ALS.TO - Altius Minerals

[giofranchi]

divide by 32.71M shares = $10/share book 

 

--

 

the $13 book noted earlier is incorrect; I've modified it.

 

I think the BVPS at $10 is a bit low… Anyway, it doesn’t matter: 1.4xBVPS is still an attractive price, if you mean to invest in something with ALS's charachteristics for the long-term.

 

Gio

 

[gary17]

Gio - I think over the long term any business that can do 15% or so a year and in a fairly stable industry will do very well.  However, given the uncertainties in the market.... as the prices appreciate, there's more risk... less margin of safety.  Picking a good entry point can often help with that.... Don't disagree; but it's just that the price I pay is the only 'control' I have in any investment really.  Gary

[Guest Dazel]

 

 

Gary,

 

No the equity financing will lower the interest payable and change all of your book value and other calcs....Your are off.

 

Don' t have time to do it... will have 5 analysts out next week you can look through and choose what you agree with.

 

You are obviously very negative on china and iron ore...you should probably just move on...bank of America is cheap!

 

Dazel

[gary17]

The way I understood it is they are buying $283M worth of PMRL + CDP of which $147M from loans, and $61.7M from equity proceeds & rest from cash they already have...

 

--

 

I am negative on china... super negative ... so that's my fear - i'm trying to counter my own fear :)

 

I have too much banks  (Bank of America / Ireland / Greece) -- I am diversifying some -

 

It's a fear that's just based on all the stuff I can read in Chinese and learn when I talk to people / friends who do business in China.  But the reality is if this happens - US / Ireland / Greece will likely be equally affected -  I just don't know if ALS at $14 has some of this risk priced in.  Not that it matters - what matters is the Margin of Safety.

 

Did I see you said there will be 5 analyst reports? 

[giofranchi]

but it's just that the price I pay is the only 'control' I have in any investment really.  Gary

 

Mmm… I am not so sure… I think you must always judge the quality of the people you are partnering with… If you partner with great people, 1.4xBVPS, which in theory might look expensive, in the long run will prove to be a great bargain. On the other hand, if you partner with inept or fraudulent people, 0.8xBVPS, which in theory might look a great bargain, in the long run will prove to be expensive.

 

Gio

 

[gary17]

Gio - I totally agree - all I am doing here is just trying to get great people at great prices....  I mean in realty one pays a reasonable price... and let time does its job.  But I just want to see if there's even an opportunity to get a even better deal.  You know, like how Buffett got such a terrific deal on BAC.  Every penny counts!  8)

[giofranchi]

all I am doing here is just trying to get great people at great prices.... 

 

Whenever you find that divine combination... let us know!! ;)

 

Cheers,

 

Gio

[Guest ajc]

I have to assume Kami & JL don't go ahead - no royalty from that front; I just don't see the demand for Iron Ore at this point.  Even if they do one needs to factor in this is a few years out & mining projects take time to start, etc.

 

I am just trying to be conservative here & look for the Margin of Safety - something I haven't seen discussed here.....  what 'value' are we getting at $14/share that can be unlocked and how likely will that value be unlocked and why does the market not know this already?

 

This idea is very straightforward

 

Great points.

 

 

[SharperDingaan]

Few pointers - will do a more complete review later this evening.

 

Other than the immediate debt repayment, there will be no further net debt retirement; interest is also tax deductible @ about 40%.

MOS is meaningless today, as ALS is no longer a value stock. Marginal buyers are pricing off forecast EBITDA & dividends.

ALS is also no longer mom & pop - & their clock is very definitely ticking.

 

If Kami & JL are not settled by end-of-summer, ALS will be under enormous pressure to either merge - or deal some of their holdings &/or their royalty flow to pay off debt & boost their dividend. If Kami has not been financed 10 months after the fact, & the JL negotiations have not successfully concluded; ALS management will not longer be seen as credible, & a merger will be the preferred institutional option. Mom & pop shareholders might have waited it out, institutions will not.

 

We have every confidence the ALS management team will pull it off, but it is a very different game now; & their global competitors & institutional holders are not angels. There will be full valuation.

 

SD

 

 

[gary17]

Thanks SD

 

Would appreciate yours or Dazel commenting on the debt after equity offering. I'm a little confused. When you have time to comment. Thank you

 

Cheers

[Blue Macaw]

The way I understood it is they are buying $283M worth of PMRL + CDP of which $147M from loans, and $61.7M from equity proceeds & rest from cash they already have...

