Elemental Altus Royalties Delivers Record Revenue, Diversification and Operating Leverage

Elemental Altus Royalties recently announced record revenue and adjusted revenue for Q1 2022, realizing the benefits of its merger with Altus Strategies last year. The royalty company saw revenue increase by 74% and adjusted EBITDA jump by 140% compared to Q1 2021. With a relatively fixed cost base, Elemental is poised to continue expanding margins as royalty revenue grows. Several key factors position Elemental Royalties as an attractive investment opportunity in the royalty space.

Broad Portfolio Drives Revenue Growth

A primary driver of Elemental's Q1 revenue growth is the expanded portfolio from the merger. For example, the Bonikro gold royalty in Côte d’Ivoire is hitting the royalty area this year, contributing significant revenue in H1 with further production ramping up in H2. Overall, Elemental expects more revenue in the first half of 2022 than ever before.

Beyond Bonikro, organic royalty growth across the portfolio of 10 producing assets and 7 jurisdictions is fuelling top-line expansion. With its revenue base now diversified across multiple operators and geographies, Elemental has effectively derisked reliance on a single royalty stream.

Adding Development Assets While Generating Cash Flow

In addition to its producing assets, Elemental Altus Royalties acquired a new royalty on the Pickle Crow gold project in Ontario during Q1. The project has expanded resources substantially since the acquisition, demonstrating the potential value of Elemental Altus Royalties' royalty. The company plans to continue using existing cash flow to add high-quality development assets, enabling growth without excessive dilution from new equity issuances.

Elemental Altus Royalties' revenue generation capabilities provide an advantage over royalty peers at earlier stages. The company can be selective in accessing capital markets and avoid being forced to raise money in turbulent markets.

Proven Track Record on Royalty Investments

Elemental Altus Royalties has demonstrated judicious use of capital historically, with several royalty acquisitions already returning the initial investment through royalty payments. For example, the Quality gold royalty in Australia was acquired for under $1 million initially but has generated over $2 million in payments to date.

Providing this track record of realized returns is crucial for Elemental Altus Royalties to raise additional capital on attractive terms. The company's shareholder register reflects success on this front, with a more institutional composition than royalty peers.

Strong Leverage to Gold and Inflation

Elemental Altus Royalties estimates its revenue would decrease by about 20% if gold prices declined by 20% in a weak commodity market. However, the company would remain cash flow positive to fund ongoing operations and deploy capital into acquiring new royalties at lower prices. This highlights a key advantage over operators that would see margins compressed significantly from a commodity downturn.

Meanwhile, inflation poses less risk to Elemental Altus Royalties as costs are primarily fixed. Royalties provide leverage to the upside in commodity prices without exposure to rising input costs. Upside exposure is magnified on Elemental's large, long-life development assets like Caserones and Regent.

Additional Upside from Exploration and New Discoveries

Elemental pointers to potential resource updates across its portfolio this year that could add value to existing royalties. Exploration conducted by operators requires no capital from Elemental but directly increases the value of its royalty assets if new resources are discovered. After a royalty is acquired, ongoing exploration upside comes at no additional cost.

Proven operators and high-quality projects provide the confidence that resources will continue expanding over time. Elemental cites this "optionality to exploration" as a key strategic advantage royalty companies maintain over producers.

Financial Position Supports Growth

Following the merger, Elemental Altus Royalties has lower debt levels and interest costs as well as a stronger credit facility. The company expects another record revenue quarter in Q2 based on portfolio assets continuing to ramp up production. With its revenue base and lean cost structure, Elemental generates free cash flow to fund operations and future acquisitions.

The balance sheet flexibility and in-house cash flow fuelling growth are further reasons Elemental Altus Royalties deserves a look from investors. Management expects to release official Q2 results by mid-August. If execution remains on track, the Elemental Royalties investment case will continue gaining momentum. For investors seeking royalty exposure, Elemental provides diversity across commodities and jurisdictions in a small and nimble vehicle.

Investment Thesis for Elemental Altus Royalties for Investors

Diversified Portfolio Mitigates Risk

With producing assets across 10 projects and 7 countries, Elemental Altus Royalties provides broad exposure to the upside in commodities like gold and copper without being overly reliant on a single asset. This diversity lowers risk compared to investing in a single mine operator.

Inflation Hedge with Operating Leverage

As a royalty company, Elemental Altus Royalties has minimal operating costs. Revenue is highly leveraged to the upside in commodity prices, providing an inflation hedge. Cost inflation impacts operators' margins much more significantly.

Cash Flow Funds Growth

Elemental Altus Royalties uses existing cash flow to acquire additional royalties and development assets. This funds growth organically without heavy reliance on dilutive equity financings in weak market conditions.

Proven Track Record

Management has demonstrated judicious capital allocation historically, providing strong returns on royalty acquisitions. This gives credibility to continue executing the business model.

Exploration Upside on Existing Royalties

Resource expansion by operators adds value to Elemental's existing royalties over time. This exploration upside requires no additional capital from Elemental.

Strong Institutional Backing

A shareholder base skewed toward institutional investors provides validation of the investment thesis and management's reputation.

Still Small with Big Potential

At around a $200 million market cap, Elemental Altus Royalties can still multiply in size as execution progresses. The company has room to expand and its small size gives flexibility advantages over larger royalty players.