Updated: Nov 8, 2021
Adam Davidson, CEO of Trident Royalties presented to private investors to explain this commodity mining company which is based on royalties and streams (more on this shortly). The company listed on the AIM in June 2020 and has a market cap of c.£72m. This week Simon Thompson of the Investors Chronicle also covered the stock in a very positive and detailed piece with a blue-sky valuation of 84p/share whereas it is trading at c.40p this week.
A recording of the Yellowstone Advisory webinar can be found here.
Trident covers all areas of mining and commodities excluding thermal coal so veers away from fossil fuels. Rather than mine themselves the revenues are based on royalties and streams. Coal is not a focus for Trident as many pools of capital have a strong ESG focus so this is a practical limitation as many institutions would be barred from buying in. Also, coal exposure can create a drag on NAV even if the projects are accretive short term.
Royalties are similar to those used in the music industry. There is an agreement between the holder and the issuer of the royalty, typically the operator of the asset, which entitles Trident to a portion of the revenue derived from the project. In a typical royalty agreement, the purchase price is paid upfront and there is no ongoing payment to the owner. This gives Trident exposure to the cashflow without concerns of potential dilution or operating costs compressing margins. This gives investors a hedge against general inflation with broad exposure across multiple companies in multiple jurisdictions.
Streams differ from royalties as typically there is an upfront payment for the delivery of a ‘stream’ of processed goods which are purchased at a substantial discount to the prevailing market prices.
Royalties are typically treated as a means of financing for mining companies. Indeed, today you would be hard pushed to find a mining company that doesn’t use royalties as a way of raising capital. Royalties sit in a sweet spot for the mining operators between equities and debt as they are only paid out when producing, yet deliver capital when needed in the early stages of an operation. For the royalty holder the bonus is that the exposure is limited to the top line of the P&L with mitigated downside risk. Royalties run with the land and stay with a site even if an operator declares bankruptcy. Royalties rank senior to equities and many of the royalties Trident own are ranked senior and secured.
Trident has acquired diversified royalties and streams in resource friendly jurisdictions globally namely, USA, Australia, Peru and Zambia covering copper, gold, iron ore, molybdenum and lithium. This has diversified the focus more widely relative to the rest of the mining royalty sector which is primarily focussed on the Americas and on precious metals.
In comparison to its peers, Trident aims for the oft-ignored smaller transactions, concentrates on at-production/producing assets and is not heavily weighted to precious metals which differentiates Trident’s portfolio from the rest of the mining royalty sector. This sector is typically 92% precious metal focussed, versus Trident’s more evenly divided revenue split which broadly mirrors the global mining sector with 1/3 in precious metals, 1/3 in base metals and 1/3in bulks/battery/industrial metals. This seeks to lower risk and reduce revenue volatility.
As Trident does not operate mines and instead offers a form of financial instrument to mining operators, Adam Davidson was clear that it was a hugely scalable business. The whole market is worth approx $60-70 billion. Trident’s focus on other mining products away from the sector’s precious metals concentration gives a huge potential growth area for the company.
Over the last 18 months, Trident has done 7 acquisitions. This has boosted gold, copper and lithium royalties. At the time of listing, Trident had 1 iron ore royalty and now has 13 royalties in operation across multiple commodities. One of the royalties is now generating cash flows for Trident. The company’s acquisitive streak is set to continue with a pipeline of projects. There are currently 9 NDAs in operation looking at gold, iron ore, zinc, nickel, lead and other battery and industrial materials. All these are in in lower-risk emerging markets and Tier 1 mining jurisdictions, the majority of which are in Europe and Australasia. Adam is keen to explore more opportunities in nickel and potentially zinc for future acquisitions.
The next paying royalty mines will be Lake Rebecca in 2022, Warrawoona in 2023 and Lake Thacker in 2024.
When valuing an acquisition, Trident is firm that it will negotiate hard to pay 0.1x NAV for very early-stage projects up to 1x NAV max for producing mines with an average of 0.6-0.7x NAV paid for producing mines.
