Lithium has been a growth investment theme for a while, and early investors made their fair share of gains over the past decade. These gains include a 382% gain on one of Canada’s top lithium stocks, Lithium Americas (TSX:LAC), over the past five years. You had to get in early to harvest such high returns. Lithium stock investors have a new investment opportunity. A lithium royalty play made an Initial Public Offering (IPO) on the TSX in March. It promises low-risk exposure to lithium’s upside.
New lithium IPO stock: Lithium Royalty Corp at a glance
Lithium Royalty Corp. (TSX:LIRC) is a new lithium growth play that listed on the TSX in March 2023. Priced at $17 a share at its IPO, LIRC stock has lost 24.6% in value during its first five months of trading. Management recently launched a share repurchase program in July. It intends to buy back up to 5% of the IPO stock’s issued shares. Management believes shares are undervalued, and that’s likely possible.
The $708 million company invests in royalties on lithium properties – a low-risk-high-upside investment strategy on a valuable battery metal the world is scrambling for as electric vehicle demand soars.
Lithium Royalty Corp offers diversified exposure to lithium’s upside. As a royalty holder, it receives a portion of the revenues from mine production, but doesn’t worry about operating cost inflation, capital injections, or environmental costs associated with mining operations. In some jurisdictions, royalties may be registered alongside title claims, and may survive bankruptcies. Given the long project development lead times for lithium projects globally, Lithium Royalty offers diversified exposure to higher lithium prices, with limited stress associated with project failures.
The company has a portfolio of 32 royalties on 30 properties located in the top-rated mining-friendly jurisdictions of Canada, Australia, South America, and the United States. Two properties are already operational, four are nearing production, and the rest are in the exploration and development stage.
Management estimates nine properties will be in production by 2025, and all 30 properties may be in production by 2030. Thus, 2030 could be a key horizon date when deciding to invest in LIRC stock.
Should you buy the Lithium Royalty Corp (LIRC) IPO?
Investors bullish on uranium’s upside over the next decade may wish to grab Lithium Royalty stock as shares trade below their IPO price. At below $12.90 per share, LIRC stock trades below the company’s most recent estimates of net asset value per share of $24.58, for all 32 royalties. This implies a potential 91% upside if investors finally appreciate the company’s lithium value proposition.
Net asset value computations are very susceptible to interest rates and discount rates (for risk) used, as well as cash flow estimates, which depend much on lithium prices, and a respective project’s success rates. LIRC’s diversified portfolio exposure reduces downside risk, and lithium prices may cooperate.
Interestingly, lithium carbonate prices rebounded in April. There was street talk about a lithium cartel forming in China to establish lithium price floors. And South America could create its own “lithium OPEC” sooner than we anticipate.
Most noteworthy, LIRC stock should also benefit from mine life extensions as operating partners invest in further explorations. In June, Allkem Limited, an operator on Lithium Royalty’s portfolio property, announced a 34% increase in mineral reserves at the Mt Cattlin property. Lithium Royalties earns A$1.50 per tonne royalty on ore mined and treated at the Australian mine. Increased mine life and project extensions increase the expected lifetime value of the Mt Cattlin royalty in Lithium Royalty’s portfolio.
A future dividend play?
Royalty companies usually pay dividends, and LIRC stock should become a dividend stock as portfolio mines enter full production – a potential passive income source over the next decade.
If your investment holding period extends to 2030 or beyond, you may initiate positions in Lithium Royalty stock and expect capital gains as Lithium Royalty’s royalty project partners continue to de-risk and grow their operations, and as revenue growth compounds. Juicy dividends may follow as the company’s royalties portfolio receives boatloads of recurring cash flow from dozens of lithium mines over time.