 

--

 

I am negative on china... super negative ... so that's my fear - i'm trying to counter my own fear :)

 

I have too much banks  (Bank of America / Ireland / Greece) -- I am diversifying some -

 

It's a fear that's just based on all the stuff I can read in Chinese and learn when I talk to people / friends who do business in China.  But the reality is if this happens - US / Ireland / Greece will likely be equally affected -  I just don't know if ALS at $14 has some of this risk priced in.  Not that it matters - what matters is the Margin of Safety.

 

Did I see you said there will be 5 analyst reports?

 

If China goes down then US will be very bad off and the rest of the world for that matter. But it will not happen, not yet at least. First we will have some years of lower growth.(natural, a huge country will eventually have lower growth but still buying more iron ore as a whole :) ) World will keep on going, people will continue get in to debt, US government will keep printing money leaving payment to future generations (which means poverty will be severe for majority in the future). The ponzi scheme will have its end finally and it will not be pretty, not at all. But if you are rich or don´t have loans (debt/equity lower than 1) you will be fine. The sad story will be the middle class and the poor people like always.

 

The margin of safety is lower now of course. If trading at 14 incomparison to 10 of course the margin is lower. But we hve to look at what we have now also. Before we had book value of around 10 and we had money in the bank and no growth except the hope of Kami. That has all changed now. We suddely have more possiblity of growth from other areas for example CDP. We still have Kami and also Julienne lake and the rest.

 

First years I do not expect any dividends until debt is reduced substantially. But with Kami deal secured, which I do think we will get lower than we wanted but still 2CAD per Alderon share leaving us with 64 M and being able to reduce debt.

 

If only relying on the royalties and no growth I think we will see a share price at 14 or lower for a very long time. If Altius pays off 10 M a year it will take a long time and you would have to renegotiate loans as time goes by. But with Kami and Julienne lake together with CDP we have a completely different ball park. It is worth a shot. If you don´t believe in iron ore, coal or potash then this company is of course not for you. As I said earlier, the share price could go down if Kami is bust so for those who believe that should not buy now but wait until we go to maybe 12 or hedge now and sell half of what you own. (I doubt we will go lower than 12)

 

I think they have stretched it a bit with buying these royalties and a equity raise was necessary but it was a great move instead of sitting on that pile of money and just showing red numbers each year. Kami has come a long way since I first entered and Julienne lake hardly excisted at the time. CDP could be the next 10 years of deal makers.

 

Good luck. Interesting 6 months ahead of us.

 

 

 

 

[gary17]

Blue- this is basically my conclusion that $14 is fair market value today reflecting the reality of the business .. and so management did price this fairly.  After all , it is a 40% premium before they announced the acquisition.  So to me, we are paying  or holding it at $14/share for what it is , as is.  With the risk of macros; but the upsides of Kami, JL, CDP and a great management team. 

 

When I spoke to Chad last week he told me dividend could be coming in a few month.  I am pretty sure that is what I heard.

[Blue Macaw]

Blue- this is basically my conclusion that $14 is fair market value today reflecting the reality of the business .. and so management did price this fairly.  After all , it is a 40% premium before they announced the acquisition.  So to me, we are paying  or holding it at $14/share for what it is , as is.  With the risk of macros; but the upsides of Kami, JL, CDP and a great management team. 

 

When I spoke to Chad last week he told me dividend could be coming in a few month.  I am pretty sure that is what I heard.

 

I agree with the valuation. I also have a negative outlook on the future of homo sapiens but not now. First we will see China dominate for some time and there will be ups and downs in their growth. But in the long term they will do better than the rest. I would not enter the housing market in China now and private debt is getting out of hand over there as well but the state sits on cash and will make strategic investments as we can see every day. What we are seeing now is unbelievable. 1,3 billion people going after the same status and wellbeing as the people in US.

[Guest Dazel]

http://www.china.org.cn/english/2005/Dec/151676.htm

 

 

Seems to me that no one has ever been sure of China....so imagine you were in the iron ore business and you listened in 2006?

Leucadia didn't listen and they made about $2 billion in iron ore about the same time this was released....does it sound familiar? Kami and JL  began their existence earlier than this!

 

For those not familiar they have increased their iron ore imports 4 fold since they were calling over capacity and price drops because of a change in policy 2006!

 

 

[jose]

Fears of a China slowdown, and the subsequent demise of Kami/JL projects are already priced in.

