Is this the best business model on the ASX (that you've never heard of)?

At Seneca, we're always on the lookout for businesses that might be underappreciated for the quality that they possess, rather than chasing growth businesses at any price.

We think the best business model in the world is one where you can deploy small amounts of capital and get paid recurring revenue. SaaS software is one example, funds management is another. But royalties might be the best return on invested capital (ROIC) of the lot.

In the face of volatile markets, we thought we'd go back to basics and dive into one such small cap ASX-listed company, which we think is a hidden gem in an attractive sector. This company is printing cash hand over fist, at no cost, and yet remains under the radar. We think the market is asleep to this opportunity.

Royalties - the best business model in the world?

Royalty companies provide upfront capital to mining operators in exchange for a percentage of future revenue or production. This model offers miners immediate funding without incurring debt or diluting equity, while royalty companies gain exposure to commodity prices and potential exploration upsides with reduced operational risks.

In 1986, Franco-Nevada (NYSE: FNV), led by Pierre Lassonde and Seymour Schulich, paid just $2 million for a 4% royalty on what was a modest heap leach operation producing ~44kozpa. In December 1986, Barrick Gold acquired the property and drilled some deeper exploration holes. This led to the discovery of Goldstrike, a substantial Carlin-style gold deposit, hosting a 50-million-ounce orebody, that nowadays produces almost 1 million ounces of gold annually.

Lassonde later recounted how the vendor, unaware of the property's true potential, was happy to take the cash, while Franco-Nevada retained all the exploration upside. When Barrick Gold developed Goldstrike into one of the world's most prolific gold mines, the royalty generated billions in revenue, making it one of the most lucrative deals in mining history, helping Franco Nevada shareholders generate a 173x return (38% CAGR) in the 16 years to 2001 (despite the gold price dropping through that period!). This deal cemented the royalty model’s viability, proving that a well-structured agreement could deliver outsized, long-term returns with minimal risk.

Today, the royalty model still holds strong in the resources sector, which is as cyclical as ever. Mining is hard and expensive. And when you're the operator, things go wrong and can land the company in financial trouble. Royalty companies have a number of attractive traits relative to miners: high and stable profit margins, high ROIC, exposure to commodity prices with limited cost exposure, and lower cost of capital. Franco Nevada delivered net income of US$552 million in 2024, from a headcount of 45 people, for US$12.3 million profit per employee, reinforcing the scalability of the royalty model relative to miners.

Free option on discoveries, expansion

Royalties offer genuine embedded optionality. Depending on their structure, they typically entitle the holder to a percentage of a mine’s top-line revenue, with no exposure to capital or operating costs.

This creates a powerful asymmetric payoff: the royalty holder captures all the upside from higher commodity prices, increased production, or a longer mine life while avoiding the downside risks of cost overruns or capital-intensive operations. We believe this type of optionality is one of the most underappreciated concepts across the broader market.

In May this year, I wrote this article on Livewire outlining some strategies to buy 'something for nothing' on the ASX. Consider this to be part 2 of that article.

"A big part of identifying these asymmetries is finding optionality—can we pay a fair price for a good asset but simultaneously acquire an equally attractive asset for free?"

Seneca Financial Solutions, May 2025

Despite well-known mining billionaires like Gina Rinehart, among others (ever wondered how Clive Palmer got so rich?!), benefiting significantly from the royalty model, royalties are not as well understood in Australia as they are in the US. It's a much lower risk way to invest in the resources sector, and accordingly, you can use a significantly lower discount rate, and royalty companies trade at a premium to their mining counterparts.

As such, there's a dearth of listed players on the ASX - you can count on one hand the listed players with significant royalty assets. The largest and most well-known of which is Deterra Royalties (ASX: DRR), which spun out of Iluka Resources (ASX: ILU) in 2020. Deterra has historically been a single-asset company with a 1.232% royalty over BHP's Mining Area C (MAC) Pilbara Hub iron ore project. BHP (ASX: BHP) has increased production at MAC from 57Mt in 2020 to a current rate of 145Mtpa through its South Flank expansion, which transformed BHP's largest iron ore hub into the world's largest iron ore mine while retaining 20+ years of mine life.

We like Deterra. ~$200 million of annual cash flow from a tier 1, low-cost, long-life asset. However, though the royalty model is capital light, Deterra came under shareholder pressure for its cost base running at c. $10 million p.a. for essentially cashing a cheque, so their business development team has been actively scouring new assets to prove their worth. This culminated in the acquisition of Trident Royalties, a UK-listed royalty company with 21 royalty assets across different commodities, but very small in size relative to Deterra.

