ALS.TO - Altius Minerals

[linealdin]

Recognition of the reality of a market cycle is quite different from prediction of market cycles.

 

We are in a trough for potash and iron ore. I have no idea how long this trough will last.

 

We are in a bull market for copper and zinc. I have no idea how long this bull will last.

 

Recognition is a lot easier than prediction, but it is still important. Altius recognized that we are still in the trough in potash and iron ore, therefore they picked up positions in LIF, Champion and the McChip potash royalty this year.

 

Altius did recently buy a small zinc/copper royalty with Wolfden but they also basically have a money-back guarantee if it doesn't work out (Mount Pickett royalty exchangeable for cash, equity, another property royalty, or ancillary timberland rights). Why be so cautious with the deal structure? Because zinc and copper are in a bull market therefore you have to be very, very careful.

[nostradamus]

They also invested more in zinc through their funding of Adventus. That's a bull market investment that could go to zero right?

[linealdin]

They also invested more in zinc through their funding of Adventus. That's a bull market investment that could go to zero right?

 

Absolutely! Adventus is a bull market spinout, same as Alderon was. Even the names are similar, Adventus could have the ADV stock symbol. The market wants a zinc vehicle therefore Altius feeds that need by packaging up some dross.

 

Altius only invested C$2.3 million yet they now own 27% of Adventus's C$50 million market cap. I expect Kargl-Simard to push Adventus to a market cap between $100 million and $200 million. Will Altius be disciplined enough to sell down that stake? Have they learned not to start believing their own hype?

 

Altius needs to squeeze at least C$23 million out of this ripe piece of fruit. 10 bagger should be the minimum goal.

[linealdin]

LIF cracked through the $22 ceiling this morning. New 52 week high of C$22.48. Altius position worth C$72 million at that level.

[nostradamus]

They also invested more in zinc through their funding of Adventus. That's a bull market investment that could go to zero right?

 

Absolutely! Adventus is a bull market spinout, same as Alderon was. Even the names are similar, Adventus could have the ADV stock symbol. The market wants a zinc vehicle therefore Altius feeds that need by packaging up some dross.

 

Altius only invested C$2.3 million yet they now own 27% of Adventus. I expect Kargl-Simard to push Adventus to a market cap between $100 million and $200 million. Will Altius be disciplined enough to sell down that stake? Have they learned not to start believing their own hype?

 

Altius needs to squeeze at least C$23 million out of this ripe piece of fruit. 10 bagger should be the minimum goal.

 

I really hope that you are right, but making new investments in zinc when a bull market is already in full flow is hard to reconcile with being countercyclical.

[Liberty]

Hindsight bias? I owned Altius before and during the Alderon-related run-up. I emailed and talked with Brian and Chad many times about cashing out, especially when Alderon's market cap was worth almost as much as Altius. It was crazytown.

 

Of course you fell in love with Alderaan:

 

"So if ADV had the same revenues of 2.5B, 3% GSR for altius would be about 75 million (I'm doing that right? GSR is calculated over revenue?). Very impressive. I guess it'll vary with the price of iron ore (f.ex. 2009 was 1.144B), but I was expecting something closer to 40-45m at recent prices. Since the 16m tons/year for Alderon won't happen for a while, the 8m tons/year should be about half that, or 37.5m."

 

Where was the discounting crew then?

 

There was no crazy town. The price of ALS didn't move during that whole period. It's not like it ran up to 60 and then fell back down to 10-13. It just stayed there. And it hasn't moved since. It wasn't stupid to invest at the time because if commodity prices hadn't fallen off a cliff, the mine would've been built. But they fell, so nothing came out of it. That's what a probability distribution is. But with hindsight, you can now say that it was crazy (even if ALS price didn't move), but in fact, if things had unfolded otherwise, you wouldn't be saying this (but I'm sure you'd come up with another 'just so' story to explain why you were emailing them at the time). That's what I mean by hindsight bias.

 

And why do you trust Dalton so much if you're saying that it was super obvious to you but not to him?

[linealdin]

They also invested more in zinc through their funding of Adventus. That's a bull market investment that could go to zero right?

 

Absolutely! Adventus is a bull market spinout, same as Alderon was. Even the names are similar, Adventus could have the ADV stock symbol. The market wants a zinc vehicle therefore Altius feeds that need by packaging up some dross.

 

Altius only invested C$2.3 million yet they now own 27% of Adventus. I expect Kargl-Simard to push Adventus to a market cap between $100 million and $200 million. Will Altius be disciplined enough to sell down that stake? Have they learned not to start believing their own hype?

 

Altius needs to squeeze at least C$23 million out of this ripe piece of fruit. 10 bagger should be the minimum goal.

