Trident Royalties (TRR)
Market Cap £96.6 million; NAV £109; Discount to NAV 11.4%
Bid 32p - Ask 34p
Trident, a mining royalties investor has been building up a significant portfolio of royalties and is close to profit.
It has accumulated 21 investments. The latest acquisition is a 0.9% net smelter royalty on New World’s Antler copper project in Arizona for A$11 million.
The gold portfolio provides the near-term upside. This accounts for 37% of the company’s NAV, while lithium accounts for 41%. The rest of the portfolio covers copper, silver, iron ore and mineral sands. This means that there is significant exposure to electrification technologies.
At the end of November, Trident Royalties secured a three-year $40 million revolving credit facility at a lower interest rate (SOFR+3.5% average) than previously and this will save around $1 million/year. The facility can be expanded to $60 million and could be used to fund new acquisitions (are there any bombed out mining concessions who need funding anyone?!).
Trident Royalties made a loss in 2022, but is expected to report its first PBT of $8.4 million in 2023. More importantly, $16 million in cash is likely to be generated, helped by a reduction in receivables. In 2024, $11.5 million could be generated, although cash generated prior to working capital movements should double. Cash generation should really take off in 2025 and 2026. In fact cash flow should equate to 80% of today’s market cap in 3 years time (27p of cash per share).
The share price has dropped a third this year on negative sentiment to Lithium. But 59% isn’t Lithium - and given that all the 41% Lithium are NON PRODUCING (yet) then the 1/3 reduction in the share price is even more insane! In fact, almost the same proportion (37%) as lithium is gold which is currently near record highs!!
Most of the gold holdings aren’t royalties but instead are offtakes. It’s worth understanding what an “offtake” is too. An offtake contract according to TRR is a contract pursuant to which the operator agrees to sell, and the purchaser agrees to buy, refined gold produced from the mine or mines over which the offtake is granted. Gold offtakes provide “royalty-like” exposure, where returns are driven by the volatility, production profile, gold price and exploration success but is insulated from capex or operating costs. The key commercial terms include those relating to the amount of gold to be purchased, the duration of the contract, and the payment terms. The purchaser has the right to purchase gold at the lowest reference price in a defined quotation period, which is typically 6-8 days. A positive margin can normally be made on the resale of the gold. The average margin is typically larger during periods of increased volatility and higher/rising gold prices.
The offtake portfolio generated US$6.1m of revenue for Trident during 2022 and is expected to grow significantly over the coming years.
For example, if you are a Gold Miner who has an offtake agreement with me. Let’s say Gold increases from $2000 to $2100 next week. The offtake gives me the right to buy 35%-100% of your gold at $2000 and sell it at today’s market rate = $2100. If you’re producing 1,000 ounces every week, and it’s a 100% offtake, I’ve just skimmed ($100x1000) so $0.1m from you….. in the space of a week. If gold drops the following week back to $2,000 I simply don’t buy any.
Conclusion:
Trident is an excellent opportunity to buy and have less risky exposure to minerals markets.
It is low risk and a great way to take advantage of net zero trends without mining risk. A great complement to the likes of Power Metal.