Electric Royalties (ELEC) - Differentiated Battery Metal Focus Royalty

Electric Royalties Ltd. is a royalty company set to take advantage of the demand for a wide range of commodities including lithium, vanadium, manganese, tin, graphite, cobalt, nickel, and copper that will benefit from the drive to electrification through cars, rechargeable batteries, large scale energy storage, renewable energy generation, and other applications. 

Matt Gordon caught up with Brendan Yurik, CEO, and Director, Electric Royalties. Mr. Yurik is the Founder and CEO of Evenor Investments Ltd., a financial advisory group to junior mining companies for alternative financing, debt, equity, and M&A (Mergers and Acquisitions). He has experience of over $2Bn in mining financing transactions over the course of his career. He has previously worked in research analysis, business development, and mining financial advisory roles with Endeavour Financial, Cambrian Mining Finance Ltd, Northern Vertex Mining Corp., and King & Bay West Management Corp. 

Company Overview

Electric Royalties is a royalty company that was founded in 2012 and is headquartered in Vancouver, Canada. The company is listed on the Toronto Stock Exchange (TSX-V: ELEC) and the OTC Markets (OTCQB: ELECF). Electric vehicle, battery production capacity, and renewable energy generation are slated to increase significantly over the next several years and with it, the demand for the company’s target commodities. This creates a unique opportunity to invest in and acquire royalties over the mines and projects that will supply the needed materials to feed the electric revolution. 

Portfolio Updates

Electric Royalties is focused on capitalising on the transition towards clean energy by purchasing royalties on the mines that are going to supply the metals required for the future. The company went public 1.5 years ago and currently has a portfolio of 18 royalties. It has a highly-supportive shareholder base. The company has $2M in current cash flow along with zero debt.

Operating in a variety of commodities has benefited the company from the growth in the metals space. Lithium prices shot up 400% last year, while tin prices were up by 100%. Cobalt prices also saw a 75% increase. 

Electric Royalties has been strategic in its capital raises to minimise dilution. It is currently in the process of developing a business plan where the company gains exposure to all commodities, particularly for early-stage projects. It seeks to conduct accretive deals. 

The company is expecting a significant increase in value in 2022. It seeks to enter projects just before the release of a PEA (Preliminary Economic Assessment) for better economics. These projects are compensated in the form of company shares. 

Over the course of the next 5 years, the company expects to develop a $3M annual revenue and start paying back. The company’s goal is to stay diversified across various commodities including lithium, vanadium, manganese, tin, graphite, cobalt, nickel, and copper. 

The company generated its first revenue through the Middle Tennessee Mine Zinc Royalty back in October. Since its acquisition, there has been a 25% jump in zinc prices. The company has the option to increase its ownership in the project to 50% alongside Sprott Resource Streaming and Royalty Corp. A 50% ownership could generate about $1.25M in annual revenue. This could be achieved once operations are ramped up and covid delays are addressed. 

Electric Royalties has the Graphmada Graphite Mine Royalty in eastern Madagascar. This project has been a continuous producer for the past 30 months, however, operations were shut down due to covid restrictions. Graphmada resumed operations in the past few months and is looking to double its production capacity. Graphite operations are known to have a modest CapEx (Capital Expenditure), hence it is easier to increase production. Electric Royalties anticipates that this project will pay up to $1M in royalty annually starting mid-2022.

The Authier Lithium Royalty under Sayona Mining is advancing towards production. This project is expected to enter production by early 2023. This royalty is expected to generate $1M in royalty revenue. 

Notably, 3 projects in Electric Royalty’s portfolio are entering production over the next 2 years. The Bissett Creek Graphite royalty is expected to produce shortly after the 2-year mark. Meanwhile, the Northern Graphite royalty has also returned positive results in recent times. 

Based on the existing portfolio, the company expects to generate $2.5M-$3.5M in revenue over the next 2 years. Over a 5 year timeline, the company will generate $20M in free cash flow. Since these projects are being advanced by third parties, the cash flow comes at no additional cost for Electric Royalties. 

The Royalty Space

Electric Royalties anticipates that the competition within the royalty space will increase over time. According to the company, there’s a lot of capital available in the market as investors seek to enter the royalty space. 

The company has a strong ongoing deals flow. However, it anticipates that given the number of entities entering the royalty space, competition is expected to grow. 

Royalties serve as an alternative financing mechanism that is highly beneficial for both the company and investors. Electric Royalties anticipates that over time, royalties will play a much larger role when it comes to financing within the sector. 

