Elemental Royalties Turns Down 'Opportunistic' Takeover Bid, Focuses on Executing Growth Strategy

Elemental Royalties Corp (ELE.V), a precious metals royalty company focused on producing assets, rejected a takeover bid from Gold Royalty Corp (GROY), calling the offer "opportunistic" and "wholly unacceptable" as it significantly undervalues the company. ELE believes that continuing as an independent company and executing on its growth strategy will create more value for shareholders over the long term. Here are the key reasons why ELE could be an attractive investment opportunity for royalty investors.

Majority of Shareholders Oppose Deal

• In response to an unsolicited all-stock takeover bid from Gold Royalty Corp, Elemental Royalties formed a special committee and issued a directors circular outlining 13 reasons why the bid undervalues the company and is not in the best interest of shareholders.
• Elemental has been in touch with an absolute majority of its shareholders following the bid, and most have clearly communicated that they do not intend to accept the current offer.
• Having an absolute majority of shareholders aligned with management's view that the bid significantly undervalues the company puts Elemental in a strong position to reject the offer and continue executing its growth strategy as an independent company.

Bid Significantly Undervalues Elemental's Producing Assets

• The bid offers Elemental shareholders only 12% of the pro forma merged company despite Elemental contributing over 60% of the revenue. This shows the takeover bid is highly dilutive to Elemental shareholders.
• Elemental has steadily built a high-quality portfolio of cash flowing royalties on producing mines, which are hard to acquire and the "holy grail" in the royalty sector.
• Gold Royalty's portfolio consists mostly of exploration-stage royalties that have higher risk and may take years to generate cash flow, if they ever make it into production.
• Based on 2022 revenue estimates, Elemental is trading at a reasonable 9x P/E multiple, whereas Gold Royalty is trading at a lofty ~90x revenue multiple.
• An all-stock merger would expose Elemental shareholders to significant downside risk if Gold Royalty's valuation reverts closer to industry averages.

Producing Assets Have Exploration Upside

• Elemental's two cornerstone royalties - the Wahgnion Gold Mine in Burkina Faso operated by Endeavour Mining and the Karlawinda Gold Mine in Australia operated by Capricorn Metals - both commenced production recently in 2019 and 2021 respectively.
• As such, there is significant exploration upside at both mines that can potentially expand resources and extend mine life, unlocked at no additional cost to Elemental.
• For example, Endeavour has budgeted $21.5 million for exploration at Wahgnion over 2022-2023 and is targeting to double the mine's resources by end 2025. A larger royalty asset will be far more valuable for Elemental.
• Karlawinda also has excellent near-mine exploration potential that is still untapped, with operator Capricorn Metals having an impressive track record of growing the resource base at previous mines.

Strong Organic Growth Trajectory Intact

• Elemental reiterated guidance that 2022 will be a record year for royalty revenue, expected to nearly double year-over-year.
• The company's key growth drivers are the two cornerstone assets mentioned above - Wahgnion and Karlawinda - both ramping up production and delivering full year contributions.
• Additionally, the Mercedes Gold Mine in Mexico operated by Equinox Gold will start contributing royalties to Elemental from July 2022 onwards under a new NSR agreement.
• Beyond 2022, Elemental has several royalties on development-stage projects like Panton Platinum in Australia that can provide additional medium-term cash flow growth.

Proven Track Record of Value Creation

• Since inception in 2017, Elemental has consistently created value for shareholders. The share price has risen from the IPO price of CAD 0.27 to today's level of CAD 1.39, a more than 5x return excluding dividends.
• Elemental's portfolio has expanded from just one royalty in 2018 to 19 royalties today on mines operated by large, reputable mining companies. Annual royalty revenue has nearly doubled year-over-year.
• The disciplined management team, led by CEO Frederick Bell, has acquired royalties on producing mines at reasonable valuations. Directors and management collectively own 15% of the company, aligning their interests with shareholders.
• Elemental has a strong track record of capital discipline, minimizing dilution and acquiring royalties accretive using a prudent mix of cash and shares.

Deep Industry Relationships to Pursue Consolidation Opportunistically

• While focused currently on developing Elemental independently, the company is open to evaluating strategic consolidation opportunities in the royalty space in the future.
• Elemental has relationships with many leading miners and royalty companies worldwide, putting it in a strong position to be the acquirer/consolidator should the right opportunity arise.
• Management emphasizes any deal must be value-accretive for Elemental shareholders and is not pursuing growth just for the sake of size.

Strong Balance Sheet and Access to Capital

• Elemental has a strong shareholder register, solid balance sheet, and growing diversified cash flow from its producing royalties. This enables easier access to equity and debt financing to fund portfolio growth.
• The company is already in discussions to potentially upsize its credit facility and also opportunistically raise equity capital if warranted.
• The recent strength in Elemental's shares driven by the takeover offer also provides flexibility to issue shares accretive for new royalty acquisitions.

Key Takeaway for Investors

In summary, Elemental Royalties presents an attractive investment case for royalty investors seeking exposure to near-term cash-flowing assets. The company has rejected an undervalued takeover bid and is progressing well in executing its growth strategy as an independent entity. The producing royalties have exploration upside, strong operators, rising output, and additional assets coming online, supporting a robust organic growth trajectory. The management team is aligned with shareholders and has a proven track record of value creation. With a discounted valuation compared to peers and extensive industry relationships, Elemental is well-positioned to continue consolidating the royalty space while maximizing shareholder returns.

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