What a few weeks it’s been for Trident Resources PLC (LON:TRR). The company listed on Aim at the beginning of June, announcing as it did so the first of what it hopes will be a long sequence of royalty acquisitions.
The Koolyanobbing iron ore deal and the £16mln in new money laid a couple of solid cornerstones for further developments, and chief executive Adam Davidson didn’t waste much time moving ahead.
On listing, he had been reckoning that the company would cut its first deal as a public company within four-to-six weeks, but as it happened the subsequent US$5mln acquisition of a copper royalty on a Zambian mine came in slightly ahead of that schedule.
So far so good.
There’s one iron ore and one copper royalty in the bag, and the way these deals have been structured there’s are fairly clear timelines to a payback point where the cash that flows into the company starts being earnings accretive.
Because that’s the art here in the royalty space – familiar in Canada, but less so on the eastern side of the Atlantic – acquiring cashflow is easy, but getting it at a price that makes sense for shareholders is much more of a skill.
The copper deal was a case in point though.
For a US$5mln payment up front, Trident gets a staged but chunky income stream from the Milumba mine all the way up until the US$5mln gets paid off, at which point it starts getting much smaller payments. But that’s the point too at which it’s in for nothing, and the money flowing in is all income and no cost.
So, that’s the model: how’s it going to work in practice?
Chief executive Adam Davidson understands that to some degree Trident is going to have to educate the UK market about royalty companies. There’s venerable old Anglo Pacific (LON:APF) of course, which has had the UK market to itself almost since records began, but Anglo Pacific is a company built around one major asset, that’s only now beginning to see the fruits at a concerted effort at diversification. It’s also got its own preferences when it comes to commodity, something that won’t, in the long-term, be an issue for Trident.
For one thing, this is a company that although only recently listed, has been in the planning a long time. That means deals have been in the offing for a fair while too, waiting, as Adam Davidson explains, for proof of concept.
“Our counterparties said that once you’ve raised the money and we know you have the capacity to pick things up, then we can really get down to business.”
Well, the counterparties have been served notice: the company is away, cashed-up and doing deals. Expect a few more fairly soon: Davidson reckons that by 2021 Trident could be bringing in upwards of US$5mln in royalty revenue, and that if all the deals he has in mind come in, that number could be much higher.
There’s even the possibility that investors will start to see a notional dividend too, once those initial royalty income streams are in place, as a statement of intent of greater things to come.
Initially, deals will get done solely according to how profitable and accretive they are. But in time a broader pattern is likely to emerge.
The plan is to make the Trident royalty portfolio broadly reflective of the mining industry as a whole, with the idea that investors can come to the company for exposure to the commodity cycle, while offsetting almost all of the execution risk.
It’s a smart idea, and has made Canadian companies like Altius, Sandstorm and Franco Nevada billion dollar propositions.
Trident is obviously starting at the bottom, but a clear direction of travel has already been laid open to it.
“We want to build a royalty company that’s representative of the sector,” says Davidson. “In 12 months’ time we hope we’ll be well on our way there.”