Electric Royalties (ELEC) - Beginner’s Guide to Mining Royalties

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. 

Electric Royalties is a royalty company that focuses exclusively on all the clean energy metals required for the transition to an environmentally-conscious future.  

As the world moves towards rebuilding the infrastructure towards a decarbonized global economy, there will be a large impact on several metals such as cobalt, lithium, and tin, which are currently smaller markets. The company forecasts exponential growth over the next 2 decades. It is looking for royalties on mines that could supply these metals for building a green future. The company has 18 royalties to date, which includes cash-generating royalties.

The Lithium Market

Rio Tinto had announced a $2.4Bn investment in the Jadar Valley project to develop the asset into Europe’s biggest lithium mine. The Jadar mine in Serbia was supposed to be a huge lithium mine that would help develop a large lithium supply that would be needed over the next few years. However, the first production at the new lithium mine was delayed by a year as a result of delays in the required licences for an environmental assessment. The Jadar mine delay will have a significant effect on the global lithium supply. 

The clean energy metals market already has a limited supply. However, lithium is an exception here. There’s a lot of lithium supply through clay in Nevada. It is important to note that commercial extraction of lithium clay hasn’t been done before, though there has been a lot of investment in this space. There’s a lot of lithium available to mine, but advancing a project, building a mine, and bringing it into production is challenging. 

Jurisdiction Risks

Operating in countries such as Chile, Peru, and Argentina has been historically challenging. The majority of these countries have a significant mineral endowment. Notably, 30% of the world’s copper comes from Chile. 

Peru is a very big metal producer. The current discussions with the changes in the mining landscape are worrying for a lot of investors. As a result, Electric Royalties is targeting safer jurisdictions to develop a domestic source of supply. Deposits within North America, Europe, and Australia can sufficiently provide the metal supply for Giga factories that are being constructed locally. 

Operating in countries like Serbia, Peru and Chile require companies to deal with the ongoing social unrest, and bringing projects online is often challenging. Investing in space comes with a greater risk, for instance, a project with an average 15-year development timeline can get killed at year 10 or 14. 

To mitigate this risk, Electric Royalties operates in the space as a royalty company. This enables the company to diversify its risks while avoiding the hook when it comes to development and capital costs.

Practical Solutions

There needs to be a meeting of minds where decisions are practical and based in reality. As the world is transitioning towards clean energy, the need for these metals will continue to grow. There is no doubt that the need for these metals will require more mines. Land-based mining has been ongoing for a very long time and now it’s possible to carry out mining responsibly. 

From an ESG (Environmental, Social, and Governance) perspective, geothermal lithium going into Europe is as ESG friendly as possible. The process produces renewable energy while simultaneously capturing lithium. Electric Royalties expects that similar mining methodologies will definitely be a priority in the future. 

There’s a misconception on the extent of supply shortages expected in the near future. According to the company, a surprisingly limited number of people understand the supply-side projections for these essential metals. Electric Royalties is the only group that covers 9 metals in the clean energy metals space. 

A Volatile Market

There is a lot of risk in the market at the moment. There were multiple graphite producers that tried to make it in Africa years ago, however, most of these projects failed. Similarly, there have been a number of groups that have also tried entering the lithium space, however, this led to significant losses for the equity investors. Nemaska Lithium is one such recent example.

It is a highly risky space for equity investors. To remedy this issue, Electric Royalties provides exposure to the clean energy metal space which is backed by the company’s dedicated information and due diligence to pick projects that actually have a chance to succeed. The company provides investors a good place to gain exposure to these metals while significantly reducing the risk factor that comes with picking out individual projects. 

Electric Royalties’ current portfolio is lithium heavy. Notably, lithium prices jumped by 400% last year and the company anticipates that a similar trend will be seen across all these commodities at some point. Tin is up by around 100%, while cobalt saw a 75% jump in price. Copper was trading at $1.50 18 months ago and now it is around $4.50. The company anticipates that the jump in prices will hit all these different metals at once. 

Identifying Better Projects

Choosing a mining company for investment is difficult, but investing in the battery metals space comes with its own challenges and difficulties. 

A project can have an average 15-year development timeline. Unlike oil and gas, where the cash flow generation is significantly quicker, exploring a commodity like copper can be a long drawn process. It involves dozens of complexities and processes which can make or break a project. This includes core assays, additional funding, permitting, metallurgy, and more. 

Furthermore, the company should be able to build out a mineable resource. This can also face stalling due to technical difficulties. For the clean battery metals space, metallurgy is the most challenging aspect. If a company is looking to develop 99.9% pure material for battery-grade quality, it will bring its own set of challenges. 

The companies developing for the EV (Electric Vehicles) space, especially in graphite and manganese, each project is unique in terms of metallurgy and how it is approached by the company.  

