Creating a Diversified Mining Royalty Business
Trident Royalties is a newly AIM-listed diversified mining royalty and streaming business that aims to provide investors with exposure to a broad range of development and cash-generating mining assets across the base metal, precious metal, bulk materials and battery metals sectors.
We estimate that around 21% of Trident's net asset value (NAV) comes from cash flow generating assets; based on the existing portfolio, this is expected to increase to 29% by 2022.
Trident is constructing a portfolio with exposure to assets that broadly mirrors the global mining industry in favourable jurisdictions, providing investors with an opportunity to invest in the mining sector with a lower-risk profile than a typical junior mining or exploration business, while retaining much of the upside.
Unlike the majority of its royalty and stream peer group, Trident is focused on being a fully diversified business, while most existing providers are focused on, or heavily weighted to, precious metals in the Americas.
The company is targeting small-to-mid-sized acquisitions that tend to have less competition from the larger royalty companies, allowing Trident to secure deals on favourable terms and generate significant positive returns over the near, medium and long-term.
To date, Trident has made initial investments in copper, iron ore and gold, with two of these five initial acquisitions being cash-generating royalties. Trident has a strong pipeline of potential deals on which it is currently completing due diligence and negotiations.
Trident's board and management currently hold around 4% of the company. The company does not currently pay a dividend, as it is in a growth phase, but is targeting an aggressive dividend policy once it reaches critical mass.
Strategy
Trident’s strategy centres on its ability to acquire royalties on financial terms that reflect the risk associated with a single asset, and then combine the interests with others in the portfolio, resulting in a lower-risk and higher-value profile. The risk profile is lowered from the diversified nature of the assets, the operators of those assets, the geology of the assets, the host country/region of the assets and by reducing the volatility associated with single royalties. Through the process of building a diversified portfolio, the risk profile of the assets is lowered and, as a result, the value that can be applied to the assets increases.
While building this portfolio, Trident is operating a low-overhead model that can be scaled to support a larger-scale business, without a commensurate increase in operating costs, ensuring that the majority of its funds are focused on acquiring return generating assets.
The company is actively deal-sourcing and is focused on royalties held by natural sellers such as closed-end funds, prospect generators, junior and mid-tier miners, and private individuals and family offices. Also, it is open to writing new royalties, one of which has already been completed.
Once Trident achieves the scale of business required to support its expectations of strong cash flow, it plans to initiate an attractive dividend policy, providing investors with a desirable mix of dividend income, inflation protection through exposure to commodities, and capital growth. These returns can be potentially further enhanced through the conservative use of leverage.
Figure 2 - Portfolio summary
Source: Source: Trident Royalties PLC
What are Royalties and Streams
Mining royalties and streams represent a highly attractive asset class where large cash flow generating assets can be managed by a small low-cost team, resulting in a very high-margin business. Trident is acquiring financial instruments, and is not actually operating mines and can therefore stay small and nimble relative to larger mining organisations.
Royalties
A royalty agreement typically involves the holder providing upfront finance to the mine or project and in return, the holder of a royalty is entitled to receive a payment that can be based on several operational or financial metrics. The holder of the royalty has no ongoing liability to the mine, or owner of the mine, and is therefore exposed to the positive cash flow from the operation without any additional negative cash flow beyond that originally outlaid.
Royalties can also be created in return for consideration in a corporate transaction, including from the sale of a mineral property, as a backstop to a dilution clause in a joint venture arrangement, or as an adjunct to a debt or equity financing arrangement
Royalties can take several forms, including:
- Gross Proceeds Royalty (GPR)
- Gross Smelter Return Royalty (GSR)
- Gross Value (GV)
- Milling Royalty (MR)
- Net Profits Interest Royalty (NPI)
- Net Smelter Return Royalty (NSR)
- Net Value Royalty (NVR)
Streams
Streams are agreements to buy a product from the mine at a substantial discount to the mineral or metal prices prevailing at the time the stream agreement is entered into, giving the holder significant upside to any uplift in the streamed metal. Streams are often focused on a by-product of mining such as silver produced from a base metal mine.
The holder of the stream will normally make an upfront payment to assist in the development or expansion of a project, reducing the amount of debt and equity the projects owners require to advance the asset.