 

I really hope that you are right, but making new investments in zinc when a bull market is already in full flow is hard to reconcile with being countercyclical.

 

Do you really not recognize the difference between:

 

A) Buying a C$75 million zinc royalty

 

versus

 

B) Investing C$2.3 million in a zinc spinout that feeds a strong market need?

 

Option A you do during a bear market. Option B you perform during a bull market. And no, it doesn't take genius to recognize whether we are in a bull or bear market for zinc. You just open up your eyes.

 

Adventus spinout is a low risk, high reward means of selling some dusty zinc properties to the market. You sell during a bull.

 

Also it is impossible to spin out vehicles like Adventus and Alderon during a bear markets. No one wants them then.

[linealdin]

Hindsight bias? I owned Altius before and during the Alderon-related run-up. I emailed and talked with Brian and Chad many times about cashing out, especially when Alderon's market cap was worth almost as much as Altius. It was crazytown.

 

Of course you fell in love with Alderaan:

 

"So if ADV had the same revenues of 2.5B, 3% GSR for altius would be about 75 million (I'm doing that right? GSR is calculated over revenue?). Very impressive. I guess it'll vary with the price of iron ore (f.ex. 2009 was 1.144B), but I was expecting something closer to 40-45m at recent prices. Since the 16m tons/year for Alderon won't happen for a while, the 8m tons/year should be about half that, or 37.5m."

 

Where was the discounting crew then?

 

There was no crazy town. The price of ALS didn't move during that whole period. It's not like it ran up to 60 and then fell back down to 10-13. It just stayed there. And it hasn't moved since. It wasn't stupid to invest at the time because if commodity prices hadn't fallen off a cliff, the mine would've been built. But they fell, so nothing came out of it. That's what a probability distribution is. But with hindsight, you can now say that it was crazy (even if ALS price didn't move), but in fact, if things had unfolded otherwise, you wouldn't be saying this (but I'm sure you'd come up with another 'just so' story to explain why you were emailing them at the time). That's what I mean by hindsight bias.

 

And why do you trust Dalton so much if you're saying that it was super obvious to you but not to him?

 

I have copies of the emails with Altius management. Long discussions about Alderon. Should I post them? Normally they ask that communications not be posted on public forums, but these emails were from so long ago.

 

Not cashing out Alderon was a sin of aggression. I think they wanted ADV to achieve a billion dollar market cap with production. Crazytown.

[Liberty]

Missing my point. You're talking like what happened was the only thing that could have happened. That's hindsight bias. If things had turned out differently, you'd probably be saying that they were geniuses for holding on to the equity, or that they had made a huge mistake for cashing out of it early.

[linealdin]

Missing my point. You're talking like what happened was the only thing that could have happened. That's hindsight bias. If things had turned out differently, you'd probably be saying that they were geniuses for holding on to the equity, or that they had made a huge mistake for cashing out of it early.

 

I wouldn't be complaining if things had turned out differently (saying they sold too early) because of the structure of the spin out: equity and royalty.

 

The equity is there to be sold Too Early. The investment gods handed Altius a gift: their plot of moose pasture was spun out and shortly after the IPO was worth $400 million. How in the world did they turn down that gift? Sell a 1/3 of the position, sell a 1/4. Sell something. It wasn't a flash crash. They had three full years to sell shares for $1 or more. It would have been very, very easy to lock in a 20 bagger on their original investment of $2 million.

 

The royalty is to be kept forever. If you sell the equity Too Early (you're always too early if the royalty turns out to be a producer) you don't have any regrets because the 3% royalty pays out for the mine life.

 

The same logic applies to the Adventus and Zeus Copper spinouts during this cycle. Sell the equity Too Early, keep the royalties forever. They can't come out of this copper/zinc bull market with nothing to show for it. Cash out.

[nostradamus]

They also invested more in zinc through their funding of Adventus. That's a bull market investment that could go to zero right?

 

Absolutely! Adventus is a bull market spinout, same as Alderon was. Even the names are similar, Adventus could have the ADV stock symbol. The market wants a zinc vehicle therefore Altius feeds that need by packaging up some dross.

 

Altius only invested C$2.3 million yet they now own 27% of Adventus. I expect Kargl-Simard to push Adventus to a market cap between $100 million and $200 million. Will Altius be disciplined enough to sell down that stake? Have they learned not to start believing their own hype?

 

Altius needs to squeeze at least C$23 million out of this ripe piece of fruit. 10 bagger should be the minimum goal.

 

I really hope that you are right, but making new investments in zinc when a bull market is already in full flow is hard to reconcile with being countercyclical.

 

Do you really not recognize the difference between:

 

A) Buying a C$75 million zinc royalty

 

versus

 

B) Investing C$2.3 million in a zinc spinout that feeds a strong market need?

