Electric Royalties (ELEC) - Technical Analysis & Due Diligence

Electric Royalties Ltd. is a mining royalty company that aims to take advantage of the worldwide transition to clean energy by buying royalties on mining operations which supply clean energy commodities. Energy commodities include metals such as lithium, vanadium, manganese, tin, graphite, cobalt, nickel and copper. The portfolio of the company is focused on energy commodities which saw increases of up to 400% depending on the commodity in 2021.

The portfolio of the company consists of 18 royalties, with one of the royalties, the Middle Tennessee Mine zinc royalty, generating revenue. The royalty is owned by Sprott Resource Streaming and Royalty Corp’s special purpose vehicle (SPV). Electric Royalties Ltd. owns 25% of the SPV and will receive distributions from the Middle Tennessee Mine zinc royalty on a quarterly basis at a minimum.

The zinc royalty is structured as a sliding scale gross metal royalty, with no royalty payable if the zinc price is below USD$ 0.9 per pound. The royalty will be 1.0% should the price of zinc be between USD$ 0.90 and USD$ 1.10 per pound and 1.4% should the price of zinc be above USD$ 1.10 per pound.

Electric Royalties Ltd. announced on the 12th of May 2022, that it had concluded with a marketed public offering. The offering consisted of the issuing of 11.5 million units of the company at CAD$ 0.30 per unit for the total gross proceeds of CAD$ 3.45 million to the company. The public offering has been able to further strengthen the financial position of the company and enable it to access various royalties and assets that previously were unattainable.

Electric Royalties Ltd. announced at the end of June 2022 that it has signed an agreement with Lithium Royalty Corp. for the sale of 1% of the existing 1.5 % Net Smelter Return (NSR) royalty it holds on the Seymour Lake Lithium Deposit in Ontario, Canada. The rationale behind selling two-thirds of the NSR royalty is to free up funds which the company will implement towards diversifying its royalty portfolio.

The company announced at the start of July 2022, that Manganese X Energy Corp. had filed a Preliminary Economic Assessment (PEA) of the Battery Hill Manganese project. Electric Royalties Corp. holds a 2% gross revenue royalty on the Battery Hill project, which is estimated to have an operating lifetime of 47 years. The highlights of the PEA include an after-tax internal rate of return (IRR) of 25% and an annual average gross revenue of USD$ 220 million over the first 5 years. The company will see approximately USD$ 4.4 million in annual cash flow from the gross revenue royalty.

The company also recently announced that Greenwing Resources Ltd. had released a JORC-compliant updated mineral resource estimate for its Graphmada Graphite property, located in Madagascar, Electric Royalties Ltd. owns a 2.5% net smelter return (NSR) royalty on the project. The updated mineral resource estimate sees the project’s measured and indicated resources grow by a factor of 5 to 31 million tons at 4.8% fixed carbon which totals 1.6 million tons of graphite. The project’s inferred resource estimate has also increased to double its initial size to 30.9 million tons of mineralisation at a 4.5% fixed carbon.

Capital raise

Electric Royalties Ltd. announced on the 12th of May 2022, that it had concluded with its previously announced marketed public offering. The offering consisted of the issuing of 11.5 million units of the company at CAD$ 0.30 per unit for the total gross proceeds of CAD$ 3.45 million to the company. A unit consisted of one common share of the company as well as one common share purchase warrant of Electric Royalties Ltd. A common share purchase warrant entitles the holder thereof to purchase one common share of the company at an exercise price of CAD$ 0.454 for a period of 36 months after the closing of the offering. Brendan Yurik, one of the company’s founders and the CEO of Electric Royalties Ltd. sums up the public offering as follows:

“We were fully subscribed, but quite frankly, our last financing before that was at CAD$ 0.40, and we didn’t want to raise too much money at these prices. We’re glad we did now because we have a bit of cash.”

The public offering has been able to further strengthen the financial position of the company, with Yurik explaining that the strengthened financial position will enable the company to access various royalties and assets that previously were unattainable.

“We’re going to have CAD$ 8 million cash in the bank here on a pro forma basis in a month. We’ve been very good at building this portfolio, we’re very frugal with our cash. Our G&A burden is very, very low. Theoretically, we could survive for the next 4 or 5-years. Really, this is an opportunity I think for us to go out there and get royalties on assets that quite frankly, 3-months ago, were otherwise unavailable to us, or would have been much more expensive.”

Seymour Lake

Electric Royalties Ltd. announced at the end of June 2022 that it has signed an agreement with Lithium Royalty Corp. for the sale of 1% of its existing 1.5 % Net Smelter Return (NSR) royalty it holds on the Seymour Lake Lithium Deposit in Ontario, Canada.

