Profit from the deal of the millennium

Commodity royalty group Trident Royalties (TRR:48p) pulled off the deal of the millennium last year. In March 2021, the group paid US$28mn (£20.7mn) for a 60 per cent interest in an existing gross revenue royalty over the Thacker Pass Lithium open mine project in Nevada, one of the largest known lithium deposits in North America. Thacker Pass is operated by Lithium Americas (CA: LAC), a well-funded Can$4bn market capitalisation mining group.

At the time, Thacker Pass contained Canadian Institute of Mining Metallurgy (CIM) compliant mineral reserves of 3.1m tonnes Lithium Carbonate Equivalent (LCE), making it the largest lithium reserve in U.S.A, and one with an estimated mine life of 46 years based on LCE proven and probable reserves. However, the Mineral Resource Estimate (MRE) was close to 6m tonnes of LCE, thus offering resource upside to extend the mine life or support production expansion.

Lithium Americas subsequently released an update to the MRE which more than doubled the size of the Measured and Indicated Resource to 13.7m tonnes LCE, of which 8.2m tonnes is classified as Measured (up from 3.8m tonnes) and 5.5m tonnes Indicated (up from 2.2m tonnes). Furthermore, Phase 1 capacity of the project has been increased from 30,000 to 40,000 tonnes of LCE annual output with Phase 2 (starting 3.5 years later) providing an additional 40,000 tonnes (up from 30,000 tonnes). The permitting process is on track and Lithium Americas is currently developing an integrated pilot plant that should be operational in the first half of 2022.

Bearing this in mind, Trident holds a 60 per cent share of the 8 per cent gross revenue royalty (GRR) on all mining products generated from Thacker Pass, reducing to 4 per cent (so 2.4 per cent share for Trident) after royalties of US$22mn have been repaid. Lithium Americas has the right to reduce the GRR to 1.75 per cent (1.05 per cent attributable to Trident) by making a buy-back payment of US$22mn (US$13.2mn to Trident) at any time. Clearly, Lithium Americas will do that before production commences because the LCE price has rocketed from US$12,800 per tonne at the time of the acquisition in March 2021 to US$59,000 per tonne, driven by insatiable global demand for the battery metal.

The rise is supported by strong fundamentals. For instance, S&P Global Market Intelligence estimates that annual demand from battery applications will rise from 341,439 tonnes of LCE in 2021 to 807,399 tonnes in 2025. By 2024, investment bank UBS estimates that the market will move into deficit and by 2030 annual demand will exceed supply by 2.1m tonnes. This not only highlights the importance of new sources of LCE, but the strategic value of Thacker Pass to the US electric car industry.

So, not only is Trident on course to recoup more than half of its cash investment before production even starts, but the net present value (NPV) of the future revenue stream has sky rocketed. At a LCE spot price of US$55,000 per tonne, and following completion, royalty revenue attributable to Trident in Phase 1 of Thacker Pass Project will be US$14.4mn per year, rising to US$28.9mn.

Analysts at house broker Tamesis have updated their models and calculate that at a LCE price of US$50,000 per tonne (so below the current spot price of US$59,000), the post-tax net present value of Trident’s royalty stream equates to US$295mn (75.6p a share), or 58 per cent more than Trident’s own market capitalisation of £125m (48p).

TRIDENT NPV PORTFOLIO ESTIMATES

Furthermore, the group owns a further 19 royalties and streams, of which nine are already producing cash flow. These include the US$69.75mn acquisition in mid-December 2021 of offtakes covering seven producing gold mines operated by five counterparties across six countries, funded by a new US$40m debt facility and US$35mn placing.

Trident’s directors estimate that the acquired portfolio will generate US$13.3mn of revenue in 2022, rising to US$14.3mn per year between 2023-2026. Effectively, Trident will recover all its capital within five years, and have a free carry thereafter. That’s smart business. Following that transaction, Orion Mine Finance Fund, a fund managed by Orion Resource Partners, a global alternative investment management firm with US$8.3bn assets under management, controls almost 10 per cent of Trident’s shares.

TRIDENT ROYALTIES

In addition, Trident has paid a US$2.5mn deposit as part of a US$52mn transaction to acquire an indirect 1.5 per cent gross revenue royalty on the Sonora Lithium Project, an advanced development stage asset in Mexico jointly owned by Bacanora Lithium and Ganfeng Lithium. Ganfeng is a US$28.5bn market capitalisation global lithium producer with best-in-class processing expertise and an aggressive production growth agenda. Bacanora has provided guidance of plant commissioning in the fourth quarter of 2023, with Phase 1 targeting steady state production of 17,500 LCE tonnes per annum, rising to 35,000 LCE tonnes per annum when Phase 2 commences after five years.

This means that at current LCE spot prices, and assuming Trident acquires the Sonora Lithium Project royalty in early 2023, the group could be generating aggregate revenue from its two lithium royalties of US$37.5mn per annum under their respective Phase 1 production profiles, rising to US$75.1mn per annum under respective Phase 2 production profiles.

Moreover, although Tamesis expects Trident’s net income to more than double from US$4.9mn this year to US$13.2m by 2024 to lift earnings per share (EPS) from 1.7c to 4.6c, these estimates exclude the Sonora Lithium Project and are based on conservative LCE prices of US$40,000 per tonne (2022 and 2023) and US$30,000 per tonne (2024), well below the current spot price of US$59,000 per tonne.

TRIDENT REVENUE FORECASTS

I first advised buying Trident’s shares, at 37p (Alpha Report: 'A lowly rated commodity and green energy inflation hedge’, 1 November 2021), and see material upside in light of both the surge in the LCE price and the subsequent acquisitions. My 60p initial target price and 85.9p a share unrisked NAV estimate I outlined in my report are very conservative. Indeed, Tamesis has an unrisked NAV of 111.5p a share which is still only based on a LCE price of US$42,000 per tonne, well below the spot price. Buy.

Please note that this article was first published online on 4 February and subsequently updated on 7 February.

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