In a world increasingly driven by renewable energy and electric vehicles, lithium has emerged as a pivotal commodity. Trident Royalties PLC (AIM:TRR, OTCQX:TDTRF)'s recent acquisition of a lithium royalty from Atherton Resources, over projects owned by Anson Resources in Utah's Paradox Basin, is a testament to this trend. But what does this mean for investors?
At a glance
Trident has committed to a binding agreement to acquire a 2.5% perpetual royalty from Atherton Resources. This royalty pertains to projects owned by Anson Resources.
The financials are structured with an initial payment of $1.5 million, followed by $8.5 million in milestone payments. According to Liberum, the royalty is valued at $46 million. With the application of a 0.3x risk multiple, Liberum has adjusted its price target for Trident from 76p to 81p, suggesting that the recent market weakness presents a lucrative buying opportunity.
Why this matters
The Paradox project is at an advanced stage with promising economics. A DFS (definitive feasibility study) published in September 2022 highlighted a post-tax IRR (internal rate of return) of 37%. The project, which is expected to cost $495 million, will employ direct lithium extraction, a method that promises efficiency and sustainability.
The final investment decision is still pending, hinging on the completion of front-end engineering & design studies and necessary permits. While Liberum assumes a one-year delay with production starting in 2027, the minimal environmental impact of the project's brine operations could simplify the permitting process. Moreover, Anson's commitment to sourcing components domestically might make it eligible for debt financing from US government agencies, the investment bank notes.
De-risking the investment
The company has structured the $10 million purchase price over three tranches, with the bulk of the payment deferred. This strategy significantly de-risks the transaction for investors. However, it's essential to note that the royalty is tied to Anson's ownership. If Anson decides to sell a Paradox Basin project, the royalty would cease to apply to that asset. Instead, Trident would receive 2% of the net sales proceeds.
Bigger picture
Liberum's analysis provides a comprehensive breakdown of Trident's assets, including the newly acquired Paradox royalty. If the Paradox project lives up to its DFS projections, it could usher in a surge in operating free cash flow beyond its initial phase.
However, it's not just about the Paradox project. Trident's shares experienced a 2.4% dip following news about Mexico cancelling Ganfeng’s lithium concessions. This acquisition in Utah could offset the valuation downgrade Trident faced due to the Sonora incident.