Valkyrie Royalty: about founders shares and a ‘Vancouver Special’ – how founders take home the bulk of the gains with the sale to Nomad Royalties

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 30^th) 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 24^th.
There was no return email to discuss the points below, calls to Daniel Schieber
on Monday August 24^th and Tuesday August 25^th remained
unanswered, and in a call with Rick Van Nieuwenhuyse on Tuesday, August 25^th
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.