Ecora Resources: A Royal Opportunity

Jun 29, 2023

Additionally, please be aware that the author may have a financial interest in the securities discussed in this article. The author reserves the right to buy or sell any security mentioned in this article at any time, without prior notice. Therefore, the information presented in this article should not be considered as a solicitation to buy or sell any security. Please consult with a registered financial advisor before making any investment decisions.

Preface

This week is on the busier side for me, so I figured it would be a good time to use a writeup I’ve had in my back pocket for a little bit now. While it may seem on the shorter side, much of the legwork was already done in a previous writeup titled “Base Metal Bull Thesis,” which provides a high-level overview of (you guessed it!) the base metal bull thesis and why I believe royalty companies are the best way to play it. Here is a link for anyone interested:

Base Metal Bull Thesis

June 1, 2023

Read full story

Overview

Based in the UK, Ecora Resources (Ecora) is a mining royalties company. Historically the company has been focused on coal mines, though management has not been naive in seeing the writing on the wall, which very clearly says “coal is not the commodity of the future.” Because of this, Ecora has done a complete 180 and is now focusing on future-facing commodities as the world transitions into becoming more populous, more rich, and most importantly, more electric.

Background and Business

Throughout most of its life Ecora has gone by Anglo Pacific Group (Anglo Pacific). Anglo Pacific was led by Julian Treger for a decade with a focus on coal royalties. In that time the company saw tremendous success, with revenue up about 17 times from 2013 until Treger’s retirement in 2022 (though likely near a cyclical peak). Treger stepping down coincided with the company’s strategic shift away from coal and towards more future-facing royalties. The mantle was taken over by the company’s Chief Investment Officer Marc Bishop Lafleche, who subsequently changed the company's name to Ecora Resources. With a younger CEO and newer, more modern brand, Ecora has made its intentions very clear: shift away from coal and towards the base metals that are going to power the future. Though it has only been a year under this new regime, Ecora has already taken major steps in its shift away from coal with its acquisition of a royalties portfolio from South32, which is fully focused on base metals. Management expects the acquired royalties4 to make up about $50M of the $100M it expects its portfolio to generate as various assets come online throughout the next five years. That said, the current portfolio is still largely based around its coal asset, Kestrel, which will roll off the company’s books in 2026. While I believe it’s become quite clear that Ecroa's management understands that coal is not a commodity of the future, Kestrel will play an integral role in the company's transition towards the energy transition. Though coal prices have come down significantly from their highs, they are still far above their historical levels, leading to outsized cash generation by Kestrel. This has become, and will likely continue to be, a key source of funding for Ecora to add to its more future-facing royalties portfolio. A key point worth highlighting is Ecora’s strategy when choosing what royalties to be involved with. Ecora has a major lean towards quality, rather than speculation. As management puts it, their “strategy is to acquire royalties and streams over low-cost operations and projects with strong management teams, in well-established mining jurisdictions.” Ecora seems to adhere strictly to these guidelines, staying away from riskier projects, with lower-quality operators.

Assets

While predictions of business performance is much more of an art than a science (despite what a junior analyst with an Excel model may say), this is even more the case in the mining industry. Developing and subsequently operating a mine comes with many variables that are out of the operator’s control. Though Ecora does not actually develop or operate any mines, I believe these dynamics make it most topical to provide a high-level overview of Ecora’s assets. The Assets are broken down into three categories: “Legacy Producing,” which is its coal asset, “Producing,” which are assets that are currently producing metals, “Development,” which are mines that are currently being developed and are believed to have a high chance of success, and “Early Stage,” which are very long-term and are not expected play a role in the results of any time soon.

Legacy Producing

Name: Kestrel
- Commodity: Coking Coal
- Location: Australia
- Operator: EMR Capital and Adaro
- Royalty basis: 7-40% GRR
- Expected mine life: Off the books in 2026

Producing

Name: Voisey’s Bay
- Commodity: Cobalt
- Location: Canada
- Operator: Vale
- Royalty basis: 22.82% NSR
- Expected mine life: 2035

Name: Mantos Blancos
- Commodity: Copper
- Location: Chile
- Operator: Capstone Copper
- Royalty basis: 1.525% stream
- Expected mine life: 2038

Name: OIC
- Commodity: Iron ore
- Location: Canada
- Operator: Rio Tinto
- Royalty basis: 7% GRR (indirect)
- Expected mine life: 2045