Advantages
Mining royalties and streams have many advantages when compared to traditional equity investments, including:
- Ranking senior in the capital structure and can often be secured
- No exposure to increases in capital cost or operating costs of the mine
- Exploration expense and capital investment made by the owner of the operation add value to the holder of the royalty at no cost or dilution
- They provide direct exposure to commodity prices
- Royalty and streaming companies trade at attractive valuation multiples
- Increased scale and diversification enhance value
- Ability to increase returns through low-cost leverage
Figure 3 - Royalty and Streaming Peer Group
Source: Mining and Metals Research Corporation Ltd.
Figure 4 - Total Value of Mining Royalty Shares Traded
Source: Mining and Metals Research Corporation Ltd.
Figure 5 - Share Prices of Selected Royalty Majors
Source: Mining and Metals Research Corporation Ltd.
Peer Group
There are currently 20 listed royalty and stream focused business that have market capitalisations that range from US$5mln to US$36bn (Figure 3). The peer group can be divided into four groups based on their market valuation and the development stage of their business.
The majors range in size from US$26bn to US$7.8bn. These are well-established businesses with annual revenues greater than US$500mln or thereabouts, substantial operating cash flows over US$300m per year and are, in general, profitable with EBITDA (underlying earnings) margins between 67% and 79% and PE (price/earnngs) ratios between 39.5 and 113.2. The majors are all listed in North America and are focused on precious metals.
The large-tier companies range in size from US$1.3bn to US$2.0bn. These businesses generate annual revenues greater than US$80mln and annual operating cash flow greater than US$50mln. They have EBITDA margins between 50% and 79% and PE ratios between 17.4 and 170.9.
The mid-tiers range in size from US$305mln to US$665mln. These businesses are a mixture of expanding profitable businesses and businesses that have created a significant royalty or streaming portfolio and are moving toward profitability in the near to medium-term. The annual revenue levels from these businesses range from roughly US$30mln to about. US$45mln, with moderate levels of operating cash flows, between US$20mln or so and roughly US$30mln. The mid-tiers are predominantly listed in North America, and some are diversified with assets in precious metals, bulks, base metals, battery metals and energy, while some are precious metals focused.
The junior’s range in size from US$6mln to US$298mln. These businesses are typically not currently profitable, with limited revenues and are building a portfolio of royalty and streaming assets. The juniors are also mostly listed in North America and are more diverse in terms of their commodity exposure.
Sector interest
Over the past 12 months mining royalty companies have seen a substantial uptrend in the value of shares traded (Figure 4).
This increased interest has driven mining royalty companies share prices up by an average of 66% in a year.
Royalty and streaming majors have performed very strongly recently with Franco Nevada Corp (NYSE:FNV) up 66% since March 2020, Wheaton Precious Metals Corp (NYSE: WPM) up 114% and Royal Gold, Inc. (TSE:RGL, NASDAQ:RGLD) up 82% (Figure 5). Wheaton recently announced an intention to dual list in London, further highlighting increased interest in the space.
The royalty and streaming companies have benefited from high-precious metal prices, but are also gaining traction with investors as they represent a lower-risk opportunity to gain exposure to the mining sector compared to directly taking a position in mining companies.
Figure 6 - Location of Mimbula
Source: Moxico Resources
Figure 7 - Copper Cathode from KCM
Source: Moxico Resources
Figure 8 - Mimbula Reserves
Source: Moxico Resources
Figure 9 - Mimbula Resources
Source: Moxico Resources
Mimbula Variable Copper Royalty
The Mimbula Copper Mine and associated tailings dumps are located in the Central African Copper Belt in Zambia (Figure 6). The open-pit mine is owned by Moxico Resources Plc. (Private) and covers an area of 1,271 hectares. It comprises mining licences 21816-HQ-LML (Mimbula); 8440-HQ-SML (Zuka); and 8514-HQ-SML (OB18).
The Central African Copper Belt is the world's largest and highest-grade sediment-hosted copper district. It contains mines operated by companies such as First Quantum, Glencore, Rio Tinto, Barrick, Ivanhoe and China Non-Ferrous Metals.
