- $10mn acquisition of lithium smelter royalty in Utah
- $6.25mn purchase of gold royalty in Mali
- Uncertainty over Sonora lithium project
Commodity royalty group Trident Royalties (TRR:41p) has been ramping up its deal flow in recent months. The latest acquisition looks like one of the group’s smartest to date, the purchase of a 2.5 per cent net smelter royalty (NSR) over projects owned by Anson Resources (AU:ASN) in the Paradox Basin, Utah. The transaction includes Anson’s flagship lithium project.
Having released a definitive feasibility study in September 2022, outlining a Phase One operation producing an initial 13,074 tonnes of lithium carbonate for the first 10 years of a 23-year operation, Anson is targeting a final investment decision (FID) at the end of this year. Capital expenditure of $495mn is required to get the project up and running, but it will be eligible for financial support through the Inflation Reduction Act in the US.
Bearing this in mind, a cash cost of $4,400 per tonne of lithium carbonate equivalent (LCE) is 87 per cent below the current spot price of $35,000 per tonne, highlighting the hefty returns investors are set to make when the mine starts producing in the second half of 2026. Indeed, Anson estimates a quick-fire two-year cash payback period for the capital cost of a project, which could deliver over $5bn of cash profit at spot LCE prices in its first 10 years.
That’s good news for Trident as the group is acquiring the royalty from Atherton Resources for $10mn, of which $1.5mn is being paid upfront, $3.5mn is due on the start of commercial production and a further $5mn two years later. Analysts at Tamesis Partners believe that it could deliver $11mn of annual royalty income to Trident over the first 10 years based on a conservative-looking $20,000 per tonne LCE price. The brokerage also estimates a net present value (NPV) of $28.6mn for the royalty using an 8 per cent discount rate, or almost three times higher than the amount Trident is paying. At spot prices, NPV doubles again to $55.6mn.
A golden investment opportunity
It’s not the only smart deal Trident has pulled off recently. The group has now completed the purchase from a group of private equity holders of a 50 per cent share in a 2 per cent NSR over the Dandoko Gold Project in western Mali, owned by B2Gold Corporation (US: BTG), a $3.9bn market capitalisation company.
Located 25km from B2Gold’s operating mill, Fekola, which is targeting current year production of up to 610,000 ounces at a $565-625 per ounce (oz) cash cost, B2Gold spent $6.6mn in the first half of this year alone on the Dandoko permit. The company has announced significant further investment plans, too. Bringing Dandoko and other nearby permits into production could scale up B2Gold’s annual output to 800,000 oz of gold.
Effectively, Trident is acquiring a one per cent NSR over the Dandoko permit area, which has a mineral resource estimate (Inferred and Indicated) of 423,000 oz of gold, for $6.25mn. It looks a smart deal, lifting the group’s annualised royalty income by $0.9mn to $20.6mn in 2024 when Dandoko comes on stream, rising to $1.6mn in 2027, say analysts at Tamesis.
True, there is uncertainty over Trident’s proposed acquisition of a gross revenue royalty over the Sonora Lithium Project after the Mexican government cancelled the concession held by the operator, Ganfeng Lithium, at the end of last week. However, the transaction was structured as a $2.5mn secured loan to the joint venture acquiring the royalty, so Trident’s investment looks well protected. In any case, it only accounts for 1 per cent of Tamesis’ unrisked NAV estimate of 69.4p a share, so it's not material.
Unwarranted share price discount to NAV
Trident’s share price is 10 per cent above my 37p entry point (Alpha Research: 'A lowly rated commodity and green energy inflation hedge’, 1 November 2021), but has drifted since my last buy call, at 49p (‘Trident is s smart call on battery metals’, 19 May 2023).
From my lens, the 41 per cent share price discount to NAV estimates is completely unwarranted given the diversification of the portfolio, potential to deploy $20mn of Trident’s free cash on further smart acquisitions to further boost future earnings, and the conservative-looking valuations of the group’s existing royalties. The group’s interim results will be released later this month and should bring these dynamics into sharp focus, too. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