 

Option A you do during a bear market. Option B you perform during a bull market. And no, it doesn't take genius to recognize whether we are in a bull or bear market for zinc. You just open up your eyes.

 

Adventus spinout is a low risk, high reward means of selling some dusty zinc properties to the market. You sell during a bull.

 

Also it is impossible to spin out vehicles like Adventus and Alderon during a bear markets. No one wants them then.

 

Yup, I really do recognise the difference. Thanks for asking.

 

I also recognise that there is an Option C, which is to farm out the zinc properties you already own in exchange for a royalty and an equity interest. That is, try to get a return without risking C$2.3 million of shareholders' money. I would feel more comfortable if they did this, ie carried on doing what they have done many times in the past. Slow and steady.

 

Now maybe you take the view that its only C$2.3m, so who cares, its small change. But you recently suggested that maybe Altius has drawn down the C$50m Fairfax money to invest more in a Adventus related transaction. Also, I guess it is likely that they will put money into their copper spin out. So, maybe it turns into more than small change. That is, not small change being spent during a bull market in the hope of getting those ten baggers that you mention. This possibility concerns me.

 

Also, recently you have been painting a picture of a spivy Altius business model that is essentially about selling worthless crap to fools. If this really was their business model, I would want out. But, fortunately I don't believe it is.

 

N

 

 

 

[linealdin]

Sorry, Nostra, the vituperative tone was meant for someone else. Apologies.

 

Merchant banking type spinouts seem to me to be very low risk and high reward. Even Alderon, which we all acknowledge as an unmitigated failure, has still increased Altius's original investment by 4X. It seems very unlikely Adventus or Zeus will end up losing Altius money.

 

As to the spivy-ness of the merchant banking model? I've heard knowledgeable people say that the majority of the resource companies on the TSX Venture exchange are worthless (a small minority will make you a fortune). Until I have convincing evidence I will assume the companies that Altius spins out onto the TSX-V are also intrinsically worthless. Adventus seems like a very risky investment but the speculators love it. I'm okay with Altius exploiting the market's desire for single commodity vehicles.

 

Altius couldn't attract joint venture partners for these zinc properties therefore they packaged them up for a spin out. Same deal with the Chilean copper. 3 years and no earn-in partners signed up. The copper spinout is a last attempt to squeeze out some value.

 

 

[linealdin]

I have no idea where the last C$50 million of Fairfax money goes. I was just guessing that Kargl-Simard could bring them an attractive royalty opportunity. He found them Chapada.

 

Depends on the attractiveness of the individual royalty deal. I don't think Altius feels a particular obligation to support Adventus or Zeus Copper with royalty financing. Those companies will determine their own fates.

 

Some thought Altius would draw down the Fairfax money to throw more money at Alderon. Not at all.

[nodnub]

Interesting thread. Linealdin, do you follow any other resource/mining co's?

[nostradamus]

Sorry, Nostra, the vituperative tone was meant for someone else. Apologies.

 

Merchant banking type spinouts seem to me to be very low risk and high reward. Even Alderon, which we all acknowledge as an unmitigated failure, has still increased Altius's original investment by 4X. It seems very unlikely Adventus or Zeus will end up losing Altius money.

 

As to the spivy-ness of the merchant banking model? I've heard knowledgeable people say that the majority of the resource companies on the TSX Venture exchange are worthless (a small minority will make you a fortune). Until I have convincing evidence I will assume the companies that Altius spins out onto the TSX-V are also intrinsically worthless. Adventus seems like a very risky investment but the speculators love it. I'm okay with Altius exploiting the market's desire for single commodity vehicles.

 

Altius couldn't attract joint venture partners for these zinc properties therefore they packaged them up for a spin out. Same deal with the Chilean copper. 3 years and no earn-in partners signed up. The copper spinout is a last attempt to squeeze out some value.

 

No problem linealdin. I see what you saying regarding Adventus: contributing a small amount of cash to get the thing going might have been the only way to squeeze out some value from the properties.

 

On Alderon, did you ever get a clear explanation as to why Altius did not sell out during the bull market? I always assumed that they felt the real value was in the Alderon royalty, and that they needed to stay invested as a major shareholder to help ensure that the mine reached production.

 

 

 

 

[linealdin]

Altius was just extremely fired up and positive about Alderon. Dalton was spending huge amounts of time in China trying to lock down a steelmaker investment. They were all in.

 

I'm not saying Altius should have sold their shares on the open market in a mercenary way that would damage the project. They certainly could have lined up a strategic longterm investor to take 1/3 of their shares. They found creative ways to draw down their Aurora stake when that stock went nuts.