The Mimbula Mine is an open-pit operation located adjacent to the operational Konkola Copper Mine complex (Figure 7). Mimbula has a JORC 2012 compliant total mineral reserve estimate of 623kt (thousands of tonnes) of contained copper at a grade of 0.92% (Figure 8) and a JORC 2012 compliant mineral resource estimate of 795kt of contained copper (Cu) at a grade of 0.95%, with an additional 111kt at a grade of 1.14% Cu from the Zuka deposit that is currently non-compliant (Figure 9).
The resource estimate is open on strike and at depth, demonstrating the potential for Moxico to increase the size of the deposit with further work.
Moxico is currently ramping up production levels from Mimbula and based on the implied terms of the deal, is targeting productions levels of around 30,000-40,000t of copper per annum. Moxico has a life-of-mine tolling agreement with Konkola Copper Mines to process the oxide ores from Mimbula at the Nchanga Tailings Leach Plant, producing LME Grade A copper cathode.
Deal
Trident Royalties purchased a gross revenue royalty on the Mimbula Project for US$5mln. Under the agreement, Trident receives a royalty of 1.25% until it has received payments equivalent to its initial US$5mln investment. Once the US$5mln threshold is reached, the royalty rate decreases to 0.3% until 575,000 tonnes of copper cathode or other finished copper product have been sold. At this threshold, the royalty decreases to 0.2% and remains at this level in perpetuity.
The royalty is subject to a minimum payment schedule, which ensures that Trident will, at minimum, be repaid US$5mln within the first three years of operation and provides downside protection against production shortfalls.
Revenue
Using the current reserve estimate of 623kt of copper, which we assume is all oxide, and the upper production level of 40,000t, we estimate that Mimbula could have a mine life of upwards of 17 years.
Assuming a copper price of US$6,000t over the life of the mine we would expect the royalty to repay its acquisition cost within 26 months, and then generate pre-tax revenue of around US$720k to Trident for around 13 years at a royalty rate of 0.3%, before the rate lowers to 0.2% in 2035/2036. Over the assumed life-of-mine we estimate that pre-tax revenue of US$14.7mln could be returned to Trident at a copper price of US$6,000/t, with a large portion of that cash front-loaded in the early years.
Figure 10 - Koolyanobbing Location
Source: Mineral Resources
Figure 11 - Koolyanobbing Open Pit
Source: Mineral Resources
Figure 12 - Koolyanobbing Reserve
Source: Mineral Resources
Figure 13 - Koolyanobbing Resource
Source: Mineral Resources
Koolyanobbing 1.5% FOB Iron Ore Royalty
The Koolyanobbing Iron Ore Mine is located within the Yilgarn Region of Western Australia (Figure 10). Some footage on Koolyanobbing Iron Ore Mine can be found using this link. The open-pit mine is 100%-owned by Mineral Resources (ASX: MIN), who currently operates at a rate of 12.7 million tonnes per annum (Mtpa) and plans to increase production levels from the open pits (Figure 11) to a run rate of 13Mtpa by the end of fiscal 2021 (FY21). According to its most recent quarterly update, production levels are currently at an annualised rate of 12.5mtpa. Mineral Resources' has committed A$120 million of growth capital to the expansion of its Yilgarn Operations.
Koolyanobbing has a JORC 2012 compliant total mineral reserve estimate of 40.8mt of contained iron ore at a grade of 58.2% (Figure 12) and a JORC 2012 compliant mineral resource estimate of 108.6mt of contained iron ore at a grade of 56.8% (Figure 13).
Trident owns a 1.5% free-on-board (FOB) revenue royalty over tenement ML77/1259, which forms part of the Deception Open Pit, which is currently being mined.
Deal
Trident purchased the 1.5% free-on-board (FOB) Koolyanobbing Royalty from Fe Limited (ASX:FEL) for a staged cash consideration of A$7.0mln.
The A$6.65mln is payable in two tranches; the first tranche of A$4.0mln was paid on the completion of the acquisition and the second tranche of A$2.65mln was paid on September 25, 2020.
To date, Trident has already received over US$1mln (A$1.44mln) during the first half of 2020 (H120) from its Koolyanobbing Royalty, which is nearly half of the first tranche paid for the asset.
