Ecora, a royalty company focused on future facing commodities like copper, nickel, cobalt and lithium released its annual report last week.
The release contained several critical catalysts for a stock already trading at a 35% discount to the value of producing assets only, ignoring upside from future royalties.
Ecora Trades At a 50-75% Discount to Other Royalty Companies
Ecora remains our favorite way to gain diversified exposure to future facing commodities due to its deep valuation discount, strong growth forecast and management team with a proven track record making value enhancing royalty investments.
Buyback for 4% of Shares Announced
The most important near-term catalyst Ecora announced was the initiation of a US$10 million buyback. Management feels strongly the company is deeply undervalued and believes a buyback is a prudent use of capital to go along with further investments in commodities seeing strong demand growth this decade.
Management didn’t waste any time after the announcement, spending US$180,000 or 2% of the total authorization to buy back 195,000 shares on March 27th at a weighted average price of 74.17 pence.
Management went a step further and said buybacks beyond the current US$10 million are possible as long as the market continues to value the stock below what they believe is its fundamental value.
25%-35% Free Cash Flow Payout Going Forward
Ecora cleared up a critical question mark for investors by releasing an updated payout strategy that will carry the company through the current commodity transition this decade.
Now investors can accurately model exactly how much cashflow will be coming back to them as the company sees ramping royalty production and underlying free cashflow generation.
Ecora is targeting a 30% FCF payout for 2024, which at current commodity prices would equal 4 cents per share, an attractive 5.4% yield and in line with royalty peers.
Targeting 25%-35% Payout of Free Cashflow
Ecora believes the current portfolio can generate $110 million of revenue in 3-4 years, which would equal around $90 million of free cash flow (as the company defines it) at current margins and reinvestment rates.
If Ecora paid out 35% of potential FCF, it would generate a 13% yield for investors, more than double the current yield and double peer company payout ratios.
Surprise Uranium Upside Announced
Ecora called out a huge recent uranium discovery on an exploration target with a 2% royalty owned the company. The property is owned by NexGen Energy, currently advancing the Rook 1 project, the largest uranium project by volume in the western hemisphere.
Uranium cashflow upside is not currently included in Ecora’s net asset value and would represent pure upside to cashflow and future stock value.
NexGen said the discovery was “significantly better” than the nearby Arrow discovery, already the largest uranium project in the western hemisphere.
NexGen Uranium Discovery Details
The Rook 1 project is expected to produce 29 million pounds per year so this new discovery could easily exceed 5 millions pounds if additional drill holes are similar grades.
The Right Commodity Exposure and Large Borrowing Base for More Growth
Ecora’s valuation alone makes it a must watch in the royalty space, but digging deeper it also has exposure to the commodities seeing the strongest demand benefit from electric vehicles, Ai and renewable energy.
Strong demand increases the probability prices will stay high enough for all projects currently under development to see the light of day, while also providing upside optionality should current supplies not be adequate for future demand.
Ecora’s assets are also in developed and stable jurisdictions which is often overlooked but is one of the most important factors to consider when owning mining projects.
Commodity Exposure Breakdown (March 2024)
Ecora’s significant borrowing capacity – 3.5x maximum leverage vs 1.6x today – means the current valuation discount could grow even without the stock price moving as further growth investments are made.
$150 Million of Financial Flexibility for Growth and to Support the Balance Sheet
Management’s first priority is growth that meets their return hurdles, so the NAV will continue to grow beyond the current value of £1.82/sh.
Ecora is run by a CEO who was the past head of investments and the team there has a multi-decade record hitting their return hurdles. They know the important global mining regions intimately and are prioritizing diversification and scale, two prerequisites for a royal company to achieve a premium valuation.
Targeted Ticket Size and Commodity Mix
As the shift to renewables and future technologies heats up, Ecora is likely to be a major beneficiary, yet the stock price treats the company like a coal royalty company in decline, when nothing could be further from the truth.
The entire royalty space offers lower risk, but still highly leveraged exposure to commodities and Ecora looks to offer a heavily discounted entry point for any investor who favors inflation protection, high payouts and undervalued cashflow growth potential.