Finding off-takers to use the end product is another hurdle. When analysing a mining company in the battery metals space, 25%-30% of the focus should be on metallurgy. The project should also have a good infrastructure. In case a renewable power source is used, the ESG component would actually help the project get into production. 

One also needs to assess the management team. For Electric Royalties, the focus is more on the deposit as its royalties are tied to the deposit. Hence, the company isn’t too concerned about management. It focuses on the deposit’s size and whether off-takers would be interested in the project that is going to run for the next 20-30 years or not. This is where product testing comes into play as the end product should meet the needs of the end-user.

The company looks for projects that have the size and longer mine life. Jurisdictional risk is also a major component along with a variety of technical aspects. The ESG component can be a powerful driver to push a project forward in the current environment. Funding is another consideration that is essential to bring a project into production. 

The ESG Component

Notably, there has been an ongoing trend where some groups are changing names to capitalise on the battery metals play. Some of these companies change their name back after a year, making it challenging to identify good projects. 

As per Electric Royalties, one-third of the general mining companies do not have investors or a real asset and are highly unlikely to generate a return. This makes it paramount to assess the actual assets and the ongoing company strategy. 

Electric Royalties is focused on getting exposure to all the key deposits in safe jurisdictions. These projects provide exposure to deposits in North America, Australia, and Europe. The company anticipates that these projects have a very high chance of providing metals including lithium, zinc, tin, etc. 

Growth Projections

There is a need for new money in the battery metals sector. It is expected that the clean energy metal space will cannibalise the oil and gas sector for the next 20-30 years. Notably, the oil and gas sector is about 4x-5x bigger than the mining market as a whole. 

The clean energy metal space in mining is definitely in a growth phase. 2 years ago, this space accounted only for 5%-10% of the market. There are expectations of a fundamental shift in the mining sector, where the clean energy metal space will be 4x-5x bigger than the traditional mining sector which has been consistent over the last 50 years. The growth profile for the battery metals space appears to be incredible.

According to a report by the International Energy Agency, there are predictions that lithium, nickel, and graphite can have anywhere between 5x-20x growth over the next 10 years. It also forecasts that there will be a 20x increase in supply. Though the demand for projects may not be as high, there will definitely be a 400%-500% price jump over the next decade. Lithium is the key metal in this clean energy transition. 

When choosing projects, the first plan of action is to see the supply side of these metals and analyse whether it has the chance of making it into production and where it would fill the gap. Electric Royalties anticipates that there will be a demand shortage across most of these metals within the next 5 years. 

The company anticipates that the battery metals space will be the ideal place to be over the next 10 years and that the growth and potential for this space will be unparalleled. It is important to note that there are very few investors actually in the space right now. 

Due to the massive price jump in lithium, a lot of projects have become more economical. This has allowed more capital into the lithium space which helps create a bit of a supply-demand balance. The company anticipates that following a big influx of capital, there are always little fluctuations. It is important to note that the majority of the money was invested into the lithium space while tin, zinc, and graphite have had a limited capital investment. 

The Pallinghurst Group is the only other private equity group that has a similar focus to Electric Royalties in the broader clean energy metal space. 

Electric Royalty anticipates that there will be a small pullback in lithium at some point in time. Though it’s important to focus on the growth where a 400%-500% increase is expected across all these metals over the next 5-10 years. 

Capital Availability

Electric Royalties anticipates that there’s a lot of money looking at the clean energy metals space. The company has had multiple discussions with groups as they have access to deal flows. There are groups that are willing to put together funding structures that are in favour of the company, something rarely seen in the mining space before. 

According to the company, there is a lot of money available, however, the people responsible for capital deployment have limited knowledge of the space. A lot of groups are now learning about the clean energy metals space. Electric Royalties has had conversations with several oil and gas investors who are keen to see where the company invests its capital. The oil and gas groups have a 100-year outlook. A lot of these groups are in conversations with the company. This is something that was absent 1.5-2 years ago. 

Electric Royalties has plans to raise capital at some point. A lot of sources are looking to gain exposure and deploy into the clean energy metals space. The company provides exposure in a diversified and low-risk way for these sources. 

Outlook 2022 and Beyond

Electric Royalties anticipates that the interest and need for the clean energy metals space aren’t going anywhere. The company is strategically assessing the projects that have the best chance for success. When looking at projects with a 15-year average development timeline, the best projects to pick are the ones in year 10 or 12 of the timeline. These are the projects that are most likely to come online. 

The company is focused on making the most of the time and opportunity as its one of the few groups operating in the broader clean energy metals space. It seeks to continue its growth by analysing and picking up good long-term deals and assets.

To find out more, go to the Electric Royalties website