomad Royalties. Not only does this provide a reasonable premium to the investors in the US$0.20 round (in line with the performance of the precious metals markets), this also means founders are still making 8X their money on the founders shares. Additionally, a part of the money ‘lost’ on the lower founders share count would be mitigated by the higher consideration received for the shares you subscribed to at US$0.20 – where I am sure you also participated for a considerable amount. This would result in a more fair treatment of all shareholders as the 3.3% in contributed capital would still take 62% of the capital gains home.

Long story short, there are several options on the table to find a solution that could make everyone happy, and yes, some compromises will have to be made. But the proposed deal, as is, is unacceptable as this would indicate a severe underperformance versus an ETF over the same investment period.

Kind regards,


Disclosure: The author has a long position in Valkyrie Royalty Corp.

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