Some of the smaller assets look decent to us, but the primary 'jewel in the crown' asset within the portfolio is a 1.05% (effective) gross revenue royalty over the Thacker Pass Lithium project operated by Lithium Americas (NYSE: LAC), which we are more sceptical of. Thacker Pass is objectively a giant lithium deposit; however, in our view, its clay-hosted nature presents a considerable challenge to extract lithium economically, at a commercial scale, relative to established lithium brine and hard rock mining methods. Though we're not sold on this particular project, with these 'moonshot' projects, you do want to be exposed via a royalty rather than equity when there are elevated construction and timeline/capex risks.

While the transaction offers diversification benefits, we believe it has ultimately diluted the overall quality of Deterra’s portfolio. Activist shareholders agree. Also, the A$276 million in capital required for the transaction has forced Deterra to cut its dividend payout ratio from 100% to 50%, alienating its shareholder base, who enjoyed a reliable stream of fully franked dividends.

This leads us to the only other royalty player listed on the ASX of meaningful scale…

Red Hill Minerals (ASX: RHI)

As I discussed on the Money of Mine podcast (listen here), in October, RHI might just be "the best kept secret on the ASX".

Backstory

In the 2000s, Red Hill Minerals (then Red Hill Iron) explored and developed what is now known as the Onslow Iron ore project, defining a gigantic resource of 820Mt @ 56.4% Fe in Western Australia's Pilbara region. Red Hill Iron, lacking the capital and infrastructure to develop the project alone, ultimately sold its interest in the project to Mineral Resources (ASX: MIN) in 2021 for $400 million cash and a 0.75% royalty over all future production from the project tenements.

After paying out the cash proceeds as fully franked dividends, RHI retains $64m in cash (no debt) and, subtracting that from its $245m market cap, trades on an enterprise value of just $183m, giving little credit to the massive royalty optionality embedded in Onslow.

Royalty Cash Machine

MinRes commenced production at Onslow in May 2024 and reached nameplate capacity of 35Mtpa on an annualised basis in the September quarter of 2025. At current iron ore prices (adjusted for grade and FX), Red Hill's 0.75% royalty stands to earn ~A$1 million per annum for every 1Mtpa of production. At nameplate capacity, that translates to ~A$35 million per year in high-margin, passive royalty income - a true cash cow.

But here’s where it gets interesting…

The Market is Missing the Upside

The market has turned ultra-bearish on MinRes, given its high debt load and well-reported governance issues.

RHI is being priced as though Onslow will never exceed 20Mtpa — despite Mineral Resources clearly and repeatedly stating a target of 35Mtpa. Say what you will about Chris Ellison, or MIN governance, but their operational track record of project delivery has always been first class, among the best in the mining sector — arguably in any sector. MinRes has built the Onslow project in 2.5 years, an unbelievable achievement when you look at timelines of other projects, let alone of this scale.

But forget 35mtpa, we're looking at +50Mtpa. We think investors are so focused on the 35Mtpa run rate that they're missing the forest for the trees. Onslow was never supposed to stop at 35Mtpa, that was just Stage 1, with Stage 2 targeting 50Mtpa by adding a 6th and 7th transhipper. Given the modular nature of the project, MIN can feasibly increase production by adding more transhippers, road trains, and iron ore deposits within the project tenements, all while leveraging the existing haul road infrastructure. Analysts are forecasting >50Mtpa in 2027, for which RHI is currently being ascribed ZERO value.

This slide from MinRes' site visit in May caught our eye, with the company wording up analysts that it expects to reach 40Mtpa sooner rather than later:

At its FY25 result, MIN confirmed what we'd been thinking for months, that they "have a clear pathway to operate Onslow Iron above nameplate capacity with minimal additional capital investment".

There's a reason why MIN structured the haul road deal with Morgan Stanley such that MIN keeps all the upside from production above 40Mtpa.

Based on current transhipper activity (5 in place, 2 more coming mid-2026), port activity, and current crushing rates, our analysis suggests that 50Mtpa is realistically achievable.

What about costs?

On-time and on-budget mining project delivery has become exceedingly rare, especially in this period of cost inflation. MinRes has already increased cost guidance twice at Onslow.

But who bears the brunt? It's MIN, not RHI as the royalty holder, who is only exposed to top-line revenue. The beauty is that the royalty holder has minimal exposure to these overruns. Royalty payments are tied to production, but it makes little difference to RHI’s NPV whether MIN reaches nameplate production in September or October. MIN, by contrast, is highly sensitive to production costs at Onslow. Each A$1/t change in Onslow unit costs equates to approximately (just over) $1.00 per share in MIN share price value, on our estimates.

The next question you should be asking is "Will this project be viable through the cycle?"

