Royalty firm Ecora plans transition to green metals despite lucrative coal contract

Ecora Resources (TSX: ECOR), a mining royalties company, is betting its shift to green-economy investing in projects by giants such as Vale (NYSE: VALE) and Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO) will propel it through a looming recession.  
 
The London-based company formerly called Anglo Pacific has a US$200-million war chest in revolving credit from lenders such as CIBC, Scotiabank and RBC while on track to double last year’s revenue. Ecora began revamping its strategy away from coal in 2017 to invest primarily in copper, nickel, and cobalt projects among other commodities key to electric vehicles, environmental power generation and modern tech gadgets.  
 
“If someone is keen to get exposure to these commodities and wants to do it in a relatively de-risked way, i.e., the royalty model, Ecora is a pretty unique proposition,” chief executive officer Marc Bishop Lafleche said in an interview in Toronto. “We’ve built a company that is fundamentally positioned to a more sustainable world.”  
 
The alternative financing provided by streaming and royalties companies has grown from US$2.1 billion in 2010 to more than US$15 billion in 2019 although it’s less than 3% of the mining industry’s debt and equity financing, according to McKinsey & Co. Mining companies appreciate the option’s longer payment terms than traditional debt while being less dilutive than equity deals. There’s “room for significant growth” as the royalty concept spreads beyond its concentration in North America and miners adopt it to fund operation byproducts like cobalt, the consultant said in a 2021 report.  
 
Ecora, which bills itself as the largest LSE-listed royalty company that doesn’t focus on precious metals, is tapping into the surging trends of smart technologies and electrification. Still, Ecora’s record revenue in this year’s first half was based on coal.  
 
Royalty income through June of US$92.8 million was greater than its entire income last year of US$85.6 million as it gained from soaring prices for coking coal from the Kestrel mine in northeastern Australia. The operation run by Hong Kong-based EMR Capital and PT Adaro Energy of Indonesia accounted for US$70.9 million or 76% of Ecora’s half-year income. Ecora’s 7%-to-40% (depending on the value of the coal) gross revenue royalty expires in 2026 when Ecora moves entirely out of coal. 

South32 royalty buy 

In July, Ecora paid US$47.6 million and 17% of its shares, valued at US$82.4 million, to Perth, Australia-based miner South32 (ASX: S32) for its royalties portfolio. The acquisition of four streams from early or development stage copper and nickel projects reflects the company’s new strategy, Lafleche said. 
 
“It really changed the complexion of our business and portfolio,” the 38-year-old former investment banker for Citigroup said. “We have a growth-style portfolio, so assets that are not in production yet, which in the medium term are expected to come into production.”  
South32 with 17% is Ecora’s largest shareholder, followed by London-based Schroder Investment Management with 11%, Aberforth Partners of Edinburgh holding 7.4% and Vancouver-based Canaccord Genuity Wealth Management at 4.7%, Ecora said.  
 
One key green economy commodity eluding Ecora for now is lithium — used in electric vehicle batteries — because its price has rocketed almost seven-fold since August last year to around US$540,000 per tonne this week. 
 
“Could it stay at these levels?” Ottawa native Lafleche said. “How long, where does it end up, what’s the right long-term price? That’s a bit less clear, it’s a rapidly growing market.” 
 
Ecora could add lithium by investing in the growth of early or development stage projects. It’s doing this with BHP’s (NYSE: BHP; LSE: BHP; ASX: BHP) Pilbara iron ore project in western Australia, chromite from Ring of Fire Metals’ Eagle’s Nest deposit in northern Ontario, and Capstone Copper’s (TSX: CS) Santo Domingo mine in Chile. 
 
Lafleche, who joined Ecora nine years ago and became CEO in April, sees a clear trend in how downstream mineral buyers, such as Tesla (NASDAQ: TSLA) and General Motors (NYSE: GM), are keen to secure lithium sources of their own. Tesla boss Elon Musk had considered buying 4,000 hectares of lithium-bearing clay in Nevada. GM invested US$69 million last week in a Queensland Pacific Metals (ASX: QPM) nickel and cobalt project after buying a stake last year in Controlled Thermal Resources’ Hell’s Kitchen lithium project 260 km southeast of Los Angeles.  
 
While most economists are forecasting a slowdown if not recession early next year as rising interest rates to control decades-high inflation bite into economies, Ecora chief financial officer Kevin Flynn sees opportunities.  
 
“The royalty and streaming model works best in times of volatility and to some degree downturns in equity markets, where our capital is required more,” Flynn said in the same interview. “We’re very well capitalized and generating a lot of cash flow and that puts us in a strong position to act opportunistically.”  

Mining royalty companies have been considered lenders of last resort, but Ecora’s executives say the stigma has lifted over the past 15 years as the concept has become more common among growth-focused explorers and miners. Also, Ecora sees greater opportunity in the less competitive space of sustainable industries fighting climate change compared with precious metals. 
 
The company started as Diversified Bank Shares in 1967, changed its name to Anglo Pacific Group in 1997 although it was no relation to the Anglo American group, before adopting Ecora this month. The name combines letters from the words energy, commodities and royalties. 
 
The share price touched $3.23 in April and closed at $2.24 on Wednesday, valuing the company at $580 million. This year’s interim dividends totalled 4.59¢ per share, a yield of about 5%, Lafleche said. Part of the appeal to investors is exposure to commodity price gains without suffering high-inflation operating costs, he said.  
 
Half of Ecora’s 18-stream portfolio is producing, including its 23% slice of cobalt from Vale’s Voisey’s Bay nickel mine in Labrador. Ecora earned US$13.9 million gross revenue in this year’s first half from the streaming royalty after investing US$205 million in the project, according to the company. The mine life is projected to 2035, although Ecora says the stream will decline by half when delivery targets are met. 
 
Vancouver-based Capstone is third in generating income for Ecora. Its Mantos Blancos open-pit mine in northern Chile’s Antofagasta Region supplied US$3.1 million to Ecora’s first-half gross revenue from a 1.525% net smelter return (NSR) royalty, filing documents show. US$2 million in the same period came through a 2% NSR from the Maracás Menchen vanadium mine in Brazil run by Toronto-based Largo (TSX: LGO).  
 
“Look at the Canadian assets in our portfolio and some of the non-Canadian assets in the hands of Canadian operators,” CFO and Dublin native Flynn said. “We feel like we’re probably the largest Canadian royalty company that a lot of people in Canada have never heard of.”