Electric Royalties Ltd.

An Undervalued Royalty Portfolio in the EV Metal Space

Published: 7/10/2024

Author: FRC Analysts

Thumbnail of the report An Undervalued Royalty Portfolio in the EV Metal Space
*Electric Royalties Ltd. has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.

Sector: Basic Materials | Industry: Other Industrial Metals & Mining

Ticker Symbols:ELECF - NASDAQ 🔹ELEC.V - NEO 🔹
Rating and Key Data
MetricsValue
Current PriceCAD $0.22
Fair ValueCAD $1.12
Risk4
52 Week RangeCAD $0.17-0.35
Shares O/S (M)102
Market Cap. (M)CAD $22
Current Yield (%)N/A
P/E (forward)N/A
P/B1.7

Report Highlights

  • In May 2024, ELEC acquired the Ontario Lithium Projects (OLP) for $1.87M cash and 2.25M shares. This portfolio includes 18 royalty agreements and 32 lithium properties, with 31 currently optioned to third parties. ELEC could receive up to $2.2M in option payments over the next 2.5 years. 
  • ELEC’s investments primarily target Electric Vehicle (“EV”)  and clean energy metals such as lithium, graphite, cobalt, copper, and nickel. 
  • Its portfolio consists of royalty investments in 40 projects (previously 22),  including two past-producing mines, seven advanced stage projects poised for production within the next four to five years, and 31 others in various stages of exploration.
  • We believe ELEC’s portfolio has potential to generate US$10M+ in royalties by 2028.
  • Twenty-five out of 40 royalties in ELEC's portfolio are focused on lithium. Lithium prices are down 65% YoY to US$13k/t vs the five-year average of US$21k/t. That said, we maintain a positive outlook on lithium stocks as we believe lithium prices have stabilized, and battery/EV manufacturers/miners are actively seeking stable/long-term supply sources. 
  • We anticipate multiple near-term catalysts from ELEC’s investee companies. The average sector Enterprise Value/Royalty Investments is 1.98x vs 1.16x for ELEC, a 41% discount.

Price Performance (1-year)

 

  YTD 12M
ELEC -8% -31%
TSXV 4% -7%

*See important disclosures at the bottom of this report rating and risk definitions. All figures in C$ unless otherwise specified.

 

Streamers vs Miners

Shares of miners have outperformed streamers in the past year

Streamers are trading at a significantly higher EV/Revenue as they have higher EBITDA margins, robust five-year revenue growth, and lower debt/capital

Streamers typically target a return of 15%-20% p.a. on their investments

 In exchange, they receive a predetermined percentage of metals produced, typically ranging between 0.5% to 2% of a miner’s production

 

ELEC’s Portfolio 

40 investments totaling $20M (paid in cash and shares), including 25 lithium, three graphite, two each of cobalt, nickel, copper, tin, and manganese, and one each of zinc and vanadium

 

30 projects in Canada, and four in Australia

 

In May 2024, ELEC acquired  the Ontario Lithium Projects (OLP), comprised of 18 royalty agreements and 32 lithium properties in Ontario, for $1.87M in cash and 2.25M shares. Of the 32 properties, 31 are optioned to third parties. ELEC can receive up to $2.2M in option payments over the next 2.5 years, after which these options will convert to royalty interests. Should any of these options not be exercised, ELEC will retain ownership and seek to re-option or monetize such properties, as streamers do not actively engage in exploration or development.

32 hard-rock lithium properties in Ontario, with many strategically located near well-known lithium deposits 

 

Portfolio Summary

ELEC’s royalty portfolio consists of: 

  • Two past-producing mines (Middle Tennessee and Penouta
  • Seven advanced stage projects, with potential to be in production in the next four to five years 
  • 31 projects in various stages of exploration 

25 out of the 40 projects are held by publicly traded companies; we note that investments in publicly traded companies offer higher transparency. 

The most advanced project is the Authier lithium project (#4 on this list). Its owner, Sayona Mining (ASX: SYA/MCAP: $312M), plans to integrate production from Authier with their existing North American Lithium (NAL) operation, which has been operational since March 2023. Sayona has not yet announced a firm timeline for production; our models assume production will commence in 2026. 

Upcoming Catalysts

Several upcoming catalysts from investees

Financials 

At the end of Q1-2024, ELEC had $0.17M in cash, and $17.5M in royalty investments. As of June 2024, ELEC had drawn $2.5M from a $10M credit facility.

FRC Valuation and Rating

 

ELEC is trading at a 41% discount (previously 27%) to the average sector Enterprise Value/Royalty Investments

We have updated our models to include the nine most advanced-stage projects (previously eight)

We believe ELEC’s portfolio has potential to generate US$10M+ in royalties by 2028  (previously US$7M+)

As a result, our valuation increased from $1.06 to $1.12/share

We are reiterating our BUY rating, and adjustintg our fair value estimate from $1.06 to $1.12/share. Upcoming catalysts include ongoing newsflow from investee companies.

 

Risks

We are maintaining our risk rating of 4 (Speculative)

We believe the company is exposed to the following key risks: 

  • The value of the company is dependent on commodity prices
  • Streamers are highly dependent on their partners’ ability to advance projects to production
  • Can lose up to 100% of invested capital if a project is not advanced to production
  • Changes in battery technologies can impact demand for target commodities