Revenue
To gain an understanding of the potential cash flow from the Koolyanobbing Royalty, we use the current estimated reserve for the Deception Pit and assume that tenement ML77/1259 ultimately holds 7mt of iron ore and that 2mt is extracted from this area in 2020, decreasing to 1.5mt between 2021 and 2022, decreasing further to 1mt in 2023 and then decreasing again to 0.5mt in 2024-2025.
Assuming Mineral Resources receives an iron ore price of US$100/t over the life of the mine, US$108.8/t in H120), and taking into account the staged acquisition cost, we would expect the royalty to repay its acquisition cost within 24 months, and then return pre-tax revenue of around US$1.3m per year to Trident for around four years. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$10.5mln could be returned to Trident at an iron ore price of US$100/t, on an acquisition made for about US$4.5mln.
Figure 14 - Lake Rebecca Location
Source: Apollo Consolidated
Figure 15 - Lake Rebecca
Source: Apollo Consolidated
Figure 16 - Lake Rebecca Resources
Source: Apollo Consolidated
Lake Rebecca 1.5% NSR Gold Royalty
The Lake Rebecca Gold Project is located 145 kilometres (km) east of Kalgoorlie, Western Australia (Figures 14 and 15). A video of the project can be found using the link here. The project is owned by Apollo Consolidated Ltd (ASX:AOP), which is advancing the production towards open-pit production and is anticipating commencing construction in 2023.
Lake Rebecca has a JORC 2012 compliant total mineral resources estimate of 1,035,000 ounces (oz) of gold at a grade of 1.2 grams per tonne (g/t) gold (Figure 16). Apollo is currently continuing drilling at the three key deposits that make up the Lake Rebecca Project, as well as at key exploration targets. This programme is expected to complete in H220, and if results are positive a resource update would be expected to follow.
Trident owns a 1.5% net smelter royalty over tenement E28/1610, which is currently being converted into a mining licence (M28/400 application dated 2/12/2019) and covers all the Lake Rebecca Project, including the three defined gold deposits: Rebecca; Duchess; and Duke, as well as other targets, such as Cleo.
Deal
Trident purchased the 1.5% net smelter royalty (NSR) from a private party for a consideration of A$8mln, of which A$7mln will be in cash and A$1mln in equity. The full consideration is due on the financial close of the transaction, which is expected to take 2-3 months, as Australian FIRB approval is required. The equity will be issued at a price of 29.39p, almost 50% above Trident’s listing price just months ago.
Revenue
To gain an understanding of the potential cash flow from the Lake Rebecca Gold Royalty, we use the current resource estimate for the Project (1,035,000 oz of gold), and conservatively assume that production commences in 2023 at a rate of 100,000 oz per annum over an assumed mine life of ten years. Nick Castleden, the managing director of Apollo, recently stated that construction is expected to commence in 18-24 months.
We use a conservative gold price of US$1,500/oz and we would expect the royalty to repay its acquisition cost within two years, and then return pre-tax revenue of US$2.25mln per annum to Trident over the life of the mine. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$22.5mln could be returned to Trident.
The Mineral Resource at Rebecca remains open along strike and at depth, and a drill programme during 2020 could potentially lead to a further increase in the size of the resource, or the ultimate size of the operation,which would be upside to the value of Tridents Royalty.
Figure 17 - Warrawoona Location
Source: Calidus Resources
Figure 18 - Warrawoona
Source: Calidus Resources
Figure 19 - Warrawoona Reserves
Source: Calidus Resources
Figure 20 - Warrawoona Resources
Source: Calidus Resources
Figure 21 - Klondyke Open Pit
Source: Calidus Resources
Talga Resources Royalty Package
Trident is acquiring a package of four Australian gold royalties from Talaga Resources for a total consideration of A$800,000 (US$575,000), of which A$250,000 was paid upfront in cash and the balance will be satisfied through the issue of shares in Trident Resources; the shares are subject to a six-month "no selling" condition. The deal is conditional on approval by Australia's Foreign Investment Review Board (FIRB) by 31 March 2021, or such later date as the parties may agree.
The royalties covered include:
Warrawoona - 1.5% Net Smelter Royalty
Talga Talga - 1.5% Net Smelter Royalty
Mosquito Creek - 1.5% Net Smelter Royalty
Bullfinch - 1.0% Net Smelter Royalty
Warrawoona 1.5% NSR Gold Royalty
The Warrawoona Gold Project is located 150km east of south-east of Port Hedland and around 25km south-east of the town of Marble Bar (Figures 17 and 18). A video of the project can be found using the link here. The project is owned by Calidus Resources Ltd (ASX:CAI), which is advancing the production towards open-pit production and is anticipating commencing construction in 2021. Calidus anticipates production of around 80,000 ounces of gold per annum over an eight-year mine life.