We think the answer is a clear 'yes'. MinRes has guided to Onslow Iron FOB costs of $54-$59/t for FY26. Combine that with the value MIN derives from infrastructure charges and mining services volumes, and the project is clearly profitable at current rates. The project should get further cost benefits from increasing scale towards 50mtpa, where unit costs reduce and further cost-saving initiatives like autonomous haulage stack up (to become more competitive relative to rail - BHP/RIO/FMG).

Playing devil's advocate

It's all well and good to talk about how undervalued a stock is. But what about the downside risks? At Seneca, we are looking for asymmetric upside ideas, where we are protected on the downside and comfortable with the risks of owning a business. It's not just about finding the highest potential return opportunities in the market. It's all relative to the risk you are taking.

Accordingly, we're constantly challenging our own theses rather than blindly clinging to faith from initial analysis. Below, we discuss these opposing theses and why we think RHI stands up to scrutiny.

What about the troublesome haul road? What if they can't get to nameplate capacity?

Safe to say, the Onslow project hasn't been a walk in the park. Located in a remote corner of the Pilbara, the project had been stranded until MinRes came in and built a 147-kilometre private haul road to transport the iron ore to port. The haul road surface sustained structural damage, and multiple truck rollovers sparked a media frenzy.

MinRes then spent a further $239 million on repairs to the haul road, completing upgrades in September, with haulage resuming at normal speeds. Note, the royalty holder does not have to contribute to these capex charges.

What gives us confidence that the project can sustainably operate at nameplate capacity of 35Mtpa? Well, firstly, it already is. On 27 October 2025, MinRes confirmed that it had received the $200 million contingent payment from Morgan Stanley Infrastructure Partners tied to achieving nameplate capacity between August-October, on an annualised basis. Even before the haul road was fully completed, the project was already shipping more iron ore than its planned nameplate capacity in this period.

What happens if MinRes' $5b debt becomes too burdensome?

One risk with royalties is that you don't control your own destiny. It is therefore important to be aligned with a competent and motivated mine operator. We believe MinRes ticks both boxes, with every incentive to get Onslow humming and to reduce its $5.4 billion net debt pile, despite the negative press the company has faced over the last 12 months.

MIN has every incentive to hit and surpass that mark. Onslow is central to MIN’s deleveraging plan — it’s the flagship project to generate cash flow and reduce a growing debt pile. Having recently received the contingent payment, sold down its lithium assets, and incrementally profiting more from tonnes above 40Mtpa, MIN is improving its balance sheet. If MIN were forced to raise equity, that would not be dilutive to RHI as the royalty holder. And worst case, RHI's royalty applies to the mining tenement lease, which lives on beyond the mining company operator.

Instead of trying to play a game of "who's the smartest" on whether MIN will de-lever its balance sheet to avoid a capital raise or further asset sales (before its 2027/2031 bond maturities), we prefer to invest in RHI, which is positively disposed to the growth optionality the project offers, without taking on excessive operator risk. RHI is probably the best way to express a view on MinRes with convexity.

What about the iron ore price?

How many false dawns do we need to see for the 'death of iron ore' before we start to realise that the long term iron ore price might be closer to US$100/t than US$50/t?

If the supposed 'Pilbara killer' Simandou project in Guinea has commenced production, and iron ore is still trading >US$100/t, then perhaps the rumours of iron ore's death have been greatly exaggerated. Sure, Simanodu is yet to ramp up, but an operation of that scale in West Africa is bound to have its fair share of hiccups, especially with a government that is pushing for more downstream value-add in-country (ie. a greater slice of the economics).

“Economists have predicted nine of the last five recessions.”

Iron ore is a commodity that analysts have notoriously struggled to forecast correctly. Ask those same analysts in 2020 whether iron ore would reach US$200/t the next year, and they’d have laughed you out of the room.

Equities are already pricing in significantly lower iron ore prices. What I've come to learn in markets is that when everyone expects something, it's dangerous to assume it's true. Coal in 2020 ("it will never go up again") and gold in 2022 ("it has no value") serve as prime examples etched into my memory.

Regardless, the iron ore price holding at current levels is not central to our RHI thesis, but if anything, it could provide a kicker over and above market expectations.

Will shareholders ever see any of the cash?

Fortunately, RHI management is aligned with shareholders and has a proven history of paying fully franked dividends. Chairman Joshua Pitt owns 34.4% of RHI so is likely to continue its track record of paying out fully franked dividends to shareholders, recently adopting a policy to payout 50% of Onslow royalty revenue.

However, we also note that Red Hill Minerals remains an explorer at heart, allocating ~$6 million annually to base metals exploration across WA and NSW. It also has the option to conduct low-cost gold exploration at its West Pilbara tenements without shareholder dilution, leveraging existing infrastructure including a haul road, gas plant, and pipeline. While this optionality holds strategic merit, especially if gold is discovered, exploration results to date have been underwhelming—likely contributing to the market viewing this as 'dead money.'