Since listing the shares have doubled from 20p and liquidity has improved significantly. The company has moved past the proof-of-concept stage and is now at build out. The acquisitions have driven the share price performance but now new value in the portfolio is more visible as assets start to produce so a re-rating in the share price should be on the horizon.
At the current share price of c.40p, Trident is currently trading at a discount to NAV relative to the peer group at 0.6x versus a range of 1.0x to 1.9x across the small to major players in the mining royalties sector. With current performance the company is on track to increase the NAV-per-share while decreasing the discount-to-NAV through a re-rating of portfolio assets. In addition, the company will focus on increasing revenue through organic portfolio development and further acquisitions. There is also the potential for a dual listing on exchanges where more royalty peers are listed. Consolidation in this sector is also on the table.
Adam explained that acquisitions are made if they are good value and not just to make headlines. The ability to pick and choose across commodities allows them to be nimble and not be tied to any particular mineral. Unless there is value in deal they will not touch it. Hence over the last year there have been fewer deals than the previous year. However, the deal size is 50% more in value at $30m than 2020. When executing a deal all due diligence is outsourced to leading experts in the field and jurisdiction.
Across the portfolio pipeline, Trident now has 5 projects moving from the early exploration and feasibility stages to the later construction and production phases. Four early-stage projects are on the cusp of moving out of the exploration phase. This movement through the development cycle increases the value of the royalties as the date to first cash flow is brought forward. Typically, this value increase is exponential as each milestone is hit through to full production of the commodities.
Trident seeks to maximise equity value by focussing on a blended portfolio of the above including cash generative producing royalties, advanced stage projects with line-of-sight to additional revenue and early-stage assets with huge growth potential. These are described as value inflection points of which Trident now has several projects delivering at this turning point.
The key assets about to pass this inflection point are:
Thacker Pass Lithium, USA: This mine has already had a 100% increase in mineral resources since acquisition and a 30% increase in capacity. There are further approvals due in H1 2022 which will allow this mine to be constructed and active. This is a material re-rating event. There is also an expanded production profile on the table which will increase royalties.
Lake Rebecca Gold Project, Australia: The site expansion and upgrades are already done. Takeover offers have been received by Apollo from Ramelius Resources and Gold Road Resources which are both credible mid-tier Australian mining companies with no debt and market caps of c. AUD $1bn. This is a very good outcome and re-rating event.
Mimbula Copper: Copper prices are up 90%, project capacity has increased and the operator is considering a UK listing in 2022. Construction of the mine is underway. These are all significant re-rating signals.
Koolyanobbing Iron Ore, Australia: There has been a surge in the iron price post Covid and a new pit is being explored which falls within the royalty zone potentially pulling forward cash flows. This latter event would pay for the original acquisition.
Broker forecasts look particularly good for 2024 when the Thacker Pass $13.2m repurchase receipt is returned. Adam was clear that the company focus is on strengthening 2022 and 2023 revenues to boost the short term. Revenues are set to increase YoY either side of the peak in 2024.
The directors have undertaken significant share purchases since the AIM listing with ongoing interest in buying further shares in the company with a current undiluted 2.8% holding. The directors and the board are mainly from a Private Equity mining background with several with technical expertise with solid track records in execution. Paul Smith of Glencore and Marshall Wace has brought huge credibility to the company as have Paul Bacchus and Al Gourley as NEDs.
After the capital raise in March 2021 the shareholder register improved with several new institutional holders on board plus retail investors. The likelihood of another raise is dependent on the deals they do. However, Adam was keen to stress that the company focus is on their equity as they are only rewarded if the share price goes up so deals will only be done if accretive and unlock value.
The dividend is the hot topic right for the company. Gauging the needs of institutional investors and what yield is required for Trident to be held in a portfolio will dictate the levels paid out, but it looks like the conservative end of the peer group’s 20-30% of FCF as the benchmark will be paid out as a dividend. No timeline was put on the payout of a dividend as it is a WIP.
This was a very clear and detailed presentation from the CEO, Adam Davidson. There is huge growth opportunity for the company with the ability to slot into ESG portfolios.
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