Name: Marcus Menchen
- Commodity: Vanadium
- Location: Brazil
- Operator: Lago Resources
- Royalty basis: 2% NSR
- Expected mine life: 2041

Name: McClean Lake Mill
- Commodity: Uranium
- Location: Canda
- Operator: Cameco
- Royalty basis: 22.5% of Toll Milling Revenue
- Expected mine life: 2037

Name: EVBC
- Commodity: Gold
- Location: Spain
- Operator: Orvana Minerals
- Royalty basis: 2.5-3% NSR
- Expected mine life: 2026

Name: Four Mile
- Commodity: Uranium
- Location: Australia
- Operator: Quasar Resources
- Royalty basis: 1% NSR
- Expected mine life: 2029

Name: Carlota
- Commodity: Copper
- Location: USA
- Operator: Carlota
- Royalty basis: 5% NSR
- Expected mine life: 2024

Development

Name: West Musgrave
- Commodity: Nickel and Copper
- Location: Australia
- Operator: Oz Minerals
- Royalty basis: 2% NSR
- Expected mine life: 2051

Name: Santo Domingo
- Commodity: Cobalt and Copper
- Location: Chile
- Operator: Capstone Copper
- Royalty basis: 2% NSR
- Expected mine life: 2044

Name: Nifty
- Commodity: Copper
- Location: Australia
- Operator: Cyprium
- Royalty basis: 1.5% Realized Value
- Expected mine life: 2030

Name: Incoa
- Commodity: Calcium Carbonate
- Location: DR/USA
- Operator: Incoa
- Royalty basis: 1.23% GRR
- Expected mine life: TBD

Name: Piaui
- Commodity: Nickel and Cobalt
- Location: Brazil
- Operator: Brazilian Nickel
- Royalty basis: 1.25%
- Expected mine life: 2042

Name: Salamanca
- Commodity: Uranium
- Location: Spain
- Operator: Berkeley Energia
- Royalty basis: 1% NSR
- Expected mine life: 2039

Early Stage

Name: Pilbara
- Commodity: Iron Ore
- Location: Australia
- Operator: BHP
- Royalty basis: 1.5% GRR
- Expected mine life: TBD

Name: Canariaco
- Commodity: Copper and Gold
- Location: Peru
- Operator: Candente Copper
- Royalty basis: 0.5% NSR
- Expected mine life: TBD

Name: Ring of Fire
- Commodity: Chromite
- Location: Canda
- Operator: Wyloo Metals
- Royalty basis:
- Expected mine life: TBD

Valuation

Ecora has a particularly interesting valuation case with multiple embedded call options. Let’s start with the base case (pun intended). Using very conservative assumptions, management believes the portfolio as presently constructed (minus Kestrel) should be able to reach $100M in revenue. While they originally expected to achieve this in 2026, CEO Marc Bishop Lafleche said in a recent interview that that timeline is “tight,” with a 2027 timeline being more realistic, though we’ll use 2028 to be conservative. Using its normalized multiple over its recent history of 6.5x sales or 10x EBIT, Ecora would be valued at $650M. This would be ~65% more than its current market cap of ~$395M in five years, add in a dividend that usually sits around 5%, and this should give you a more than respectable internal rate of return (IRR) in the mid-double digits. Now onto the call options. The first is multiple expansion. Currently, Ecora trades and is priced like a coal company. This is a prime example of the market not seeing the forest through the trees, and will more than likely change as Kestrel rolls off the books. While the larger players in the industry trade well north of 30x EBIT, even the smaller, more comparable players trade closer to 15x, giving Ecora a good runway for multiple expansion. The second potential call option is the addition of new royalties. Whether it be through organic deal sourcing or portfolio acquisitions, like in the case of South32, there should be plenty of time and opportunity for Ecora’s management team to add to the current portfolio. The last, though certainly not least, is an increase in the prices of the underlying commodities. The $100M forecast is based on historical prices of the portfolio’s commodities. For the reasons laid out in “Base Metal Bull Thesis,” I believe the chances are extremely high that the actual prices are much higher than these historical norms, with the royalty structure allowing Ecora to participate in this potential upside without any cost inflation.

Summary

There are many ways to play the base metal bull thesis, if it's something you believe in of course. Of these options, I believe mining royalty companies are the best way to do it (again, detailed in “Base Metal Bull Thesis”), with Ecora presenting an excellent opportunity. Ecora should be able to provide a return that beats most market averages, with the possibility of various levers that could lead to outsized returns.