Electric Royalties (ELEC) - Technical Analysis

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.

Merlin-Marr Johnson 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 focused on the entire suite of metals required for the transition to clean energy as the world moves towards a decarbonized global economy. The company has 18 royalties which includes a producing zinc royalty in the US that is currently generating revenue. It has a strong focus on lithium along with a diversified portfolio across the entire clean energy space. 

Mid-Tennessee Zinc Mine Royalty 

Zinc has an overall global demand of 12Mt/year. It is expected to play a major role in renewable energy technologies. Zinc is also a major component in the production of galvanised steel. There has been limited interest in zinc in the past, as most investors are focused on copper. However, the current energy transition indicates that the supply side of zinc is more worrisome than copper. 

Electric Royalties’ Clarksville Gordonsville asset is called the Mid-Tennessee Zinc Mine. This asset is based in a complex that is owned by Trafigura Mining Group. Notably, the complex was acquired by Trafigura from Nyrstar. The latter was not well-capitalised and was going under for the past 2 years, which led to the acquisition. The Mid-Tennessee Zinc Mine is vertically integrated with the Clarksville smelter. It is the primary zinc producer in the United States. Electric Royalties anticipates that a single primary zinc producer for all of the US is worrisome for such a critical metal. This is because the demand for critical metals is expected to grow significantly in the coming months. 

The Mid-Tennessee Zinc Mine is a sliding scale royalty where Electric Royalties will get 1.4% when the zinc price is over $1.10c/lb. When the zinc price is between $0.90c/lb and $1.10c/lb, the company will get 1% royalty. However, if it is below $0.90c/lb, the royalty won’t pay. There isn’t any clause in the contract that accounts for inflation. Interestingly, zinc’s market price currently stands at $1.60/lb. From the time this deal was conducted, the zinc price rose by 25%-30%. This makes it a very low-risk asset as it is highly unlikely that the asset won’t be paying for extended periods of time. 

Notably, the 1.4% royalty will be wholly owned by Electric Royalties when the zinc market price is at $1.10/lb. The transaction size for the deal was $17.5M. To fund this transaction, Electric Royalties brought in Sprott Royalty and Streaming to co-invest in the project. The latter put in $13.5M to close the deal. This was done because, at the time, Electric Royalties did not have the cash flow to fund the deal. The company had the option to raise additional capital, but it wasn’t looking to invest such a large sum in a single asset. Sprott ended up paying a much higher proportion of the overall cost. Sprott paid 100% of the cash to close the deal. Initially, Sprott Royalty took 75% of the deal, while Electric Royalties got 25%. The latter has the option to buy back and get up to 50% of the deal. Electric Royalties can execute this option either in August 2022 or August 2023. 

Electric Royalties anticipates that the royalty payout will be on a 100% basis. As Trafigura recovers from the covid-induced operational delays from the past, the royalty is expected to generate about $2.5M in annual revenue. Electric Royalties is looking to keep a close watch on how Trafigura operates as it acquired the project in a better capitalised position. Historically, the company isn’t known to downsize or minimise operations. Given the importance of zinc concentrate to the Clarksville smelter, it’s in Trafigura’s best interest to advance and develop the project. 

Notably, the smelting operations of the training groups are 10 times higher than the mining side. This serves as a strategic impetus for project advancement. Once the project reaches peak production capacity, Electric Royalties expects a $2.5M in annual revenue. The asset is expected to produce for a long time. The asset has had intermittent production over a 50-year period. Trafigura Mining Group currently has 5-6 years of reserves. The company has drilled 10m-20m from the surface to source ore as needed. However, since the systems are very large, Electric Royalties is confident that the supply will continue for a long time. 

The revenue generated from the Mid-Tennessee Zinc Mine will easily cover Electric Royalties’ G&A (General and Administrative expenses). The company’s biggest costs are transactional, in the form of legal fees when deals are conducted. Being a royalty company, its G&A costs are very low. These costs can be covered by 50% of the revenue generated by the royalty. 

Unless the 50% option is executed, Electric Royalties will get 25% of the royalty of the expected $2.5M. The company will consider executing the option 2 months before the due date. Although zinc is experiencing a positive run in the market, the company plans to observe Trafigura’s project strategy. Since the former operator went bankrupt, the asset has seen fairly limited capital investment, especially on the exploration front. Electric Royalties is looking to observe the progress on the asset over the course of the next few months before deciding to execute the option. It also has the flexibility to execute the option in August 2023 if needed.

According to the company, the Mid-Tennessee Zinc Mine royalty will require additional capital investment for advancement. The company plans to observe the investment, decisions, and announcements made by Trafigura on the project in the months that follow. Additionally, the company is also looking to monitor the zinc prices over the next few months before ultimately deciding to increase its royalty stake. 

