Investing in Mining Royalty Companies - A Closer Look at Elemental Altus Royalties

About Elemental Altus Royalties

Elemental Altus Royalties (TSXV:ELE) is a fast-growing mid-tier royalty company focused on acquiring royalties on quality mining assets run by experienced operators. With a market capitalization of around $220 million, the company has delivered record revenue growth for five consecutive years, with its diverse portfolio now consisting of 10 producing assets and 90 royalties (10 of which are producing) globally.

"Every year for the last five years has been a record in terms of royalty revenue and we expect 2023 to to be another,” said CEO Frederick Bell in a recent interview. Elemental Altus is on track for adjusted annual revenue of $17 million in 2023.

Surfing the Waves of the Commodities Cycle

The mining industry is known for its boom and bust cycles, with commodity prices fluctuating depending on global demand and geopolitical factors. While miners take on substantial risk during market downturns, royalty and streaming companies can benefit during both the highs and lows of the cycle.

During boom times, royalty companies earn higher revenue from their royalty streams as commodity prices rise. But unlike miners, they are not responsible for the capital expenditures required to build and operate mines. During bust cycles, royalty companies still earn revenue from assets that continue producing, while avoiding losses from mines that close. Their costs remain relatively fixed, allowing operating margins to remain strong.

"Royalty revenue has an inflation proof aspect to it,” said Bell. “What you've seen in the market is the gold price going back to where it was in 2020. However, since then industry has probably seen 15% inflation when you put it together, which actually takes the gold price in equivalent terms lower than it really is."

Diversification Provides Stability

In mining, diversification is critical for reducing risk. Elemental Altus holds royalties on assets across 10 countries on 5 continents. This includes a portfolio of both precious and base metals.

“Risk is the critical aspect for us. We are so well Diversified across jurisdictions. Australia is our biggest weighting but we have producing royalties in in Chile, in Kenya, in Burkina Faso, in Côte d'Ivoire, Mexico - it's been spread across countries so that has been really helpful,” said Bell.

Its largest royalty revenue generators are the Caserones copper mine in Chile operated by Lundin Mining who hold a 51% interest, with JX Metals Corporation holding the remaining 49%, and the Karlawinda gold project in Western Australia operated by Capricorn.

Disciplined Acquisitions Strategy

The company pursues royalties on quality assets run by reputable operators, avoiding excessive risks. Long project development timelines can be challenging in the current environment of rising interest rates and inflation.

“For us it's it's really stark when you look at different countries, I think royalty financing is much more prevalent in North America for example than it has been in Australia and that partly comes down to historical perceptions,” remarked Bell. “But there are so many case studies where a royalty has been an excellent financing tool for a company."

So far in 2023, Elemental Altus has acquired 8 new royalties in diverse commodities and jurisdictions:

• Additional royalty on Caserones copper mine in Chile
• Royalty on Hope Brook gold project in Canada
• Royalty on Pickle Crow gold project in Canada
• Royalty on Cactus copper project in Arizona, US
• Royalties on projects in Egypt, Ethiopia, and Mali

The Cactus royalty was acquired from Resource Capital Funds (RCF) in exchange for shares, with RCF becoming a 5% shareholder. Bringing on a knowledgeable mining investor reflects the quality of Elemental Altus’ portfolio.

Bell highlighted that the company has maintained a cash balance of $10 million this year despite the number of acquisitions. Revenue from producing royalties enables Elemental Altus to reinvest capital without needing to raise additional funds.

The Investment Thesis for Elemental Altus Royalties

For investors considering mining royalties as an asset class, Elemental Altus offers:

• Pure exposure to the commodities cycle without operational risks of mining
• Revenue generation from diverse portfolio of producing assets
• Disciplined acquisitions strategy focusing on quality over quantity
• Strong operators and profitable mines in tier one mining jurisdictions
• Ability to grow rapidly during bull markets due to revenue reinvestment
• Resilient margins during downturns with costs remaining fixed
• Inflation protection as royalty revenue rises with commodity prices
• Strong institutional investor base provides third-party validation
• Proven access to non-dilutive financing from major banks
• Experienced management team with track record of value creation

For investors looking to gain exposure to mining without excessive risk, royalties warrant a closer look. The royalty model aligns incentives between royalty holders and operators to advance projects efficiently. Companies like Elemental Altus Royalties offer diversified exposure to the commodities cycle along with upside from proven operators and assets. While mining will always involve unpredictability, royalty companies can help balance the risks and rewards.