Valuing Royalty Companies - Trident Royalties

Trident is a diversified royalties company that doesn't just focus on gold & silver.  It does have gold, but it also has Copper, Iron Ore, and Lithium.  It trades on the LSE and has a market cap of around 145m GBP, which is around $188m USD.

There's only 22 assets.  10 of these are an asset type we haven't written about before, Offtake agreements.

It's worth noting that Trident is still largely funding its acquisitions through issuing shares.  Their latest acquisition of an offtake agreement for the Sugar Zone mine from Orion Resource Partners was paid for in "Ordinary Shares".  

Offtake Agreements

Gold & silver mines often produce Doré bars or concentrate that contains high levels of gold and/or silver.  The gold for stacked bars in vaults, for coins, or for jewelry needs further refining to higher purity levels.  It's a lot of work to collect all the doré or concentrate, find the refiner willing to pay top dollar, ship it safely around the world, etc.  These middle men are offtake companies, who buy from mines and sell to smelters.  Offtake companies also often are traders because they need to hedge their exposure to price changes of their inventory and because they have a lot of information from mines and smelters and can often have insight to changing prices that others wouldn't because they don't have the market data.

Offtake companies will often pay mines for exclusivity agreements to be the sole buyer of the mine's gold.  These deals are often complex and the terms needed to evaluate them are often not shared with any investors in the offtake companies or the miners shareholders.  

When Trident acquired about $40m USD of offtake streams from Orion Resource partners they said "Between February 2020 and June 2021, under Orion’s ownership, the portfolio generated a return equivalent to 1.7% net smelter return on revenue from the underlying projects".  

So, do we just take the number of ounces and call it a 1.7% NSR royalty and be done with it?  No.  Not at all.

1 If mine costs increase enough mines shut down there is no protection
2 Royalties or Streams are not always in perpetuity, but that is typical of the class as a whole.
As with all of these the detail of each individual agreement may be different than typical terms.

Most offtake agreements are capped, either in calendar time or in production totals, or both.  

So how do we value them.  Let's dive in.

Assets

*Valuation range on Sonora is $0 - $2.8b.  This is the asset to understand if investing in Trident.  Valuation range for Thacker Pass is $0 - $10.7b.

Here's my opinion.  It's a risky one, do your own dilligence, I could well be wrong.

If Sonora goes into production (it's under construction) and if the court upholds the royalty belonging to the estate of Colin Orr-Erwing (it found in favor of the estate August 2021) the Sonora royalty alone would be worth more than Trident's current market cap.

If Thacker Pass goes into production (it has its state permits and its federal permits but is currently held up in court) that royalty alone would be worth more than Trident's current market cap.

If both of those fall through the valuation is backstopped reasonably by the other assets.  

I'm not in love with the Offtake agreements as they have limited upside and I don't think we have enough historical data to know if they perform well in all market conditions.  But if you believe that the lithium assets will be most of their cashflow the offtake agreements are a nice revenue bridge.  And my best guess at valuing them does show that they are likely to be good investments.

Sugar Zone Offtake

The Sugar zone mine is an in production mine with probable reserves well in excess of the offtake agreement.  So we'll ignore the mining risk on this one and just focus on the cashflows.

50% of 335,000 oz = 167,500 oz

1.5% of 167,500 oz = 2512.5 oz if I'm a little concervative on the offtake yield.

1.7% of 167,500 oz = 2847.5 oz if I use Trident's limited timeframe return numbers

2512.5 oz * $1954/oz = $4.9m USD

2847.5 oz * $1954/oz = $5.5m USD

Trident issued $3.75m USD in shares to acquire the offtake.  Trident targets "a blended, post-tax portfolio annual return of >15% IRR".  Let's do a DCF.

Key assumptions, they get the offtake for 9 months in 2022 and 2022 production will be midway between 2021 production and 2023 projections.  The 335,000 ounces remaining is to the offtake, not total production pre 50%.

But what kind of cashflow that does potentially generate?

Note some numbers don't add up due to rounding.  But these production numbers are going to be wrong anyway, we are looking more for learnings than accounting.  These acquistions seem to be accretive (good) if Gold prices hold up near current spot levels and have enough margin built in to still be OK if Gold prices go down some.

