Elemental Altus Royalties - A Fast-Growing Junior Royalty Company Offering Value and Upside

About Elemental Altus Royalties

Elemental Altus Royalties Corp. (TSXV: ELE, OTCQX: ELEMF) is a junior royalty company that was founded in 2017 and went public in 2020. The company started with just a few royalties and has grown rapidly through acquisitions to build a portfolio of over 90 royalties and streams, with 10 producing assets, on projects located across 15 jurisdictions globally. Elemental Altus completed a transformative merger with Altus Strategies in 2022, significantly expanding and diversifying its asset base. The company currently has a market capitalization of around $220 million CAD.

Top Revenue Generators

Elemental Altus' portfolio is anchored by royalties on three key producing assets that together account for over 80% of the company's revenue.

The largest revenue contributor is an effective 0.9% net smelter return (NSR) royalty on the Caserones copper mine in Chile, which is expected to produce around 148,000 tonnes of copper equivalent over its 17 year mine life. Caserones is operated by mining major Lundin Mining, who acquired a 51% stake in the mine in 2023.

The second largest royalty is a 2% NSR on the Karlawinda gold project in Western Australia, operated by Capricorn.

The third major royalty is a 1% NSR on the Wahgnion gold mine in Burkina Faso, operated by Lilium Mining. This royalty has already generated over $1 million in proceeds for Elemental Altus.

Strong Revenue Growth and Cash Flow Generation

Elemental Altus has demonstrated strong revenue growth, with total revenue projected to reach $16-18 million in 2023. This compares to just $400,000 in the company's first year of operations in 2017. The revenue is around 80% attributable to gold royalties and 20% to copper royalties.

The company is also cash flow positive, with adjusted operating cash flow of $5.6 million for the first half of 2023. As Elemental Altus continues to grow its producing royalty portfolio, revenue and cash flow are expected to increase substantially going forward.

Initiatives to Boost Margins

Elemental Altus is undertaking several initiatives focused on reducing costs and boosting margins. The company recently partnered three of its 100% owned earlier stage exploration projects located in Ethiopia, Mali and Egypt with private operators. This move effectively outsourced the investment and ongoing costs associated with advancing these assets, in return for upfront cash payments, royalties and carried interests.

The company expects this will substantially reduce its annual expenditures on royalty generation by $2-2.5 million per year starting around Q4 2023. Combined with the revenue growth from its producing royalties, this is expected to drive significant margin expansion.

Elemental Altus also recently added key personnel in areas like finance and legal, moving previously outsourced functions in-house. This is expected to reduce external professional and advisory costs going forward.

With these margin improvement initiatives combined with continued portfolio growth, the company believes it is well positioned to achieve profitability in the near term.

Growth Through Accretive Acquisitions

Elemental Altus has an extensive track record of sourcing and acquiring high quality royalties and streams at attractive valuations. So far in 2023, the company has completed over 20 new royalty and stream acquisitions.

Recent acquisitions include royalties on Arizona Sonora’s Cactus Project and South32’s Hermosa project, both located in Arizona. The company is keeping its pipeline full of potential new royalty deals and expects to remain active on the acquisition front through the remainder of 2022 and into 2023.

The company has several funding options to support new acquisitions, including an existing $40 million credit facility as well as the potential to offer shares or cash. Being well funded and having flexibility on deal structuring is a competitive advantage for Elemental Altus in the current market environment.

Portfolio Provides Optionality and Upside Exposure

Elemental Altus’ portfolio provides shareholders with significant optionality and upside exposure across a diverse range of assets. In addition to the currently producing royalties, the company has royalties on advanced exploration and development stage projects, as well as earlier stage exploration assets.

As operators advance projects and make new discoveries, Elemental Altus stands to benefit without any of the common risks or costs incurred by traditional mining companies. The company estimates the total uncapped value of its royalties could potentially exceed $900 million based on feasibility studies for the associated projects. With exploration and development upside, the portfolio offers substantial value.

Focus on Resilience

Throughout its rapid growth trajectory, Elemental Altus has maintained a focus on building a resilient company positioned to withstand market volatility. This is reflected in efforts to diversify the portfolio across commodities, jurisdictions and counterparties. The company also has a strong shareholder base that includes major institutions.

Maintaining a resilient financial position with low leverage and adequate liquidity to take advantage of opportunities has also been a priority. The company has successfully tapped credit facilities and creative deal structures to fund growth without excessive equity dilution.

Valuation Appears Attractive

Despite significant fundamental progress, Elemental Altus shares have declined modestly from their $1.30 CAD listing price in 2020. However, the company has pointed to the fact that its merger partner Altus Strategies traded around $0.50 CAD at the time of the deal, suggesting the current valuation may represent an opportunity.

Indeed, Elemental Altus estimates its shares trade at a significant discount to the estimated net asset value of its royalty portfolio on a per share basis. The company also notes it was the subject of an unsolicited takeover offer at a 50% premium to the current share price earlier this year, providing another indication of underlying asset value.

Conclusion

Elemental Altus Royalties has rapidly transformed from a startup into a fast-growing junior royalty company with a globally diversified portfolio. With multiple revenue and margin growth catalysts expected in late 2023 and 2024, the company appears poised to transition into profitability and positive free cash flow in the near term.

Trading at a discount to estimated net asset value and peer multiples, Elemental Altus offers investors value exposure to a producing royalty portfolio with significant optionality. As the company continues expanding its portfolio, revenue and cash flow growth have potential to drive substantial shareholder value creation over time. Elemental Altus warrants consideration as a promising emerging royalty investment opportunity.