Star Royalties ($STRR) is one of a select few public companies focusing on carbon credit creation opportunities. Capitalizing on this growing industry with royalties; my personal preferred way to have exposure to a commodity. They are a royalty company that has precious metals projects but for my investment thesis it is the carbon credit exposure that I see differentiates them from other small cap royalty companies.
Star Royalties came to market with a goal of 80/20 portfolio split. 80% precious metals, 20% green investments. But it became apparent that the green investment demand was overwhelmingly positive resulting in the team undergoing the process of spinning off Green Star Royalties. At time of writing Green Star has not IPO’d yet but the team is executing and moving in the right direction. Star Royalties shareholders will be the main benefactors of this new entity but we will get into that later.
For people following the story there is a bit of irony behind it. Kevin MacLean, the team's Chief Investment Officer has won 13 Lipper Awards. I didn’t know what a Lipper Award was when I had Kevin on my podcast. But it is an award for providing consistently strong, risk-adjusted performance relative to their peers. But $STRR came to market in 2021 with a rather questionable allocation of funds with their Copperstone project heavily overweight within their portfolio. That being said, they have further diversified and with the recent correction in the market, Star Royalties has been one of my most stable investments.
Copperstone, their largest investment ($18million obligation) at the time has a rather healthy stream attached to it with the following terms:
A front loaded stream to recoup their initial investment early and redeploy capital.
The Copperstone project was paid in tranches and Star Royalties still needs to make a $6 million payment once a milestone is met by their partner. And here lies the problem/risk. Sabre Gold Mines has yet to find/disclose any financing solution at time of writing. This is a large unknown and overhang on the valuation of Star Royalties in my opinion. The royalty was initially expected to produce cashflow in 2022, now expected in 2023.
But since then $STRR has been making great achievments and have been executing. They announced a strategic partnership with Agnico Eagle for their Green Star Royalties spinoff company. Where Agnico Eagle will become a 35% shareholder of Green Star Royalties and have certain rights to co-invest alongside Green Star Royalties. The parent company being $STRR, will retain 62% ownership and management the remaining 3%.
After completion of the private placement there will be 40.4 million Green Star shares issued at a price of $1 per share. There were no cheap options or warrants issued to any parties.
Agnico Eagle is a major company that strives on all ESG fronts and partnering with Star Royalties to form this new entity displays that clearly and legitimizes this sub $50 million market cap company.
This non-dilutive financing will result in Star shareholders benefitting materially from the new green focused entity. Their mandate is to invest in pure-green initiatives with no mining assets to become one of the highest quality ESG plays in the space for retail and more importantly institutional investors.
Their portfolio is becoming more diversified but Copperstone is still their largest precious metal royalty/stream and arguably the most concerning factor in this investment thesis. However, that unknown provides an opportunity for a rerate of the share price if/when announced. Another concern is if the carbon credit market is all smoke and mirrors or there is actually demand for this industry.
So why am I bullish on this company and the carbon credit space? It is because institutions are getting pressured to invest in green investments and companies are also being pressured to be better environmental stewards and limit or offset their carbon emissions. A deadly combination for a storm of new capital and growth of this asset class. What I see is Netflix, Google, Amazon, big oil all seeking ways to offset their carbon emissions voluntarily. Carbon credits are a quantifiable solution, but with waves of capital comes shady individuals looking to profit. The industry needs to be vetted and heavily regulated. It seems to be moving in that direction, however the rules for this competition state to not get into politics. If you are bullish on the space I simply state that this is my company of choice. This is my main thesis for this investment and why it is my largest personal holding. Institutions are being pressured to invest in green investments and the reality is there are not many quality options out there. Star Royalties is doing it right with the right partnerships and deals.
Oh and going back to portfolio diversification. With the announcement of the strategic partnership they announced a fourfold expansion of their largest carbon credit creation royalty to date. Three years out, revenue projections are now 69% green, 28% precious, 3% miscellaneous.
The BlueSource partnership for regenerative agriculture is another amazing partnership that has yet to be recognized. A picture tells 1,000 words so please take the time to understand the image below provided by a Desjardins report. This has been the most comprehensive outline of all the parties involved in the Regen Ag project.
As you can see, the project provides positive incentives to all parties involved.
Bluesource has been working on carbon credit programs for a long time. But when considering Star Royalties as a good investment we still need to look at the quality of the assets. You also need to consider will these projects produce as much credits as $STRR is projecting they will?
You will notice from the image above that Locus AG is another partnership in this regenerative agriculture project. The program looks rather attractive for the farmers where they get financially incentivized and Locus AG's technology bolsters increased crop yields, more efficient use of nutrients, and of course carbon sequestration. From my understanding, healthy soil and roots means more carbon sequestration.
So will it work and is it a good investment? Alex Pernin, has stated in past interviews that Bluesource is conservative with their estimations and have 100% success rate in projections not to overestimate carbon credits created. Bluesource has a great success rate but this is their first regen agriculture project so be aware of that.
Also it should be noted that Star Royalties has a right of first offer (ROFO) with Bluesource’s regen ag projects. This program is scalable and the missing link is the capital to provide further investments.
Without even getting into the financials you can see partnerships with Bluesource and Agnico Eagle that they theoretically have a closed loop system. This is pure speculation on my part until Star Royalties can disclose more about their partnership with Agnico Eagle. But are they the potential buyer of said credits? Because when looking at these carbon credit companies you need to consider who they are selling the credits to? Regardless, Bluesource should have no issue selling regen ag credits as they are some of the most desirable carbon credits in the space.
Agnico Eagle has capital and a strong desire surely to promote the greenest major mining company on the planet. It is not that far of a stretch for such speculation.
If you refer to the pipeline for green projects below, you will notice there are further opportunities in Canadian forest projects.