Elemental Altus Royalties: A Golden Opportunity in Precious Metals as $28M Deal Boosts Revenue Potential

• Elemental Altus Royalties announced a $28 million all-equity deal to consolidate royalties on Bonikro, Ballarat, Esquire, and 21 other exploration and development royalties in Australia.
• The deal is expected to generate $6 million in revenue next year and $5 million annually over the next five years, based on consensus pricing.
• The transaction brings AlphaStream, a large UAE natural resources fund, onto the register as a 15% shareholder.
• The company is focused primarily on gold royalties, with exposure to high gold prices.
• Elemental Altus Royalties expects over $30 million in revenue next year, which should translate into significant free cash flow.

A Golden Opportunity in the Precious Metals Royalty Space

In the ever-evolving landscape of precious metals investing, royalty companies have emerged as an attractive option for investors seeking exposure to gold and other metals without the operational risks associated with mining. Elemental Altus Royalties (TSX-V: ELE) is positioning itself as a significant player in this space, focusing on near-term producing gold and copper royalties. With a recent major acquisition and a clear strategy for growth, the company presents an intriguing proposition for investors looking to capitalize on the precious metals market.

Recent Acquisition Strengthens the Portfolio

Elemental Altus Royalties has recently announced a substantial acquisition that significantly bolsters its royalty portfolio. The $28 million all-equity deal consolidates royalties on several key assets, including Bonneco, Ballarat, Esquire, and 21 other exploration and development royalties in Australia. This move not only expands the company's geographic footprint but also enhances its near-term revenue potential.

David Baker, CFO of Elemental Altus Royalties, expressed enthusiasm about the deal, stating:

"Really, really excited to announce this material acquisition for us. So it's a $28 million all equity deal. And that really consolidates the royalties that we already have on Bonikro, Ballarat, Esquire and 21 other exploration and development royalties in Australia."

Interview with Chief Financial Officer, David Baker

Financial Impact & Revenue Projections

The financial implications of this acquisition are substantial. According to Baker, the company expects to start receiving revenue from these new assets as early as Q4 of the current year. More importantly, the projections for future revenue are promising:

"We're estimating a consensus pricing, $6 million next year, and then $5 million over the next five years. Obviously, consensus is a fair bit lower than spot, so we've got full exposure to high gold prices."

This additional revenue stream is expected to have a significant impact on the company's overall financial performance. Baker noted that the acquisition is "immediately accretive, certainly accretive on a NAV basis and certainly material accretion on cashflow is going to bring 25% more revenue year on year to us."

Strategic Partnership with AlphaStream

One of the key aspects of this transaction is the introduction of AlphaStream, a large UAE natural resources fund, as a significant shareholder. AlphaStream will become a 15% shareholder in Elemental Altus Royalties, opening up potential opportunities for co-investment in the future. This strategic partnership not only provides the company with a strong financial backer but also potentially opens doors to new investment opportunities in the future.

Focus on Gold: Capitalizing on Market Trends

Elemental Altus Royalties maintains a strong focus on gold royalties, a strategy that has proven beneficial in the current market environment. With gold prices reaching record highs, the company's exposure to the precious metal positions it well to capitalize on these favorable market conditions.

Baker emphasized this point, saying:

"That's really always been the focus of the company - gold. I think we've seen that with the significant increase in gold pricing this year, that's been a worthwhile strategy."

Key Assets in the Portfolio

The recent acquisition strengthens Elemental Altus Royalties' position in several key assets. Of particular note is the increased royalty on the Bonikro mine in Cote d'Ivoire, operated by Allied Gold, a large TSX-listed company. Baker provided insight into the significance of this asset:

"So previously on average, Bonikro has been paying us about a million dollars a quarter, now it's going to start paying us two million dollars a quarter."

Another significant asset in the portfolio is the Ballarat mine in Victoria, Australia. This historic mine has recently undergone an administration process and emerged with new management and strong funding. Baker expressed confidence in the potential of this asset, noting that it should be "another material contributor to revenue immediately."

Market Dynamics & Consolidation Trends

The precious metals royalty space has been experiencing significant consolidation in recent years. Elemental Altus Royalties views this trend positively and has been an active participant in the consolidation process. Baker noted that there have been over 10 acquisitions, mergers, or combinations in the sub-billion dollar royalty space in recent months alone.This consolidation trend is driven by the inherent characteristics of the royalty business model. As Baker explained:

"It should be a very high margin, low overhead business. So there's obvious synergies from combining royalty companies."

Growth Strategy: Balancing Acquisitions & Organic Growth

Elemental Altus Royalties' growth strategy involves a balanced approach between acquiring existing royalties and potentially providing financing to mining companies. The company's improved cash flow position following the recent acquisition puts it in a stronger position to pursue both avenues.

Baker elaborated on this strategy:

"Going out there and being that sort of provider of finance in tough capital markets, I think we're on the cusp of being able to do that. If we are talking over $30 million of revenue next year, which should translate into material free cash flow, then we are looking to deploy that."

However, the company remains disciplined in its approach, focusing on opportunities that meet specific criteria. "Obviously, it's got to be the right operator, the right jurisdiction, the right stage," Baker emphasized.