Warrawoona has a JORC 2012 compliant total mineral reserve estimate of 519,000 ounces of gold at a grade of 1.2g/t of gold (Figure 19) and a total resources estimate of 1,495,000 ounces of gold (Au) at a grade of 1.06g/t Au (Figure 20). Based on a crude visual estimate of the strike within the licence covered by Trident's royalty (E45/3381) (Figure 21), the royalty could contain around a quarter of the 1,133,000 ounces of gold at a grade of 0.89g/t Au from the Klondyke Open pit.
Trident owns a 1.5% net smelter royalty over tenement E45/3381, which contains the eastern strike extension of the Klondyke Resource, including a proportion of the JORC (2012) Compliant Resource.
Revenue
To gain an understanding of the potential cash flow from the Warrawoona Gold Royalty, we assume a quarter of the 1,133,000 ounces of gold grade at 0.89g/t Au from the Klondyke Open-pit, and assume that production commences in 2022, with the royalty covering the production of 30,000 oz per annum over a mine life of eight years.
We use a conservative gold price of US$1,500/oz and we would expect the royalty to repay the portfolio acquisition cost within the first year of operation. The royalty could return an annual pre-tax revenue of US$675,000 to Trident over the life of mine. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$5.4mln could be returned to Trident.
The Mineral Resource at Klondyke remains open along strike to the south-east and additional drilling could potentially lead to a further increase in the size of the resource, adding value to Trident's royalty.
Figure 22 - Results from Talga Talga
Source: Novo Resources
Figure 23 - BullFinch Location
Source: Torque Metals
Talga Talga 1.5% NSR Gold Royalty
The Talga Talga Gold Project (M45/618) is located in the Pilbara region of Western Australia. The project is owned by Novo Resources Corp (CVE:NVO), which completed rock chip sampling of lode quartz veins that returned grades of 81.4 g/t, 46.9 g/t, 35.1 g/t and 30.0 g/t gold (Figure 22). Of a total of 149 samples, 68 returned grades greater than 0.5 g/t gold and 33 returned grades greater than 5.0 g/t gold. Historic drilling identified shallow dipping, near-surface gold zones with results including of 7 metres at a grade of 14.4g/t Au and 3 metres at a grade of 24.8g/t Au.
Novo recently acquired Millennium Minerals (Private) processing plant and infrastructure in the Pilbara region and is assessing using ore sorting a processing method for its Beatons Creek Project; this technique could also potentially be applied at the Talga Talga Project.
Mosquito Creek 1.5% NSR Gold Royalty
The Mosquito Creek Gold Project (E46/1035) is located in the Nullagine Region, East Pilbara, Western Australia. The project is owned by Nimble Resources (Private). The project contains historic workings and anomalous gold defined from soil and rock sampling and historic drilling.
Bullfinch 1.5% NSR Gold Royalty
The Bullfinch Gold Project (E77/2221, E77/2222, E77/2251, E77/2350, P77/4106) is located 40 km north of Southern Cross, midway between Perth and Kalgoorlie in Western Australia (Figure 23). It is owned by Torque Metals Ltd (8TM.SSX), which recently listed on the Sydney Stock Exchange.
The Bullfinch area is known for its historic high-grade gold discoveries dating back to 1887. Local gold production was dominated by the 1.5mln oz Au Copperhead Gold Mine, which first commenced production in 1910 and, after three periods of production, closed in 1997. The tenements include over 200 prospects outlined by high-grade gold surface sampling, small scale mining and drilling to the east of historic Copperhead Mine. The tenements are located within 70km of two existing processing plants.
Figure 24 - Location of Spring Hill
Source: Company
Figure 25 - Photograph of Spring Hill
Source: Company
Figure 26 - Spring Hill Resources
Source: Company
Figure 27 - Exploration Target
Source: Company
Spring Hill Variable Gold Royalty
The Spring Hill Gold Project is located in the Pine Creek Region of Australia's Northern Territory (Figure 24). The Project is 100%-owned by PC Gold Pty Ltd (private) and royalty covers production from the mining licence (ML23812) that covers an area of 1,035 hectares (ha), as well as any production from exploration licences EL22957 and EL28855 that surround the mining licence.