Team Structure

Electric Royalty’s team comprises a small management team that includes the CEO, the CFO, multiple advisors, and the Company Secretary, along with a small team of back office staff and David Gaunt, the company’s technical expert. David is a geologist who is working closely on the due diligence and the assessment of various projects. He is known to conduct due diligence on assets for the past 20 years. The modelled resources are added to a database. The company has a strong focus on due diligence, which is conducted in great detail and with careful consideration. Martin Raffield is an engineer with Electric Royalties who worked closely on the technical due diligence alongside Sprott Royalty and Streaming. 

Graphmada Mine

The Graphmada mine is based in eastern Madagascar and is operated by ASX-listed Bass Metals Limited. This royalty was acquired from Vox Royalty in 2021. Notably, the asset was in continuous production for 30 months before it was placed under care and maintenance due to covid restrictions, and because the operations were shut down by the Madagascar government. 

Bass Metals is one of the two ASX groups that are capable of producing graphite. It is important to note that although there are a lot of groups operating in the graphite space, only a few are capable of producing. While copper concentrates are highly sellable, zinc often requires the product to be sent out for testing. In this process, the product is customised to the off-taker’s specific requirements which leads to long-term buying agreements. Bass Metals ran the project for 30 months. During this time, the company got its end product qualified by off-takers. It is important to note that none of the product was sent back. The company has conducted additional testing on the product. 

Bass Metals announced that it is looking to bring the asset back in production this year. The company is working on upgrading the resources and is looking to conduct a Scoping Study on the expanded case. The project has a modest CapEx (Capital Expenditure). The company is looking to double its production output in 2022. In order to achieve this, the company would need to invest additional capital and wait for the Madagascar situation to stabilise. If the company is successful in entering production, this asset will generate $1M annually for Electric Royalties. 

Notably, Madagascar is a special place for graphite production as the graphite found here is very high in quality. It meets the flake distribution and size that groups actively seek. A lot of investment has been poured into the country for graphite-based assets. Vision Blue Resource made a significant investment in Madagascar over the last 18 months. 

Madagascar is out of Electric Royalties’ usual target jurisdiction. The company is looking to pick up assets in North America, Europe, and Australia that could potentially serve as a domestic source of supply. According to the company, there hasn’t been any news on export controls enforced by the Madagascar government on graphite producers or developers. The country seems to be turning a corner in terms of investment targeted at the graphite sector. 

The country imposed very harsh covid restrictions during the pandemic. This made it increasingly difficult to operate mines. Bass Metals utilised this time efficiently by conducting exploration work and metallurgical testing. The company also tested fine-tuning and further upgrading of its product. The company is looking to get back into production over the next 12 months. 

Authier Lithium Royalty

The Authier Lithium Royalty is operated by Sayona Mining. This royalty is likely the next asset to enter production in Electric Royalties’ portfolio. Interestingly, when the royalty was first acquired, Sayona Mining was a $6M market cap company. Since then, it has grown to an $800M market cap company. Sayona Mining recently closed the acquisition of the Canada Lithium mine, the only real producing lithium mine in Canada. Notably, the Authier Lithium mine sits next door to the Canada Lithium mine. Sayona Mining has plans to blend ore from the former to ramp up its production. The company is looking to release results from a planned Scoping Study in early 2023. This study will focus on integrating the Authier ore to ramp up mine production.

Sayona Mining’s stock was recently suspended as it was pending a resource announcement. The company is actively looking to build a lithium hub in Quebec. The company’s price performance has been exceptional. By the end of 2020, it was trading at $0.006c, which grew to $0.11c. This equates to a 10x growth in stock value or 30%-40% growth from the highs. 

Electric Royalties is highly satisfied with its lithium portfolio. Lithium market prices were up by 400% last year, which has led to massive growth for lithium companies. Companies such as Lake Resources were at a $20M market cap 12-18 months ago. Currently, Lake Resources is a $1Bn market cap company. Lithium is emerging as an entirely new long-term market from the traditional mining perspective. The Authier asset will be Electric Royalties’ first lithium royalty to generate cash flow in the near term. 

In 2019, a DFS (Definitive Feasibility Study) was completed and updated on the Authier Lithium Royalty. Currently, the project is in the permitting stage. For a Canadian company trading publicly, it is mandatory for a resource to be 43-101 NI (National Instrument) compliant before the numbers can be included in presentations and press releases. 

The project economics are available on Sayona Mining’s website. The NPV (Net Present Value) was originally evaluated at $120M, however, the current pricing is a fraction of the 2019 figures. In fact, the current pricing is expected to be one-third of the original NPV. Electric Royalties is betting on hard rock spodumene in Eastern Canada. This is a proven technology that requires relatively simple processing. The project is very economical and the permitting prospects in Quebec are highly desirable. 