 

So you get stable royalty portfolio and dalton for current price, and the potential upside on Kami/JL for free.

 

Altius has bought itself some time to see a favorable outcome as far as the iron ore commodity cycle, which is not bad at the moment.

[wisdom]

I agree with Jose - the PMRL and CDP have been bought after the drop in the respective commodity prices. Coal and potash are needed for food and electricity which are independent of Chinese housing/infrastructure demand.

 

Iron-ore prices are still high historically. I would prefer it if the iron ore mines are sold/financed before a slow down in construction picks up any more momentum in China. While I believe in the long run demand for iron-ore - not so sure about the near/medium term when a country buying 50% of a commodity is slowing spending on infrastructure and housing.

 

heh way we see it - ALS has until end of 2015 or so to make something happen with Kami and JL.

[SharperDingaan]

Would appreciate yours or Dazel commenting on the debt after equity offering. I'm a little confused. When you have time to comment.

 

Re p59-61 of the prospectus. The debt was structured in expectation of a minimum 76M principal repayment within 2 yrs. Pricing & covenants (asset sale proceeds pay off the loan first) also anticipate that most of the principal repayment will actually occur within the next 12 months (2% anniversary fee). Most likely, the interest charge is so high (rate + covenants) because the loan is not expected to be o/s for very long. Most would expect ALS to be able to fund at a good 200-300bp below what they are currently paying.

 

Keep in mind this was simply a best efforts raise, the UW overallotment was excessive, the debt structure is abusive, & they paid top of the scale; for the UW group to take very little risk. Had the UW group not been publicly shamed, on pain of pulling the issue just ahead of pricing - the UW overallotment would probably not have been rescinded.

 

Hard to see why ALS would agree to such a gouging, & still go for so much additional cash - over & above this anticipated 76M of near term sale proceeds; unless there is something else in the pipeline. It must also be pretty rich - to make it worth risking their independence (via a takeover) if they screw up. They are not new to this, they would have factored in the risk, & yet they still concluded that it was worth going for? We have also heard suggestion that a couple months out - this raise will not matter; which implies that whatever this is, it must be strongly accretive.

 

Todays institutional buyers are not buying to make 10%/yr, they will be looking for 50-100% within 12-18 months, & bonuses will be riding on it. As there are lots of ways by which they could get there, they also aren't taking much risk.

 

Same court, but it is now a very different game.

 

SD

 

 

 

 

 

 

 

[giofranchi]

http://www.china.org.cn/english/2005/Dec/151676.htm

 

 

Seems to me that no one has ever been sure of China....so imagine you were in the iron ore business and you listened in 2006?

Leucadia didn't listen and they made about $2 billion in iron ore about the same time this was released....does it sound familiar? Kami and JL  began their existence earlier than this!

 

For those not familiar they have increased their iron ore imports 4 fold since they were calling over capacity and price drops because of a change in policy 2006!

 

I agree with Dazel on China.

Don’t forget that Mr. Chanos’ (one of the most vocal bear on China for the last few years!) refrain about China is:

Don’t invest in China, but trade with China!

And it is simple, but summarize the state of things with China right now concisely, yet powerfully. And who is playing that refrain better than ALS? ;)

 

Gio

 

[hohi]

I've put some of my calculations in a file so you guys can have a look and see what ALS' royalties might be worth in the future. Feel free to ask questions or correct me if there are any mistakes.

 

http://ihre-hoheit.de/NPV%20ALS%20assets.pdf

[hohi]

Oh and to calculate the intrinsic value for ALS I use 66% DCF and 33% PE metrics. I know most of you guys are talking just about the multiples for royalty companies. And that is probable what will happen. But I always like to include a DCF analysis to make sure the assets a rock solid.

[Blue Macaw]

I've put some of my calculations in a file so you guys can have a look and see what ALS' royalties might be worth in the future. Feel free to ask questions or correct me if there are any mistakes.

 

http://ihre-hoheit.de/NPV%20ALS%20assets.pdf

 

Looks ok to me. CMB also have 2% on other metals including copper and gold I think.

 

If you look at the prices these days (prices for royalties that have been bought) you will see that Kami could be valued around 10 which would mean your calculations and 5% discount rate and a iron ore price of 125. Not impossible. Jullienne lake at the same valuation would be at 26,5

[Guest Dazel]

 

Hohi,

 

 

Thanks for the great work! You are also correctly assuming that Altius large future DCF will be effected by an all in 35% tax rate....that is quite a chunk of change...

