Royals, Royals, TRR et al

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Coining it in with a Royalty; Gawd bless yer ma’am

Dear reader,

Let’s talk Royal…ties. Today’s focus is on Trident (TRR), ahead of its Q1 2024 update on Tuesday, but I’d also like to compare TRR with Franco Nevada (FNV), Ecora (ECOR), Power Metals (POW) and a non-mining play DUKE. Which is the best? Do I pick my Oak Bloke 2024 idea Trident or go rogue? Read on reader, read on!

Trident Royalties

TRR in their March 2024 presentation tell us that S&P assess them as undervalued relative to their NAV, by about 2.5X-3X. In fact Lithium Royalty, a 100% focused on Lithium royalty is valued on the same basis (while TRR is 41% Lithium and 59% Gold, Copper, Silver and a little HMS, Iron and Base Metals). The Lithium is not yet producing so the proportion of gold is much higher in 2024. Great news when Gold is at $2,300 an ounce.

ECOR is similarly undervalued but holds some valuable royalty holdings including notably copper. In my mind Ecora (Anglo Pacific as it used to be) was much more than 8% met coal, so finding it now has large exposure to copper is interesting. Copper is at $10k. But Cobalt, Nickel and Vanadium are all at rock bottom prices at present. These three metals are all battery metals so “should” do better in the future. So half the ECOR portfolio is prospering and half not so much.

Ecora’s portfolio of metals

Cobalt is at rock bottom prices

Franco Nevada

Franco Nevada is predominantly precious metals

Edmund likes royalties (follow his comments at 37 minutes):

Franco Nevada is on a PE of 35, pays a dividend of 1.1% and trades on 4.07 times its book value. Its assets are in safe jurisdictions and has a somewhat surprising O&G component making up 17% of its revenue. It is one of the grand daddies of the royalty space and was tipped by Edmund Shing of BNP last year at $155 per share, and now are 20% lower at $125 a share. Ouch.

POW

Power Metals earns nothing from its royalties. Not a bean. Not yet. But Kavango are soon to be drilling in Botswana, so that could change.

-   A first phase of 5,000m diamond core drilling is planned on the Karakubis Project tenements in western Botswana.

-    Drilling will target the shallower Kara Anticline's potential to be a copper mineralising system.

-    Mobilisation of drill rig expected during Q2 2024, with May targeted subject to drill rig availability.

-    Drilling expected to last four months.

Reitenbach and E-12 meanwhile are uranium prospects and POW are working towards an IPO of Uranium Energy Exploration later in 2024. Once these mines are in operation (probably 8-10 years in the future) the royalty will be valuable.

Finally New Ballarat which is 49.9% owned by POW (in addition) to the royalty is in the process of a sale to Red Rock Resources (who own the other 50.1%). They intend to develop the mine.

So POW has 4 royalties which are valued at zero but that picture could change through KAV, RRR and UEE who plan to prospect and develop these holdings.

RRR are planning to buy New Ballarat from POW

So POW would be a choice if you want amongst its cornucopia of holdings, listed holdings, and soon to be listed, some royalties which are effectively in the price for free. If any of those 3 companies find a resource these royalties suddenly could be worth many times the price of POW.

Trident

I’ve revised my TRR revenue model based on a higher $2,200 gold (appreciate even this is below current prices). The result is that the revenue estimate for 2024 arrives close to that of Liberum and ahead of Tamesis who I notice continue to assume $8,500 copper and $1,950 gold despite these prices now being well out of date.

Further good news derisking the funding for both Thacker Pass (US Gov’t) and Paradox (offtake with LG) has had zero effect on the TRR share price and both projects are 3-4 years away from production plus Lithium prices remains very depressed despite growing numbers of EVs, BESS (Battery Storage) and continuing demand for ceramics and industrial use. Paradox’s 2nd mine “Green River” is being sampled too, and TRR’s NSR of 2.5% extends to this too, but there is nothing in the NAV reflecting the value of this. Nor is it the case that any uprating of Paradox has happened. TRR’s Royalty is held at 0.3X ($12.75m) not $42.50m so there’s $30m discount which should partly unwind on the back of the LG news.

