Lithium Royalty's NCIB Renewal: A Strategic Play to Unlock Undervalued Assets?

The lithium sector has been a rollercoaster in recent years, with prices swinging wildly as demand for electric vehicles and energy storage surges. Amid this volatility, Lithium Royalty Corp. (TSX: LIRC) has renewed its normal course issuer bid (NCIB), signaling confidence in its valuation and its ability to capitalize on market dislocations. The company's decision to extend its buyback program, which allows it to repurchase up to 5% of its shares, offers investors a compelling opportunity to assess whether this move is a value-accretive move or a defensive hedge against further downside.

The Strategic Rationale: Buying Low When Others Shrink From Risk

Lithium Royalty's renewed NCIB, set to run from July 10, 2025, to July 9, 2026, authorizes the repurchase of up to 1,219,187 shares—5% of its current float. This isn't just a routine renewal. Management's decision to proceed with buybacks at current prices reflects a belief that the stock is undervalued relative to its net asset value (NAV). The company's portfolio of 35 lithium and battery-related royalties, spread across projects in Nevada, Australia, and Argentina, provides a steady revenue stream tied to the energy transition.

The key question is: Why now? Lithium prices have retreated from their 2022 highs, and the sector faces headwinds from oversupply concerns and a slowdown in EV adoption in some markets. Yet Lithium Royalty's management is betting that the current market price doesn't reflect the long-term value of its assets. This confidence is bolstered by the fact that the company recently increased the price range for its modified Dutch auction repurchase program in April, raising the maximum bid to a 30% premium over its 20-day volume-weighted average price. That move alone suggests management sees the stock as attractively priced.

The Undervaluation Case: NAV vs. Market Cap

The NAV argument is central here. Royalty companies often trade at discounts to their NAV because their assets are illiquid or depend on project execution risks. However, Lithium Royalty's portfolio includes stakes in projects with long-term contracts, such as its 1.25% royalty on Albemarle's Silver Peak mine in Nevada, which is one of the largest U.S. lithium producers. These royalties provide steady cash flows with minimal operational risk.

If the company's NAV is meaningfully higher than its market cap—a common scenario for undervalued royalty firms—the buybacks could deliver outsized returns. For instance, if NAV per share is, say, 20% above the current stock price, each repurchased share effectively reduces the discount, boosting intrinsic value for remaining shareholders.

Diversification as a Shield Against Sector Volatility

Lithium Royalty's portfolio diversification is a key mitigant to sector-specific risks. Its 35 royalties span lithium brine, hard-rock, and clay deposits, as well as battery recycling projects. This spread reduces reliance on any single mine or region, a critical factor as geopolitical tensions (e.g., China's dominance in lithium processing) and supply chain bottlenecks continue to roil the market.

The company's focus on royalties rather than direct mining also insulates it from the high capital costs and operational risks of greenfield projects. Instead, it benefits from the upside of production without bearing the burden of exploration or permitting.

Risks and the Fine Print

No buyback is without risks. Lithium prices could fall further if EV demand growth slows more than expected, or if new lithium sources (e.g., South American projects) come online faster than anticipated. Additionally, the NCIB's 5% cap limits the immediate impact of share repurchases, though it could be renewed again if conditions warrant.

The company also faces regulatory risks, particularly under U.S. tax law as a passive foreign investment company (PFIC), which complicates tax treatment for American investors. However, the fact that the NCIB includes provisions for repurchases during blackout periods—via pre-defined broker plans—suggests management is prepared to act decisively when possible.

The Bottom Line: A Buyback Worth Watching

For investors, the renewed NCIB is a vote of confidence in Lithium Royalty's valuation and its ability to navigate lithium's cyclical nature. If the stock remains undervalued relative to NAV, the buybacks could create a tailwind for long-term holders. The recent price increases in its Dutch auction, which saw the upper limit raised to C$5.70 (a 30% premium to prior levels), hint that management believes the current price is a bargain.

Investment Takeaway: Lithium Royalty's NCIB renewal is a strategic move to lock in value during a period of sector uncertainty. Investors should weigh the NAV discount against lithium's long-term trajectory. For those willing to bet on the energy transition's inevitability—and the resilience of royalty-based models—this could be a timely entry point. Just don't ignore the risks: lithium's boom-and-bust cycles are alive and well.

In short, the NCIB isn't just about trimming shares—it's about positioning the company to capitalize on a market correction. Whether it succeeds will depend on whether lithium's lithium renaissance resumes or falters.