A strong royalty portfolio can help generate significant revenue which would make large royalty acquisitions possible. Over time, the company is expecting a double-digit growth across all its metal royalties. 

The company is looking to be a part of the ongoing clean energy transition. Royalties have a distinct advantage as deals can be made on a project regardless of whether it has debt or equity, and the royalty acquirer can help fill in that gap. 

The company has several good opportunities when it comes to deal flows. It is focused on nine commodities that are a part of the broader energy theme. A diverse range of commodities ensures that some of them will see a favourable run intermittently.  As different commodities go through the low and high pricing cycles, there’s a significant opportunity and upside within the royalties space. 

Financing Considerations

Electric Royalties has a $30M current market cap. The company conducted some smaller deals at the end of 2021. These deals are expected to be highly accretive as significant capital has been invested in those projects. 

Within the lithium space, the company picked up multiple royalties in the previous year. As the company has significant exposure to lithium projects, it understands the monetary requirements of these projects and has utilised its skillset to enter the project at the ideal time. 

The company has been strategic with expending capital when compared to the size of a deal. For instance, the company’s zinc royalty was a $17.5M deal with a cash cost of $250,000.

The majority of the deals conducted by Electric Royalties are either all share or majority share deals. As a result, project operators get exposure to the company’s diverse portfolio along with equity. This enables Electric Royalties to close highly-favourable deals during negotiations. 

Electric Royalties isn’t looking to raise a significant amount of capital. The company has received offers for capital from multiple groups, however, it does not plan on raising capital on worse terms than the previous financing. 

The company has equity and debt facilities. It has 5-6 sources of cash flow and isn’t looking to take on debt. The company has been approached by big route equity funding groups as well. The company’s experience in navigating different commodities and royalties, putting deals together makes it stand out among the competition. 

Electric Royalties has plans for financing in the future to ensure sustained growth. The company anticipates that its current portfolio of royalties will be worth several times the current value over the next 1-3 years. 

The company is prioritising bringing a strategic investor or a private equity fund on board as this would allow the company to close bigger deals in the future. It is looking at equity facilities where it has control over the capital draw to avoid over-dilution. If successful, the company intends to acquire 2 more producing royalties within the next 3-6 months. At this point, the company would be open to considering a debt facility. 

For the MTM (Middle Tennessee Mine) Zinc Royalty deal, the company has a significant option value. It seeks to observe the progress of the project over the next 5 months. The company plans to shift its focus to this royalty over the next 3-4 months. In order to execute the option, the company would need to pay $4.5M. The company also has the facility to exercise the option next year, if needed. 

Currently, the company is focused on closing new deals. To acquire new royalties, the company is looking to carry out accretive transactions as it targets larger projects. As companies grow, it becomes challenging to stay diversified. 

In an ideal scenario, the company is looking to double the size of its existing portfolio. The majority of these deals will be smaller-sized, however, the company is also looking towards larger deals that were previously out of reach. As the company grows in size, it gains increased access to capital that can fund growth. 

The smaller deals provide a strategic imperative. For instance, the company’s manganese royalty operates in the only manganese district in North America that is currently under development. Strategically entering new projects helps achieve faster growth as they advance with time. Comparatively, gold exploration projects can take a very long time to advance. 

The company believes that investing in a wide variety of different commodities in an ever-changing environment offers significant opportunities. Electric Royalties does not have a lot of competition at present and has been successful in acquiring new royalties at significantly lower prices. 

Comparatively, the precious metals space faces stiff competition as there’s a thin pipeline of opportunities along with considerable pricing jumps. 

Targets 2022 and Beyond

Electric Royalties has several catalysts coming up in its existing portfolio. In 2021, operators raised $150M to invest in the company’s assets, the majority of which are earmarked for investment in 2022. 

The company expects strong economics to come out of its Battery Hill Manganese Royalty. It anticipates that over time, this project will generate up to $5M-$6M in annual royalty revenue. Notably, the Battery Hill Manganese Royalty has a 35-40 year mine life once the production starts. The PEA is in the early stages, while the metallurgy has advanced considerably as Manganese X Energy has been working on it for the past 3.5 years. 

The company is also expecting economics to come out of its lithium assets which were acquired at a low price. Given the 400% growth in lithium prices in the last year, these assets are expected to generate between $2.5M-$3.5M in royalties once production starts. The project operators of the lithium assets have raised $40M in November alone.

8 of the company’s assets have major updates planned for the next year. The Graphmada project is expected to re-enter production over the course of the next 6-12 months. The Authier asset is also expected to start production in 2023. The company is focused on doubling the size of its portfolio in 2022.

To find out more, go to the Electric Royalties website