The metal pricing for the project is based on the 2019 DFS. Over the last few years, lithium prices have observed exceptional growth. As a result, increased inflation would have a limited impact on the project economics. 

Sayona Mining is currently focused on project permitting. The company is also planning to release a detailed engineering study that will be focused on incorporating the Authier asset and the ore to ramp up mine production. Due to the 400% jump in lithium prices last year, the Authier project is critical for ramping up the company’s near-term production. The company is looking to get permitted in 2022 and enter production by early 2023. 

The delay in the permitting process could potentially be caused by the involvement of First Nations. The project does not have any water supply issues. Though Quebec is considered a great jurisdiction, the permitting times can often be fairly long. 

Bissett Creek Royalty

The Bissett Creek asset is an advanced royalty based in Ontario, Canada that is operated by Northern Graphite. It is situated 15 hours away from the largest under-construction giga-factory in the United States. The asset is currently in the construction phase. Northern Graphite is currently working on project financing and an off-take permit. In the past, the graphite space was tightly controlled by a few groups. Northern Graphite recently closed an acquisition to become the largest graphite producer outside of China. 

Northern Graphite acquired the business from Imris Inc. The acquisition resulted in the acquisition of all the off-take contracts along with the relationships Imris had built in the graphite space over the last 10 years. Northern Graphite is looking to leverage this base in production and cash flow. 

Electric Royalties anticipates that Northern Graphite could announce project financing and an off-take in 2022. The construction timeline for the project is estimated at 18 months. This royalty is expected to generate $1M in annual revenue. The asset has about 7 years of resources, indicating a long-life operation. Notably, Electric Royalties has an option to increase its royalty by 50%, which can be executed by paying partially in company shares. 

The project CapEx is around $120M, which is manageable. It has a low strip ratio with a very good jumbo flake at the higher end. In the case of graphite projects, debt financing can’t be acquired without off-take agreements. This often acts as a barrier when companies are looking to put the mine into production. This also serves as an obstacle for shareholders. However, since the off-take for this project was acquired from the previous owner, this shouldn’t pose a problem. It would instead serve as a transformational deal which would serve as an opportunity for asset growth. 

Northern Graphite has a $60M-$70M current market cap. It is important to note that the company is currently in the middle of financing. It recently closed a transformational position which is in the final phase. As part of the deal, the company also acquired a $50M package from Sprott. The base built by the previous company has the potential to transform Bissett Creek into a flagship asset. 

Battery Hill Royalty

The Battery Hill royalty is the only manganese district in North America that is being developed for the EV (Electric Vehicle) space. The project owner, Manganese X Energy Corp. is looking to release a PEA (Preliminary Economic Assessment) next month. The economics of the project are highly desirable. There are a limited number of manganese deposits globally that are amenable for the EV space. 

The Battery Hill royalty has a 60Mt resource. This asset has a 35-40 year mine life and is expected to generate between $5M-$6M in annual royalty. This is a highly economic deposit. Manganese X has been working with Comeco on the project’s metallurgy for the past 3 years, which is often one of the most complicated steps in the process. The metallurgy is in the third and final phase of testing. The company has successfully proven the recoveries. The process has been put together with ESG (Environmental, Social, and Governance) in mind. The met work will also help accelerate the Feasibility Study. 

Manganese X Energy Corp. has a $35M-$40M market cap. According to Electric Royalties, the company is undervalued relative to its peers. The company anticipates that once the project economics are announced, the market will take notice. The manganese grades here are fine with limited impurities. The economy of scale works in the project’s favour due to its large size. 

Asset Portfolio

Electric Royalties currently has 18 assets in its portfolio. It has 2 other lithium assets apart from the Authier Royalty. These projects are expected to observe similar growth to the Authier asset. The 2 assets are expected to publish the project economics in 2022. 

Electric Royalties raised $40M in September 2021 to invest in the Seymour Lake and Cancet royalties. Both projects are actively moving ahead. Drilling is underway at the company’s nickel and copper assets based in Australia. Additionally, there’s an ongoing drill program on the Chubb lithium asset which is based near the Canadian Lithium Mine. 

Royalty Advantages

In a royalty, especially in the targeted jurisdictions, the company can tie the royalty to the project itself. As a result, holding the royalty does not cost the company, leading to a long-time zero-cost prospect. In case the owner loses the project, Electric Royalty can still maintain the royalty as it’s directly tied to the project. This also comes with additional benefits. Royalties also help owners attain the cash flow needed to advance the project. The margins for these royalties range between 1%-10%. Royalties provide different rights that are directly tied to the cash flow generated by the project with no holding costs. The royalty company does not need to pay any development or capital costs.

To find out more, go to the Electric Royalties website