Navigating Market Disconnects

The precious metals market currently presents an interesting dynamic, with a significant disconnect between gold prices and the valuations of many mining equities, particularly in the exploration and development stages. This situation creates both challenges and opportunities for companies like Elemental Altus Royalties.

Baker acknowledged this disconnect and its implications:

"I still think there's not as much confidence around the developers and the capital required and the permitting process to get some of these projects online, which is probably why you see the disconnect between the producers' returns and the explorer and developers."

This market dynamic could potentially create opportunities for Elemental Altus Royalties to acquire royalties at attractive valuations or provide financing to companies that may be struggling to raise capital through traditional means.

Financial Position & Capital Deployment

With the expected increase in revenue and free cash flow following the recent acquisition, Elemental Altus Royalties is well-positioned to pursue further growth opportunities. The company's strengthened financial position allows it to be selective in its investments and patient in its approach to capital deployment.

Baker emphasized this point:

"We can afford to be patient. Now obviously, we're not paid to sit still. We are out there looking at hundreds of deals every year. Something lands on our desk nearly every day. But it does mean that we can afford to be selective. It means that we can stick to the investment thesis and strategy in targeting copper and gold in the right jurisdictions."

Valuation Considerations

When discussing the company's valuation, Baker provided insight into how investors might approach valuing Elemental Altus Royalties. He noted that the company is trading at just shy of one times NAV based on street consensus, which he feels is about right for a producing royalty company.

However, Baker also pointed out a potential disconnect in the market's valuation:

"Pro forma, like after this deal is done in US dollars, let's say we're, let's say US$210 million market cap, for example, and we're looking at $30 million dollars plus of revenue next year, using fairly high level assumptions, if that translates to $20 million dollars of recurring free cash flow, then you've got a precious metal royalty company trading at 10% free cash flow yields, which I feel like is a fair way off historical norms."

This suggests that there may be potential for valuation expansion as the company demonstrates its ability to generate and deploy cash effectively.

Differentiation in the Royalty Space

Elemental Altus Royalties distinguishes itself from peers in the royalty space through its focus on cash-flowing assets and the quality of its core underlying assets. Baker highlighted two key royalties that underpin the company's portfolio:

• Karlawinda: A large Australian gold mine operated by Capricorn Metals, expected to pay $4-5 million annually for the next 12-13 years, with potential for expansion.
• Caserones: A large, long-life copper mine producing 125,000 tons of copper equivalent annually, operated by the Lundin family.

Baker emphasized the significance of these assets: "I think that's a real differentiating factor and I think what most royalty companies would dream of having in their portfolio."

Future Outlook & Potential

Looking ahead, Elemental Altus Royalties appears well-positioned to capitalize on opportunities in the precious metals space. The company's growing revenue base, strategic partnerships, and disciplined approach to capital allocation provide a solid foundation for future growth.

As the company continues to demonstrate its ability to generate cash flow and redeploy capital effectively, it may attract increased attention from institutional investors and potentially see expansion in its valuation multiples.

The Investment Thesis for Elemental Altus Royalties

• Strong focus on near-term producing gold and copper royalties
• Recent $28 million acquisition significantly enhances revenue potential
• Projected revenue of over $30 million next year, with strong free cash flow generation
• Strategic partnership with AlphaStream, a large UAE natural resources fund
• Exposure to high gold prices through royalty model
• Differentiated by high-quality, cash-flowing core assets like Karlawinda and Caserones
• Potential for valuation expansion as cash flow generation is demonstrated
• Disciplined approach to capital allocation and growth
• Positioned to benefit from industry consolidation trends
• Potential to provide financing in tight capital markets for miners

Elemental Altus Royalties is positioning itself as a significant player in the precious metals royalty space, with a focus on near-term producing gold and copper assets. The company's recent $28 million acquisition strengthens its portfolio and is expected to boost annual revenue to over $30 million. With a strategic partnership with AlphaStream, a disciplined approach to growth, and exposure to high gold prices, Elemental Altus Royalties offers investors an attractive way to participate in the gold market. As the company demonstrates its ability to generate and deploy cash flow effectively, there may be potential for valuation expansion. However, as with any investment, potential investors should carefully consider the risks and conduct thorough due diligence before making investment decisions.

Macro Thematic Analysis

The precious metals royalty sector, particularly focused on gold, is currently operating in a favorable macro environment. Gold prices have reached record highs, driven by factors such as global economic uncertainty, geopolitical tensions, and concerns about inflation. This environment has created a unique opportunity for companies like Elemental Altus Royalties to capitalize on high metal prices without taking on the operational risks associated with mining.

The royalty model itself is particularly attractive in the current market conditions. As traditional financing becomes more challenging for mining companies, especially junior explorers and developers, royalty companies can step in to provide much-needed capital. This not only creates opportunities for royalty companies to acquire new streams at attractive valuations but also positions them as key players in the mining ecosystem.

Furthermore, the ongoing consolidation trend in the royalty space is likely to continue, potentially leading to economies of scale and increased investor interest in the sector. As larger, more liquid royalty companies emerge, they may attract more institutional investment, potentially leading to higher valuations across the sector.

However, it's important to note that the royalty sector is not without risks. The performance of royalty companies is still tied to the success of the underlying mining operations and the overall health of the mining industry. Additionally, while high gold prices are currently beneficial, any significant downturn in metal prices could impact the sector's profitability.