 

Keep in mind that Leucadia paid very little tax in their existence because they deployed an incredibly successful tax strategy....Altius certainly easily could deploy this strategy with the amount tax losses in the mining industry finite...not unlike the telecom industry when Leucadia bought WilTel...

 

Altius' team will likely follow this strategy and pick up gems in the rough along the way...as Leucadia did...if CDP was a corporation not a partnership they would have picked up $50m in operating losses. In an industry where 90% plus of the companies lose money those that make it (Royalty Companies) can pick through the ruble for tax loss carry forwards in companies that may provide some value.

 

Another reason why management matters.

 

 

 

[SharperDingaan]

Keep in mind there are a range of methodologies, each with different result, & more/less relevant. DCF, EBITDA Multiple, P/E Multiple, Div Discount, Liquidation, etc. Cant use P/E (negative earnings) or div discount (no divs) yet, so we are left with EBITDA, Liquidation, & DCF - & in pretty much that order.

 

Sum the royalty streams @ 23x EBITDA, haircut the equity positions by a 5% liquidity discount, add cash, subtract debt & divide by share count. You get a very conservative value, with zero for everything in the pipeline (Kami, JL, Cranberry, etc). It is close to todays price, & were someone to take a run at them (FNV) - they would get this attractive pipeline for free. Hence, the ticking clock.

 

DCF requires us to know the future CF, assume ore prices, agree a discount rate, & select a method. All highly variable, & hence a range of values too wide to be useful. You also get zero for everything in the pipeline (Kami, JL, Cranberry, etc).

 

EBITDA does not require positive earnings - but it does require that you look very similar to your peers. Comparable trailing EBITDA, pipelines that are at the same stage & with similar prospects. At present - most would argue that ALS has a poorer trailing EBITDA, & materially better prospects; so its value will understate. Again, exceptionally attractive to a circling peer.

 

But pay out a dividend comparable to peers, & their div gets discounted net of the growth rate (r-g). And if they grow (g) faster than their peers, for the same dividend $ - their share price will be higher than their peers;& a gobbling becomes far less likely. So either the pipeline starts monetizing, quickly, & they start with the dividends - or they get gobbled.

 

Harsh, but that is life in the big pond.

 

SD

 

 

[hohi]

SD et al. thanks for the comments.

 

Sure it is easier to use EBITDA multiples, I just don't like to rely only on that methodology. If you had to guess commodity prices and choose a discount rate you can be conservative and come up with a price target that has a solid margin of safety. EBITDA multiples are highly correlated to investor sentiment, so you would have to predict mass psychology if you extrapolated the multiples into the future. That is how the market works, but I still like to test my thesis with other means, if available. In the end it doesn't even matter, because I see ALS as being undervalued in basically all my models.

 

In the short term many things can happen - commodity prices could tank or explode, investor sentiment could shift (who knows maybe Mr. Market values commodity royalty companies at just 10x EBITDA in the future, e.g. when the supercycle ends) and what have you. As Gio says - it is just a great business with a long and prosperous future ahead of it if you can stay put for the long run.

[bizaro86]

 

Hohi,

 

 

Thanks for the great work! You are also correctly assuming that Altius large future DCF will be effected by an all in 35% tax rate....that is quite a chunk of change...

 

Keep in mind that Leucadia paid very little tax in their existence because they deployed an incredibly successful tax strategy....Altius certainly easily could deploy this strategy with the amount tax losses in the mining industry finite...not unlike the telecom industry when Leucadia bought WilTel...

 

Altius' team will likely follow this strategy and pick up gems in the rough along the way...as Leucadia did...if CDP was a corporation not a partnership they would have picked up $50m in operating losses. In an industry where 90% plus of the companies lose money those that make it (Royalty Companies) can pick through the ruble for tax loss carry forwards in companies that may provide some value.

 

Another reason why management matters.

 

This would be a huge positive to the thesis. No taxes makes a material difference to their NPV, and there are literally hundreds of juniors with large losses. Some of them are even net-nets. If they were to buy someone like a Phoscan or a Karnalyte they would get existing losses, probably only pay around the value of the cash, and get a bunch of land that has future potential.

 

Of course, I'm not sure what the breakdown between capital and operating losses is, I suspect most juniors have large capital losses but low operating losses. Capital losses wouldn't help them with royalty income, but would offset taxes on sales of stakes (eg Alderon shares).