But doing a DCF on every asset is a pain, even for a tiny company like Trident.  Let's see if we can simplify it a bit.

total offtake oz * spot price per oz * expected profit margin * (1 - discount rate)^(number of years of offtake / 2) = offtake current value

335,000 oz * $1954/oz * 0.015 * (1 - 0.08)^(8/2) = $7,034,155

That is awfully close to our DCF, and a lot less work.  It's accurate if production and prices don't vary much year to year.  And since we can't predict prices it's as accurate as a DCF if production doesn't vary much year to year.   So that's what we'll do from now on.

Los Filos Offtake

Since these are all pretty new acquisitions we'll assume they have the full off-take delivered oz remaining since we knocked 20 basis points off their profitability.  At expected production it should take 7 years to fulfill the offtake oz.

1,100,000 oz * $1954/oz * 0.015 * 0.92 ^ 3.5 = $24m

Eagle

Eagle is ramping to 200,000 oz/yr and beyond.  Trident own 25% of the offtake up to a total of 1,111,500oz.  It would take 22.23 years to deliver that gold if production doesn't ramp higher than 200koz/year.

1111500 oz * $1954/oz * 0.015 * 0.92 ^ 11 = $13.0m

Mimbula

It's producing, though they are expanding.  We'll use the M&I resource valuation method.

(517.2kt Cu Measured + 231.1 kt Cu Indicated) * $10,235/ton * 0.0125 = $107.2m

Blyvoor

100% offtake until 2.7Moz delivered.  They are ramping with an eye towards 300koz/year.

2,700,000 oz * $1954/oz * 0.015 * 0.92 ^ 4.5 = $54.4m

Bonikro

50% offtake with no production or time cap.  But not clear if the offtake can be terminated or renegotiated at a future point.  It's also a private company so no idea how much it is producing or what resources it has remaining.  In 2019 they were aiming to produce 120koz a year and had resources of 1.17Moz at the time of acquisition.  We are going to take a really really wild guess and say 120koz per year for 6 years, 720koz total production, half of that offtake to Trident.

360,000oz * $1954/oz * 0.015 * 0.92 ^ 3 = $8.2m

Koolyanobbing

This is not a great iron project, but it can produce some quick cash in its last dying breath.  The royalty doesn't cover much of the deposit, but it does cover the new Claw pit.

In 2021 there was revenue of $80,000 and in 2020 $95,000.  If we were just to value a dying deposit not generating much cash the last two years we'd carry it at $0.  But since they are pre-stripping a new deposit that is entirely on Trident's royalty area we'll carry it at $1m.  This might update higher if we can determine the production rate or mineral resource potential of the claw deposit.

Mercede/Greenstone

100% offtake up to 58.5koz per year until March 1, 2027 and they are expected to produce 62koz per year.

58.5 oz/yr * 5 yr * $1954/oz * 0.015 * 0.92 ^ 2.5 = 6.9m

RDM/Fazenda/SantaLuz

This offtake is over the combined RDM, Fazenda, and Santa Luz mines.  Offtake is for 35%.  Santa Luz has production of ~100koz, RDM ~60koz, Fazenda ~60koz, combined ~220koz.  At that rate it should take 8.5 years to deliver the offtake ounces.

658,333 oz * $1954/oz * 0.015 * .92 ^ 4.25 = $13.6m

Sonora Lithium Royalty

There is a legal dispute on the right to buy the royalty.  1.5% Gross Revenue Royalty, though Trident would only have 50% of that, 0r 0.75% GRR.  Their remaining payment would be $26m for it, so we'll subtract that from the value.

Also lithium prices are kind of insane right now at around $75,000/ton.  I personally view the long term incentive price as $12,000/ton, though with growth in electric vehicle batteries it may remain above that incentive price for a very long time.

Let's pretend this was in production and that we valued based on M&I resources, ignoring indicated and exploration.  No discounting for the long life of the project or the potential for a negative outcome from the royalty acquisition.

5038 kt Lithium Carbonate * $75,000/ton * 0.0075 = $2.8 billion.

