Our view: H1 23 portfolio income and net debt were in line with expectations although the timing of volumes at Kestrel and Voisey's Bay reduce our portfolio income forecast during the second half of the year. We continue to see ECOR as an undervalued exposure to future facing commodities and re-iterate our Outperform recommendation. Our price target falls from 230p to 220p.
Key points:
Interim portfolio income and net debt in line with expectations, lower volumes guided for H2
H1 23 portfolio contribution of $44.3m was in line with expectations (-3% vs RBCe and -2% vs cons). Net debt was reported at $43m, also in line with RBCe at $42.9m (no cons available). Ecora expects portfolio income to decline during the second half of the year driven by lower volumes from Kestrel and Voisey's Bay. Kestrel production for FY23 is now expected to be 1.7-1.8mt (prior 2-2.25mt) as some of the volumes within the royalty area are now expected to be mined in 2024. This does not impact total production expected for the remainder of the life, which remains unchanged at c.7mt. Voisey's Bay continues to ramp up more slowly than expected due to the ongoing transition from open pit to underground. As a result, ECOR now expects 140-154t of cobalt in 2023 (vs 182-210t previously). Volumes will be recovered over the life of mine as the underground ramps up production, in likely higher price environments.
Vizcachitas adds long term growth, Piaui financing ongoing
On Monday, ECOR announced the acquisition of a 0.25% NSR royalty over the Vizcachitas copper project in Chile. We estimate the IRR (post tax) of this acquisition at 12% (3-year industry average 6%). Once in production in 2030, Vizcachitas would represent 5% of total portfolio income. Elsewhere, ECOR's Brazilian nickel royalty (Piaui) raised $30m during the quarter and continues to evaluate construction financing alternatives. The group has the option to increase its royalty by 3% (for a total of 4.25%) in exchange for a $70m investment. The option is expected to be executed once financing for the project is completed (around H1 24). We have adjusted our expectations for the project in line with these timelines with full ramp up now expected in H1 26 (vs H2 25 before).
Attractive exposure to future facing commodities
The net impact of these changes reduces our FY23-25E Avg Portfolio income by -5.2%. Our NAVPS remains largely unchanged at 196p as most of this value should be recovered over the life of mines. This lower near term income and the increase in net debt associated with the acquisition of Vizcachitas lowers our price target slightly from 230p to 220p. Although there are limited near-term catalysts, recovering cobalt prices and further value additive deals like Vizcachitas should help support an attractive valuation. We re-iterate our Outperform recommendation.