Ripe for re-rate—if the right approach is taken

We believe RHI could realise significant value for shareholders if it transformed into a pureplay royalties company, which typically trade on ~2x NAV (thanks to that wonderful thing called optionality that we mentioned earlier). We don't think we're the only ones that recognise the strategic value in RHI, and we have previously opined that Deterra would be a logical acquirer (if not an overseas player) as we think the Onslow royalty alone would be worth at least $6.00 per share to a dedicated royalty company with a low cost of capital, with seemingly the only sticking points being the 69% insider ownership (potential blocking stake) and Deterra management transition.

RHI appears to be taking steps to move in our favoured direction: becoming a dedicated royalties company. RHI recently acquired a gold royalty over part of the Sandstone project, now operated by Brightstar Resources (ASX: BTR), a growth-focused junior consolidating the Sandstone region, following its acquisition of tenements from Alto Metals (ASX: AME). RHI paid $4 million to the private vendors for this royalty, which we estimate could eventually generate around $10 million in annual free cash flow. It doesn't take a genius to see that this deal could be a cracker, given that Brightstar is rapidly advancing this project toward production and the gold price is up 47% since the deal was announced.

RHI also bought a 1.5% royalty (includes a buyback provision for up to $6 million) over Legacy Minerals (ASX: LGM)'s Thompson base metals project in NSW, in May 2025. On 13 October 2025 (my birthday!), Legacy announced that Rio Tinto (ASX: RIO) is earning into 80% of the project by sole funding $25 million of exploration expenditure, firepower that increases the value of RHI's royalty, despite the project being at an earlier stage.

These acquisitions also diversify RHI’s royalty income and enhance the company’s overall value on a risk-adjusted basis.

What's the end game in this sector?

Royalties are hard to come by (especially the good ones), which is why the large royalty companies end up just buying each other. Consolidation in the royalties space is almost limitless because you don't need large management teams to manage deal flow and integrations.

M&A activity in the mining royalties space has ticked up recently. Aside from Deterra buying Trident, Viper acquired Sitio Royalties in the US, and even crypto-associated Tether (yes, the crypto company is looking to get some tangible commodities exposure, go figure…) taking a 47.2% stake in Elemental Altus Royalties (TSXV listed) which is an intriguing smaller player with key royalties over Capricorn (ASX: CMM)'s Karlawinda gold project in WA and Lundin Mining (TSE: LUN)'s Caserones copper project (Chile). Since we started writing this article, Elemental Altus has merged with EMX Royalty Corp (NASDAQ: EMX), another small cap royalty player offshore, Sandstorm (NYSE: SAND) got snapped up by Royal Gold (NYSE: RGLD), and Triple Flag bought out Orogen Royalties. Tether has also popped up as an 8% shareholder in Royal Gold and cornerstoned Versamet Royalties.

We note that consolidation is only almost limitless, because there are only so many mid-tier royalty companies out there, increasing the scarcity value of RHI, which provides exposure to production growth, a differentiated commodity, and a tier 1 miner counterparty. While the overseas players don't have much experience in iron ore, ASX-listed Deterra Royalties (DRR) is all too familiar with how profitable a long-life, growing, Pilbara iron ore royalty can be. Here's an excerpt from a Livewire article I wrote late last year, showing how RHI fits neatly in Deterra's acquisition criteria:

With Deterra CEO Julian Andrews stepping down, let's see if a fresh set of eyes, in the form of interim CEO Jason Neal, who spent 20 years as an investment banker for BMO Capital Markets on the global metals and mining team, could catalyse a deal.

What is RHI worth?

No brokers cover RHI, so these are our own estimates.

Royalty companies trade at a historical average 20x EV/EBITDA (current market valuation is higher), which would equate to $13.48 per RHI share. That includes larger, diversified global peers, but DRR's 11x multiple would perhaps be a fairer reflection, equating to 100% upside for RHI and a $7.87/share valuation.

If the market continues to be asleep at the wheel, we still think we will get paid from current prices.

At US$100/t iron ore, RHI should do $40 million in free cash flow in the coming year. At a 50% payout ratio, that's $20 million in fully franked dividends, which equates to an 11.6% grossed up dividend yield.

Final word

As we said, no brokers cover this stock. This is an attribute that we believe gives us an edge over our peers when finding inefficiencies in the small cap market.

We look forward to the next 12 months not just as RHI shareholders, but as we continue to find opportunities like this across the portfolio.

The Seneca Australian Small Companies Fund has returned 29% over the last 12 months. To apply, click here. The fund has a 0% management fee and a 20% performance fee above the RBA cash rate. Our latest monthly fact sheet is linked here.