Electric vehicle adoption and growth in renewable energy generation is expected to surge significantly over the next several years and with it demand for commodities needed to power that growth, including lithium, copper, cobalt, zinc, graphite, manganese, and nickel.
Canadian company Electric Royalties Ltd (TSX-V:ELEC, OTC:ELECF) was a first-mover in the battery metals royalty space. The royalty business model allows investors to participate in revenue generated from mining production without having to take on any operational risks. It also offers shareholders the opportunity to benefit from the upside of several development-stage plus producing resource assets.
Electric Royalties CEO Brendan Yurik is an experienced mining financier and research analyst, having been involved with more than $2 billion in mining financing transactions throughout his career. In an interview, Yurik told Proactive exclusively how he intends to build value for shareholders through the acquisition of cash-flowing royalties tied to clean energy commodities.
Proactive: How do you plan to create value for your shareholders? How have you created value for your shareholders in the past?
Brendan Yurik: I think a lot of that is thanks to the royalty business model that does the job for you. We have no holding costs, we're not contributing to ongoing development costs, capital costs, etc. Last year, operating companies that are working on the projects we have royalties on raised and invested over $100 million and that was at no dilution to us. And that’s continually going on where third-parties are managing teams and raising capital. With the royalty business model, our partners are constantly adding value to our royalties at no cost to us.
That’s something our investors appreciate as we grow our portfolio to where we now have 17 royalties on different projects and an 18th acquisition recently announced. Besides that, I think we picked the right niche, frankly, as the other royalties companies are competing mainly in the precious metals space. We made a concerted effort to focus on the entire suite of metals required for this drive to a clean energy transition and we are really the only group around if a company wants to do a royalty financing for a graphite, lithium, vanadium, manganese, or cobalt project. So I think our pricing is better than others in the royalty space. In our first package of deals we were paying about 0.05 times NPV (Net Present Value), while in the precious metals space royalty deals were typically up to 1.00 times NPV. That is definitely changing but we’re still the only royalty group dedicated to a lot of these clean energy metals even though competition is increasing for some of the more notable metals like copper, nickel and lithium.
The other side of picking this niche is the demand growth rates across all of these clean energy metals are forecast in the double digits for multiple decades in a row. That’s incredible. The clean energy revolution has barely begun and you are already seeing very big metal price increases, ie, lithium prices are up over 300% already year to date. So as a royalty company, we get upside to exploration success, production rate upside, but one of the biggest upsides is metal price movement and so we’re excited about the prospect for much higher metal prices across the board of our target commodities, which ultimately means much higher revenues from our royalties as we move forward.
What qualities are you looking for before acquiring a royalty?
We're looking for partners that can actually fit the profile of supplying these metals to the end-user. We’re looking at assets that are potentially long life, big resources, lots of exploration upside. We are definitely looking to stay more in the advanced stage part of the spectrum, assets that are closer to production but ones we can acquire at a discount because they are two years out from production, which would be the sweet spot.
We are the first movers in this space. We already have royalties all in and around the only producing lithium mine in Canada, which was recently acquired by Sayona Mining and plans to incorporate the Authier Lithium project, which we own a royalty on, to ramp up production at the mine as early as 2023. We already have royalties on two-thirds of the only manganese district in all of North America, which is being developed to supply manganese for the electric vehicles and batteries market. We have a royalty on the Middle Tennessee Zinc Mine, which is vertically integrated with the Clarksville smelter, the only primary zinc producer in the US. Thus, we are trying to identify those projects in North America, Europe, and Australia, safe jurisdictions, which are most advanced and could be that current domestic source of supply for the battery/EV sector. When you do look at that, I think we’ve done a pretty good job already, quite frankly, of going in and making bets on those projects that can fulfill those needs domestically. So we are really utilizing that first-mover advantage, as we have to pick out these key assets ahead of anyone realizing their true value.
How do you determine how much to pay for a royalty?
Typically, the answer would be to look at the Net Present Value (NPV) - you run the capital model to do a calculation. But we’ve been very creative, you could say, in terms of how we have financed our royalty acquisitions to date whether through using our share capital or bringing in groups to co-invest with us. Our share capital has been used for probably about 60% of our overall acquisition costs today. So that gives the companies exposure to our whole portfolio and allows us to negotiate on a bit of a reduced basis. So we are not really paying what would be traditionally based on a NPV calculation. But we are the first group doing these types of deals. We did the first graphite royalty financing that’s ever been done. So we are really setting the bar in terms of where we can go, so it’s a little bit non-traditional.
I understand Electric Royalties has one revenue-generating royalty. Do you expect others in the next year and, if so, which ones?
Yes, we have the Middle Tennessee Zinc Mine royalty in the US, operated by Trafigura, 50 years of operational history, so we’re excited about that one over the short and long term. Zinc prices are up over 20% since we first signed the deal to acquire that. We brought in Sprott as the co-investor on that, who invested $13.5 million in cash, and we provided shares of Electric Royalties to the vendor.
And we also have in our portfolio the Authier lithium royalty, which is on a project operated by Sayona Mining, a billion-dollar company, which as mentioned just finished acquiring the only producing lithium mine in Canada. The Authier project sits right next door to the mine and they have announced that they are working on a development plan to incorporate processing ore from Authier to ramp up production at the mine as early as 2023. So we are hopeful that will enter production within the next 12 to 18 months and we also have the Graphmada Graphite Royalty in Madagascar, which was in production for about 30 months before being shut down by COVID-19. Ultimately, the operator is looking to expand their production base when they do restart that mine, which could be back in production fairly quickly in 2022 although we are waiting on guidance from the operator for an exact timeline. In the graphite space, production can often be doubled up with a modest capex (capital expenditure) increase, so we are excited about upcoming developments at Graphmada over the next year.
And so just within our project portfolio, there are three royalties that should be in production 12 to 18 months out. We are also planning to acquire a couple more producing royalties.
Are you targeting any commodity in particular in the clean energy space?
I would say right now we are a little heavily weighed on the lithium side but our strategy is to stay diversified. Ultimately, all the clean energy commodities have exponential growth forecasts across the board. One or two of them may drop by the wayside as new technologies come to the fore, and as groups try to use cheaper metals or supply-side disruptions arise, but we’re not making bets on where battery technologies will go or what disruptions may take place. Ultimately, we believe the world will always try to use cheaper metals if they can but by staying diversified across each of these clean energy metals we are more tying ourselves to the overall transition to clean energy rather than any one commodity.
Finally, what do your shareholders have to look forward to during the next 12 months?
There’s work going on right now in about a dozen projects in which we own royalties, so there’s going to be constant updates and constant news regarding drill programs, feasibility studies, and production announcements. But ultimately what our shareholders are really going to appreciate is cash-flowing royalties, and we are planning to add a few more of those with it becoming a central focus again as we get into 2022. We’ve now got exposure to eight of our nine target commodities so we are looking to round that out as well by getting an interest in tin and to boost our copper exposure a bit in parallel as it’s slightly underweight right now relative to the rest of the commodities. But, from the get-go of 2022, there will be a serious focus on cash-flowing royalties. I think once we get to four or five diversified sources of royalty revenue, which is our goal over the next six to twelve months, then I believe that will fundamentally transform the company.
Contact Sean at sean@proactiveinvestors.com