More good news to come for this commodities royalty company

A pre-close trading update from Trident Royalties (TRR:55p) highlights the material progress the commodity royalty group has made in the past 12 months.

Total royalty revenue increased nearly eightfold to $13.8mn (£11.1mn) last year including $3.5mn in the final quarter, a 46 per cent rise on the previous quarter. Each royalty either met or exceeded the forecasts of joint house broker Tamesis Partners. The notable outperformers were offtakes from the group’s gold portfolio and the iron ore royalty from Koolyanobbing, Western Australia. It means the group should record a small net profit of $0.8mn for 2022, while the ongoing strong momentum supports analysts’ estimates that net profit could rise eightfold to $5.5mn in the current financial year.

Moreover, if investors had any doubt about the value Trident’s royalties are creating, then the recently announced disposal of several pre-production gold royalties to mining giant Franco-Nevada Corporation (CA:FNV) has put them firmly to rest. The sale realises $15.8mn of cash proceeds ($14.55mn paid on completion of the deal and $1.25mn deferred), representing a 143 per cent return on the $6.5mn capital Trident invested two years ago. It not only bolsters the group’s $21.8mn cash pile (excluding the $3.5mn receipts due from the fourth quarter of 2022), but it has enabled Trident to restructure its $40mn debt facility with investment bank Macquarie, lowering the annual coupon rate by two percentage points, thus saving $0.8mn in interest payments. Lowering the cost of capital means that Trident shareholders will now capture more of the portfolio’s capital upside.

Value creation in two major lithium projects

Management’s strategy is to provide exposure to a balanced mix of base, battery, precious and bulk metals. Post the aforementioned disposal, Tamesis' risked net asset value (NAV) estimate by commodity is split as follows: lithium (41 per cent), gold (34 per cent), copper (10 per cent), iron ore (2 per cent) and cash (13 per cent). Trident’s lithium projects could be real game-changers this year.

That’s because the soon-to-be-boosted cash balance should enable Trident to exercise its option over the Sonora lithium royalty in Mexico without having to turn to equity markets. The outstanding payment for the effective 1.5 per cent gross revenue royalty (GRR) is $23.5m. Tamesis currently values the Sonora royalty at $2.5m (0.7p a share), being the value of the deposit paid and fully recoverable in most circumstances under the loan structure.

However, analysts at the broking house point out that if the option is exercised, it would add $82.6mn (22.6p per share) to their overall un-risked NAV per share of 81.5p, lifting it above 100p. The project’s operator, Ganfeng Lithium, has recently commenced construction, thus increasing the likelihood of Trident’s option being exercised. The other hurdle is the forthcoming court hearing to appeal the validity of the royalty, expected in the next few months. I anticipate a favourable outcome, a factor that is not reflected in Trident’s share price, which is trading well below Tamesis’ un-risked NAV estimates.

I also anticipate positive newsflow from Trident’s other valuable major royalty, the Thacker Pass lithium open mine project in Nevada, one of the largest known lithium deposits in North America. It is a critical project for the US to establish a robust battery metal supply chain and represents a cornerstone asset for Trident. The group holds a 60 per cent share of the 8 per cent 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, the project operator, 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. That’s because the lithium carbonate equivalent (LCE) price has risen more than fivefold from US$12,800 per tonne when Trident acquired the royalty in March 2021 to US$66,000 per tonne, driven by insatiable global demand for the battery metal.

Bearing this in mind, Lithium Americas has been moving forward with construction of the project, targeting annual production of 40,000 tonnes of LCE in the first phase, starting in 2026. It has also announced a joint venture with motor giant General Motors (NYQ:GM) to develop the project, the latter is making a $650mn equity investment. The only hurdle now is the consent of the US Federal Court. Given the history of the case, it should be forthcoming, thus enabling investors to focus their attention on the hidden value embedded in Trident’s royalty. Tamesis has made a stab, valuing it at $151mn (£121mn) on an un-risked basis, or 41.5p per share, a hefty sum for a £163mn market capitalisation company. It looks conservative given that Trident could be making $55mn in annual royalty earnings (post royalty buy-back) in the first phase alone.

Upside potential

Trident’s share price has risen 50 per cent since I initiated coverage 15 months ago (Alpha Research: 'A lowly rated commodity and green energy inflation hedge’, 1 November 2021), during which time the FTSE Aim All-Share Total Return index has lost 29 per cent of its value. Favourable court rulings on both Sonora and Thacker Pass in the coming months are likely to be strong catalysts for a re-rating, as is the resurgent gold price. Buy.

Please note this article was first published at 4.30pm on Monday, 30 January and updated at 9am on Wednesday, 1 February to incorporate news of General Motor's investment in Thacker Pass.

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