The sale of the portion of the NSR, will see Electric Royalties Ltd. receive CAD$ 4 million in cash considerations as well as retain a 0.5% NSR royalty on the deposit. Yurik explains that the NSR royalty was acquired by Electric Royalties Ltd. in 2021 for CAD$ 1 million in shares, leading to approximately CAD$ 3 million in profits towards the company, he explains:

“We picked that up in February of last year (2021) for CAD$ 1 million in shares at the time. Right now, we’re monetising a piece of that. We’re selling 1% of 1.5% for CAD$ 4 million cash to a private group called Lithium Royalty Corp.”

The rationale behind selling two third of the NSR royalty is according to Yurik to free up funds which the company will implement to diversify its royalty portfolio, he states:

“…for us, it’s still 4 or 5 years at least from production. We are a little bit heavy on lithium, and we just feel like we can use that cash to keep growing, keep adding diversification and get into stuff that’s maybe a little bit earlier to cash flow.”

Battery Hill PEA

Electric Royalties Ltd. announced at the start of July 2022, that Manganese X Energy Corp. had filed a Preliminary Economic Assessment (PEA) of the Battery Hill manganese project. Electric Royalties Corp. holds a 2% gross revenue royalty on the Battery Hill project, which is envisioned to have an operating lifetime of 47 years. The highlights of the PEA include an after-tax net present value (NPV10%) of USD$ 486 million, an after-tax internal rate of return (IRR) of 25% and a capital cost (CAPEX) of USD$ 350 million and a payback period of 2.8 years.  The PEA estimates an average annual gross revenue of USD$ 177 million per year, over a 47-year life of mine, with an annual average gross revenue of USD$ 220 million over the first 5 years. Yurik states:

“If you look at say just Battery Hill, I won’t make a prediction in terms of when it comes into production, but it is the only manganese district in North America really being developed for the EV space. So, I think it has some impetus to it, but once that’s in production, on the base case based on their PEA, we’re expecting about USD$ 3.5 million, so let’s call that roughly CAD$ 5 million. So yeah, with the juniors, you’re looking at about 10 times cash flow. That would imply once in production, whenever that date would be, an implied valuation of CAD$ 50 million, potentially for just that royalty.”

The company will see significant cash flow from the 2% gross revenue royalty on the deposit, with Yurik explaining the strategic importance of the royalty to the company as follows:

“We have a 2% gross revenue royalty on that asset. So, it’s a nice one. That’s our biggest royalty, and its gross revenue, it’s right out the top, there are no deductions. It’s very easy for investors to calculate what they expect our revenue to be on an annual basis and the expected production for that year. You choose the metal price, and then times by our royalty percentage.”

Graphmada Graphite Royalty

Electric Royalties Ltd. also recently announced that Greenwing Resources Ltd. had released a JORC compliant updated mineral resource estimate for its Graphmada Graphite property, located in Madagascar. Electric Royalties Ltd. owns a 2.5% net smelter return (NSR) royalty on the project. The updated mineral resource estimate sees the project’s measured and indicated resources grow by a factor of 5 to 31 million tons at 4.8% fixed carbon totalling 1.6 million tons of graphite. The project’s inferred resources have also increased to double its initial size to 30.9 million tons of mineralisation at a 4.5% fixed carbon.

Greenwing Resources Ltd. also announced an update to its research and development activities which it carries out in collaboration with the Swinburne University of Technology. The research initiatives had succeeded in producing products which met ISO standards. The accomplishment serves as a milestone towards the creation of a patentable and environmentally friendly process to produce advanced materials such as expandable graphite and graphene.

Electric Royalties Ltd. is optimistic regarding the Graphmada Graphene project, with Yurik explaining that the jurisdiction, although burdened by challenges such as water shortages, possesses vast amounts of potential, he states:

“There are a couple of other operators in the country. It’s got its challenges like a lot of places. It’s probably not too dissimilar from what you face in Chile in terms of water shortages, that type of thing. But for graphite, we felt like Madagascar is a pretty special place. We feel like they can operate there. But obviously, it has challenges like operating anywhere where they have issues with water availability.”

Pursuing cash flow through near-term production assets

Electric Royalties Ltd. believes that it is well positioned to be able to grow its royalty portfolio in the near future. Yurik explains that the current metals market sees various operations that are close to production and require funding. The market conditions allow royalty companies the opportunity to purchase royalties on these operations, he explains:

“I think it’s perfect in this market where you have metal prices plunging. Groups that are going into operation, in construction, typically those guys are going to need more money. It’s one of the things, right? So, I think in this type of market, to have some cash available and to have groups where we’ve partnered like Sprott, who have a great deal of money, and even Lithium Royalty Corp. I think it’s going to let us go out and get some deals where you might have a little bit of distress, might have a lack of capital to get in more accretive than you otherwise could in a normal market, and do some producing - within 12-months production opportunities.”

The company will according to Yurik focus on obtaining royalties on near-production assets enabling it to have a larger cash flow in the future, he states:

“We’re going to chase some of those down as well and I think that’s going to be a really good space. We might be able to find some more accretive cash-flowing deals than you would have been able to say 6, 9, 12 months ago.”

To find out more, go to the Electric Royalties website