Just wow.

Even if we use my long term $12,000/ton we get $543 million.  

We should discount some more because it's pre production, and because of the lawsuit.  But let's say we cut its value in half twice, we still are left with $135m - $700 million.  We are going to carry it at $135m because anything else seems crazy.  But ummm, this could get crazy in a good way.  Of course if the lawsuit doesn't work out it could be worth $0 pretty easily too.

Warrawoona

Trident's 1.5% NSR doesn't cover the main pit.  It covers the down dip extension scheduled to be mined in year 3 of the mine and much of the surrounding area so it might pick up some resources in exploration.  It's clearly worth something, but I have no idea what it's worth.  I'll carry it at $1m

Lincoln Gold Royalty

1.5% NSR reduces to 0.75% after $3m paid.  The existing resources isn't very big and good information isn't readily available on it.  It's owned by an unlisted Australian company, so more information likely won't be forthcoming until Trident starts reporting cash flows from it.

They paid $2.5m in August 2021, so we'll say it's worth that now.

Thacker Pass Lithium Royalty

46 year mine life  based on reserves alone. 13,699,000 tons of LCE (lithium carbonate) M&I.  60,000 tons per year production.  Already has its state and federal permits, though there is an injunction pending an appeal of the federal permits.  1.05% gross revenue royalty.

60,000 tons LCE * $12,000/ton * 0.0105 = $7.5m per year.  At a 10x multiple worth $75m

60,000 tons LCE * $75,000/ton * 0.0105 = $47.2m per year.  At a 10x multiple worth $472m

13,699,000 tons M&I * $12,000/ton * 0.0105 = $1.7b

13,699,000 tons M&I * $75,000/ton * 0.0105 = $10.7b

Lake Rebecca

Ramelius Resources did some drilling in 2020 and updated the resouce to 1.035Moz constrained within optimized pit shells.  74% of that is Indicated.  That's not nothing.  It's only 1.2g/t, but it's open pit.

1.035Moz * $1954/oz * 1.5% NSR * 25% (chance it becomes a mine and discount for time until it would) = $7.5m

i-80 Gold Offtake

37,500oz in 2022 & 2023 and 40,000oz in 2024-2028.  Better think of that at 37,500 for 7 years to simplify the math.

262,500 oz * $1954/oz * 0.015 * 0.92 ^ 3.5 = $5.7m

Spring Hill

In 2012 it had 355koz Inferred.  I see no movement on the project, though it's owned by a private group so who knows.  Maybe it will be worth something someday, right now I'm carrying it at $0

Pukaqaqa

As of April 2021 the PFS for Pukaqaqa was on hold.  Probably because Peru is a terrible place to build a mine right now.  Trident's royalties are also a patchwork over the project, not covering many of the concessions for copper.  To find the project on Nexa's site I had to jump through a bunch of hoops.  Even after going to Peru projects I had to click more 3 times to find it.  

I'm carrying it at $0 for now.

Talga Talga

Novo Resources hit a 75.5gm/t interval in a drill hole there in September 2021 during a 3240m drill program (small program).  But it is awfully quiet and the company may not have the resources to follow up or it's not worth following up on.  It wasn't mentioned in their January 2022 Exploration update.  There is a fair amount of previous drilling on the project.

Carrying at $0

Bullfinch

Torque Metals is active on their Paris project and has done nothing on Bullfinch.

Carrying at $0.

Mosquito Creek

Not listed as a project in the projects section of Calidus Website.

Carrying at $0.

Disclosure

Before writing this article I had no position in Trident.  However, in the process of writing it I found the lithium royalties compelling and bought some share in the public market.  I have received no compensation from Trident or anyone else for writing this.  

I write about companies I find interesting, usually as potential investments for my own money.  I do it because it forces me to do better analysis and sometimes like with Trident I learn something during the writing process that affects my portfolio.  As a consequence I'm not unbiased.  The generous reader would say I have skin in the game.  The critical reader would accuse me of running a pump and dump.  I'm sure some day when I have more than 55 subscribers I'll have to think about the impact of my articles on the market.