The Pine Creek Region (Figure 25) has historically produced over 3mln oz of gold from multiple deposits and contains over 10mln oz of undeveloped gold resources. Spring Hill is located close to an existing gold processing plant and benefits from significant local and regional infrastructure.
Spring Hill has a JORC 2012 compliant total Mineral Resource Estimate of 355,000 oz of gold at a grade 1.26g/t Au (Figure 26), with an exploration target range of 119,000 oz to 734,000 oz at a grade between 0.74g/t and 1.45g/t Au (Figure 27).
Deal
Trident Royalties purchased a variable price gold revenue royalty on the Spring Hill Gold Project for a total staged consideration of A$1mln (US$0.7mln) from Thor Mining PLC (LON:THR). Under the royalty agreement Trident will receive a royalty of A$13.30 per ounce of gold sold from the licence when the gold price is above A$1,500/oz, this reduces to A$5.7 per ounce when the gold price is below A$1,500/oz Au. The current gold price is A$2,596/oz.
At A$13.30 and A$5.7 per ounce, taking into account the current resource estimate of 355,000 oz, the in-situ value of the royalty would be A$4.7mln and A$2.0mln, respectively. Using the upper range of the exploration target, and A$13.30 and A$5.7 per ounce, the in-situ value of the royalty would increase by an additional A$9.8mln and A$4.2mln, respectively.
The consideration for the acquisition will be paid in stages with an upfront cash consideration of A$400,000, of which A$50,000 was paid upon signing binding documentation with the remaining A$350,000 due upon completion of the transaction. An additional A$300,000 is payable following gold sales exceeding 25,000 ounces attributable to the royalty and another A$300,000 is payable following gold sales exceeding 50,000 ounces attributable to the royalty.
Revenue
To gain an understanding of the potential cash flow from the Spring Hill Gold Royalty, we use the current estimated resource for the Spring Hill Gold Project (355,000 oz Au) and assume that production commences in 2023 at a rate of 70,000 oz per annum over an assumed mine life of five years.
Assuming the Australian dollar gold price remains above A$1,500/oz over the life of the mine and taking into account the staged acquisition cost, we would expect the royalty to repay its acquisition cost within two years, and then return annual pre-tax revenue of A$0.6mln (US$0.4mln) to Trident over the life of mine. Over the assumed life-of-royalty we estimate that pre-tax revenue of A$4.7mln (US$3.2mln) could be returned to Trident.
Assuming the Australian dollar gold price is below A$1,500/oz over the life of the mine and taking into account the staged acquisition cost, we would expect the royalty to repay its acquisition cost in around four years, and then return annual positive cash flow A$0.4mln (US$0.28mln) to Trident over the life of mine. Over the assumed life-of-royalty we estimate that A$2mln (US$1.4mln) could be returned to Trident.
Should the upper end of the exploration target be "proved up", mine life would be significantly extended and returns to Trident would continue over the extended life of mine.
Figure 28 - Trident's Share Register
Source: Company
Funding
On its AIM initial public offering (IPO) in June 2020, Trident raised a total of £16mln (US$10.15) at a placing price of 20p per share.
The company also has a non-binding US$10mln debt mandate with Tribeca Global Resources Credit, which gives the company the ability to use cash, equity or a combination of the two to complete additional acquisitions.
Capital Structure
Trident has 103.5mln shares in issue and 3.125mln options granted under the company’s equity incentive plan for management (Figure 28).
The company is tightly held with ten shareholders owning over 60% of the business. The largest holders are the LIM Asia Special Situations Master Fund with 15.9%, Ponderosa Investments with 9.91% and Regal Funds Management with 8.67%. Management and Directors hold around 4% of the company.
Figure 29 - Share Price and Volume Chart
Source: Yahoo Finance
Share price performance
Since the company listed on AIM at 20p per share in June the shares traded down to 19p per share (Figure 29), shortly after the IPO. Since then positive news flow has driven the shares up to their current level of 30p per share.