Several holdings begin production in 2024. Greenstone, La Preciosa, Dandoko plus expansion is ongoing in various parts of the gold offtake portfolio. Kwale announced its production continues to the end of 2025 and

DUKE

Rather than royalty on mining what if you had a royalty on any kind of business? Duke is private credit so lends money in exchange of a cut of future revenues of whatever that business sells. If that business thrives Duke makes more money. Typically these businesses borrow from Duke to carry out an acquisition or to expand their business in some way. The loan is typically at a 12%-14% rate. Duke also takes a minority preference share position in its investees too. The agreement is typically 25-30 years (i.e. much longer term than normal debt or private equity) and this is a partnership approach - but Duke offer a “buy out” option after 3 years too. During Covid (when Duke fared badly) it took further ownership of some business swapping debt for equity and in one case took ownership of assets - some river boats on the Danube I seem to recall. Despite some pundits saying its rag tag (their words) set of assets make no strategic sense, Duke is thriving. Its cut grows with inflation so of course the past few years will have boosted its income. The business also provides an attractive 9% yield. It recently had a very favourable write up by the analysts Hardman.

Duke Investees

Conclusion

TRR is on a 47% discount to the unrisked NAV, but a 17% premium to the risked NAV. Its forecast Price Earnings of 8 falls to 4 and to 2.6 in FY25 and FY26. If you believe Lithium has a bright future, but also like Gold, with a smattering of copper and silver then TRR has strong, future upside.

ECOR meanwhile is “more mature” and is “only” on a 44.5% discount to its NAV but there’s no risk discount - just a 44.5% discount. It also offered a tasty 8% dividend but going forwards has cut this to 4c (4%) based on 25%-35% of FCF. It speaks to further diversification (away from coal and iron ore) and deleveraging and buying back shares. If you prefer industrial metals required for energy transition (copper, cobalt, nickel, vanadium) ECOR is an interesting way to play this.

Franco is on no kind of discount and is a large part of any Gold Miner ETF and while it should see upside if gold heads further up, it doesn’t appeal to me whatsoever.

Duke is on a 20% discount to its NAV and offers a high dividend but hasn’t achieved share price growth despite growing its NAV and dividend. If a nasty recession hit I expect DUKE would suffer, although it proved its model in 2020 and bounced back so confounded its critics. Mining is cyclical too, so choosing Duke wouldn’t necessarily be more risky than a mining royalty.

So which to pick of the 5? I think you need to consider priorities. Duke offers income and appears cheap relative to its commercial progress. Franco is the lowest risk and popular holding for gold with an O&G twist. POW is full of hidden value but does not offer income and carries a degree of risk inherent in junior mining. Ecora offers income along with blue chip customers and a tasty discount. Trident’s gold holdings and future Lithium prospects offers no income now but plenty of growth to both its income and NAV, but is less mature than its peers - arguably more risky - but given the recent moves at Thacker and Paradox I believe that risk is less than the price suggests. It’s fair that Sonora could go either way but the Mexicans will be under pressure by the US to stop their nationalisation - and Mexico could miss out on friend-shoring if it plays fast and loose with international law. It seems to me this will resolve in favour of TRR (and others like Cadence KDNC) in time.

I expected to come down in favour of TRR and POW which I hold, but both ECOR and DUKE are very interesting indeed. Food for thought, reader. What’s your view?

Regards

The Oak Bloke

Disclaimers:

This is not advice

Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".

STOP PRESS: A belated honourable mention should probably go out to Baker Steel too. This holds royalties over its Met Coal holding in Australia plus Gold in Zimbabwe at the Bilboes mine (my precious) and in Russia over Prognoz, previously owned by Polymetal. I see Simon Thompson wrote a very favourable article last Friday about BSRT. I’m looking forward to markets open on Tuesday.