RE Royalties and Clean Electricity

An opinion piece by Nico Popp (Apaton Finance GmbH).

Those who want to reflect the energy transition in their portfolio while avoiding unnecessary risks will find an exciting candidate in Canada: RE Royalties. The company applies the lucrative mining royalty model to solar farms. Young developers of renewable energy projects often lack start-up capital. This is exactly where RE Royalties steps in as a financing partner. The company grants asset-backed loans with short terms and collects interest, often in the double digits, in return. In exchange, it secures a share of royalties on the power plants' future gross revenue for the next 15 to 25 years.

Because these payments are based solely on revenue, many operator-borne costs do not affect RE Royalties. Remaining risks, however, include payment defaults and insolvencies. RE Royalties' portfolio comprises more than 130 facilities. In 2024, RE Royalties allocated CAD 3.0 million to a battery storage project by SolarBank Corporation, which guarantees the financier a fixed royalty for two decades at an 11% interest rate. A generous credit facility of CAD 10 million for Abraxas Power is intended to eliminate the need for diesel generators in the Maldives. It offers RE Royalties 13% interest plus 2.0% of gross revenue over 15 years**. The company also supports indigenous solar projects in Alberta. According to the company, this business model has already generated internal rates of return of up to 34% in the past.

Further Opportunities for RE Royalties

Despite its operational successes, RE Royalties is relatively unknown on the stock market. With a market capitalization of only about CAD 16 million, this small-cap stock trades "under the radar" for many professional investors. Nevertheless, cash has flowed steadily into RE Royalties shareholders' accounts for many years. Most recently, the dividend yield was even over 10%. Going forward, the company plans to make annual rather than quarterly distributions and will also draw on capital from green bonds, which the company also issues. Management, which itself controls about a quarter of the company's shares, has been fighting against this undervaluation for some time. To boost the valuation, the company commissioned PricewaterhouseCoopers to explore strategic options.

RE Royalties' stock has recently shown positive momentum. Compared to companies like Allianz or TotalEnergies, RE Royalties is a speculative small-cap stock, which entails both opportunities and risks. While large corporations are better able to weather headwinds, as demonstrated, for example, by TotalEnergies with its legal disputes, a company like RE Royalties is more vulnerable. This applies, for instance, to payment defaults. With a portfolio of around 130 projects, RE Royalties is broadly diversified but remains more speculative than the aforementioned corporations. Conversely, the stock's current valuation and niche positioning also present an opportunity—if it can find strong partners to contribute projects or capital, RE Royalties could quickly scale up its operations significantly. Investors should watch the future developments of this specialist in sustainable financing solutions. The company is in an interesting position.

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