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There’s a new royalty company in town: Trident Resources cuts its first deal in the mining sector and plans many more

Trident will connect with mining companies looking for new sources of financing

Trident Resources PLC -

What should investors make of the recent transformational move undertaken by Trident Resources PLC (LON:TRR)?

The company recently announced the acquisition of a royalty on the Koolyanobbing iron ore project in Australia for A$7mln in cash to be delivered in staged payments.

The deal sets the seal on Trident’s new incarnation as a royalty company, one of only two in the commodities space listed in London, and alongside Anglo Pacific Group and Altius, one of only three in the world of any significance with a focus that steps outside of the precious metals space.

More deals are likely to follow, funded by an imminent placing of shares that could raise as much as US$30mln.

It all adds up to an intriguing prospect, but what are its chances of success?

Pretty good if the pedigrees of those behind it are anything to go by. First, there’s the directors. Adam Davidson, the chief executive, is ex-Resource Capital Funds, as is Tyron Rees, Vice-President Corporate Development. Mark Potter, recently appointed as non-exec, is ex-Anglo Pacific and current chief investment officer of Metal Tiger (LON:MTR), while non-executive chairman James Kelly used to work for Xstrata and Glencore, and was one of the team that founded leading UK private equity group Greenstone Resources.

But there’s more. Trident itself is a vehicle that was put together by major resources-focused advisors Tamesis Partners out of the UK, and Azure and Ashanti Capital, both out of Australia.

Originally, the thinking was that a particular asset would be put into the company, but when that opportunity fell through, a new royalty strategy was mooted.

That strategy has now been officially inaugurated with the acquisition of the Koolyanobbing royalty, and it seems likely that momentum will build quickly from here on in.

“Trident is currently progressing discussions with multiple parties with regards to the potential acquisition of additional royalties to further underpin Trident's new strategy,” the company said in commentary that accompanied the deal.

And chief executive Adam Davidson is more explicit in person.

“The focus is obviously to do accretive acquisitions,” he says. “Once we’ve built up a portfolio we can refine the commodity allocation.”

He expects significant dealflow in the coming months as the company puts to bed several of the opportunities it has been negotiating for some time now, and beds down on its new market, AIM.

The medium-to-long term aim, though, is to create a royalty company that broadly mirrors the mining sector in terms of commodity profile. Such a portfolio could have real attractions for investors interested in the exposure to the markets, but discouraged by the operational risks that often go along with investing in mining companies themselves.

Royalties defray many of those risks, and as the success of countless royalty companies in Canada shows, can be hugely popular with investors. Why? – because they have been so value accretive.

Trident is somewhat different, in that unlike the most of the successful Canadian precious metals royalty companies, it aims to offer investors a broader portfolio of royalties.

“We plan to construct a portfolio which will be representative of the commodity exposure of the global mining sector,” says Davidson.

“At the moment that offering isn’t out there.”

And indeed it isn’t. Altius is weighted towards coal and potash, and Anglo Pacific, while it’s becoming increasingly diversified, still takes a strategic view on certain commodities over others.

In the end, the Trident portfolio is likely to be split between development projects and production, but in the early years it’ll be slightly different.

“We’ll be naturally inclined to target cashflowing royalties initially to cover our general and administration expenses,” says Davidson.

“Once you can get three-to-four-to five royalties, then getting debt is an option.”

And Trident will be different in other ways too.

“We’ll be much more open to emerging market risk,” says Davidson. “as many attractive opportunities can be found there. If we’re pursuing a Canadian gold producing royalty, for example, that’s going to be very competitive in a way that some other assets aren’t.”

Nevertheless, there’s one developed mining jurisdiction that doesn’t have a particularly well-developed royalty market: Australia. Indeed, there isn’t a listed Australian mining-focused royalty company to speak of.

For its part, though, Trident, and its backers, have significant Australian connections, which in part explains why the choice has been made to cornerstone the company’s growth with a cash-generative Australian asset.

Yes, the company will go anywhere in the world. But it will be grounded first in safe, secure assets, just like its more mature peers.

“It is a portfolio approach,” says Davidson.

“We’ll be acquiring assets that fit the risk profile and meet the hurdle rate. Which, once in a portfolio, will allow us to weather the wildest commodity swings.”

 

Quick facts: Trident Resources PLC

Price: 17.5 GBX

LSE:TRR
Market: LSE
Market Cap: £3.85 m
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