Take advantage of the millennium offer
Commodity Royalty Group Trident Royalties (TRR:48p) closed the deal of the millennium last year. In March 2021, the group paid US$28m (£20.7m) for a 60% interest in an existing gross revenue royalty on the Thacker Pass Lithium surface mine project in Nevada, l one of the largest known lithium deposits in North America. Thacker Pass is operated by Lithium Americas Corp (NYSE: TSX: LAC), a well-funded mining group with a market capitalization of C$4 billion.
At the time, Thacker Pass contained Canadian Institute of Mining Metallurgy (CIM) compliant mineral reserves of 3.1 million tonnes of lithium carbonate equivalent (LCE), making it the largest reserve of lithium in the United States, and one with an estimated life of 46 years based on Proven and Probable LCE Reserves. However, the Mineral Resource Estimate (MRE) was close to 6 million tonnes LCE, providing additional resources to extend mine life or support production expansion.
Lithium Americas then released an updated MRE that more than doubled the size of Measured and Indicated Resources to 13.7 million LCE tonnes, of which 8.2 million tonnes are classified as Measured (from 3.8 million tonnes) and 5.5 million tonnes indicated (against from 2.2 million tonnes). In addition, the capacity of phase 1 of the project was increased from 30,000 to 40,000 tons of annual LCE production, with phase 2 (starting 3.5 years later) providing an additional 40,000 tons (instead of 30,000 tons). The licensing process is well underway and Lithium Americas is developing an integrated pilot plant which is expected to be operational in the first half of 2022.
With this in mind, Trident owns a 60% share of the 8% Gross Revenue Royalty (GRR) on all mining proceeds generated by Thacker Pass, reducing to 4% (so 2.4% share for Trident) after United States royalties. $22 million has been repaid. Lithium Americas has the right to reduce the GRR to 1.75% (1.05% attributable to Trident) by making a redemption payment of $22 million ($13.2 million to Trident) at any time. Obviously, Lithium Americas will do this before production begins, as the price of LCE has fallen from US$12,800 per ton at the time of acquisition in March 2021 to US$59,000 per ton, due to the insatiable global demand for battery metal.
The rise is supported by solid fundamentals. For example, S&P Global Market Intelligence estimates that annual demand for battery applications will grow from 341,439 tons of LCE in 2021 to 807,399 tons in 2025. By 2024, investment bank UBS estimates that the market will become loss-making and by 2030, annual demand will exceed supply by 2.1 million tonnes. This underscores not only the importance of new sources of LCE, but also the strategic value of Thacker Pass for the US electric car industry.
So not only is Trident on track to recoup 80% of its cash investment before production even begins, but the net present value (NPV) of the future revenue stream has skyrocketed. At an LCE spot price of $55,000 per ton, and after completion, royalty income attributable to Trident in Phase 1 of the Thacker Pass project will be $14.4 million per year, increasing to $28.9 million usd.
Analysts at in-house broker Tamesis have updated their models and calculated that at an LCE price of $50,000 per tonne (thus below the current spot price of $59,000), the post-tax net present value of the flow of Trident’s royalties are equivalent to US$295m (75.6p share), or 58% more than Trident’s own market capitalization of £125m (48p).
TRIDENT VAN PORTFOLIO ESTIMATES
In addition, the group holds 19 additional royalties and streams, nine of which are already generating cash flow. These include the acquisition of US$69.75 million in mid-December 2021 of drawdown covering seven producing gold mines operated by five counterparties in six countries, financed by a new credit facility of 40 million US dollars and a placement of 35 million US dollars.
The directors of Trident estimate that the acquired portfolio will generate $13.3 million in revenue in 2022, increasing to $14.3 million per year between 2023 and 2026. Indeed, Trident will recover all of its capital within five years. , and will benefit from a free port thereafter. It’s smart business. Following this transaction, Orion Mine Finance Fund, a fund managed by Orion Resource Partners, a global alternative investment management firm with $8.3 billion in assets under management, controls nearly 10% of Trident’s shares.
In addition, Trident has made a $2.5 million deposit as part of a $52 million transaction to acquire a 1.5% indirect royalty on gross proceeds from the Sonora Lithium Project, an ongoing asset. advanced stage development in Mexico jointly owned by Bacanora Lithium and Ganfeng Lithium. . Ganfeng is a global lithium producer with a market capitalization of US$28.5 billion, with world-class processing expertise and an aggressive production growth program. Bacanora provided guidance on commissioning the plant in Q4 2023, with Phase 1 targeting steady-state production of 17,500 LCE tonnes per year, increasing to 35,000 LCE tonnes per year when Phase 2 commences after five years.
This means that at LCE’s current spot prices, and assuming Trident acquires the Sonora Lithium Project royalty in early 2023, the group could generate aggregate revenue from its two lithium royalties of $37.5 million. per year under their respective Phase 1 production profiles, increasing to US$75.1 million per year under the respective Phase 2 production profiles.
Additionally, although Tamesis expects Trident’s net income to more than double from $4.9 million this year to $13.2 million by 2024, to push earnings up from share price (EPS) from 1.7c to 4.6c, these estimates exclude the Sonora Lithium project and are based on conservative LCE prices of USD 40,000 per tonne (2022 and 2023) and USD 30,000 per tonne (2024), well below the current spot price of USD 59,000 per tonne.
TRIDENT REVENUE FORECASTS
I first advised to buy the shares of Trident, at 37p (Alpha Report: An Inflation Hedge for Low-Rated Commodities and Green Energy,” November 1, 2021), and see significant benefits in light of the surge in the price of LCE and subsequent acquisitions. My initial target price of 60p and the risk-free NAV estimate of 85.9pa that I described in my report are very conservative. To buy.
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