[nostradamus]

http://www.evrimresources.com/i/pdf/nr/2017-11-23_NR_EVM.pdf

 

Evrim announces the initial exploration results of the Cuale gold property in Mexico. Altius has a 1.5% NSR for precious metals and a 1.0% NSR for base metals. (Altius also owns > 10% of the shares of Evrim)

 

Cuale Exploration Highlights

 Rock chip sampling has defined a 500 metre by 250 metre zone of gold mineralization with all seven

samples ranging from 0.19 to 4.56 grams per tonne (g/t) gold;

 Contour soil sampling within the area defines a 400 metre by 140 metre zone of gold anomalism with all

seven soil samples ranging from 0.13 g/t gold to 4.06 g/t gold;

 Excellent infrastructure nearby and within the same region as the Barqueño project (Agnico Eagle Mines)

and the Terronera project (Endeavour Silver).

“Gold mineralization from sampling at the La Gloria prospect indicates significant potential for an oxidized high

sulphidation gold system at the Cuale project. These encouraging early results warrant rapid advancement to

define the full extent of mineralization,” commented Evrim’s Vice President for New Opportunities and

Exploration, Charles Funk. “Oxidized high sulphidation deposits are highly valued for their often large tonnages

and lower construction costs. Cuale is a new project for Evrim and the extent of mineralization over such a broad

area presents an uncommonly compelling prospect.”

 

 

[linealdin]

https://www.google.com/amp/s/amp.afr.com/business/mining/iron-ore/iron-ore-extends-rally-fresh-bull-market-beckons-20171123-gzrvj5

 

Iron ore all of a sudden trading near $67. Liam Peach, the iron ore bear quoted in the article, is a prime example of the kind of simplistic, top down analyst Rio Tinto is disdainful of. Peach is under 30, has a BA in economics and sits in an office in London trying to guess the iron ore price. Laughable compared to the resources Rio commits to make its price forecasts.

[linealdin]

https://wcsecure.weblink.com.au/pdf/PXX/01924915.pdf

 

Initial Zackly assay results from Polar X. Best result is 14.5 meters of 2.5% copper and 2.0 g/t gold. Altius holds a 2% royalty.

[nodnub]

https://wcsecure.weblink.com.au/pdf/PXX/01924915.pdf

 

Initial Zackly assay results from Polar X. Best result is 14.5 meters of 2.5% copper and 2.0 g/t gold. Altius holds a 2% royalty.

 

Linealdin, thanks for the interesting posts in this thread.  Do you follow any other mining or resource co's?

[linealdin]

https://wcsecure.weblink.com.au/pdf/PXX/01924915.pdf

 

Initial Zackly assay results from Polar X. Best result is 14.5 meters of 2.5% copper and 2.0 g/t gold. Altius holds a 2% royalty.

 

Linealdin, thanks for the interesting posts in this thread.  Do you follow any other mining or resource co's?

 

Not really. Just the big royalty companies: Franco Nevada, Royal Gold, Wheaton and Sandstorm. Mining is a terrible business.

[linealdin]

Confirmed by SEDI filings: Altius took down the final $50 million in Fairfax money on November 10th. A company changing move, for better or worse.

 

Altius will be paying Fairfax C$5 million in annual interest for at least the next 3 to 5 years.

[Cigarbutt]

Will not make friends here. But here goes.

 

Have been looking into Altius.

Prefer simple acyclical compounders but a significantly large discount to intrinsic value can do the trick.

 

Altius market cap has flat-lined for quite some time and seems to be unloved and unwanted by the market even with recent results which could be interpreted as promising. The opportunity is that market participants may underestimate the long term potential of value creation.

 

Since going public in 1997, Altius has been able to grow opportunistically. One can categorize the source of their gains into separate strategies and their progress has been closely tied to superior capital allocation skills.

 

From 1997 to 2014, book value per share increased primarily because, on a net basis, value was realized from their various involvements in different mining projects, at different stages of financing and development. IMO, there’s much more to it than just “riding” the cycle. They also opportunistically issued 1,9 million shares at 28$ a share for net proceeds of $51,2 million in 2007. From 2000 to 2014, SE went from $0,9 million to $242,0 million and share count went from 15,4 million shares (diluted) to 27,7 million shares.

 

From 2014 to 2017, their business morphed to include a significant royalty model component. My understanding is that this model has advantages that are unique and Altius has the potential to grow significantly going forward. Since 2014, Altius has issued shares ++ at a relatively low price and has maintained some leverage in order to buy, among others, a significant amount of royalty interests. When valuing a long term stream of cash flows embedded in the royalty contract, it is easy to overlook the potential value associated with the free permanent option on discoveries made on the land by operators and the free permanent option on the price of various commodities. For Altius, in a “normal” environment, I estimate that the value of those “options” is worth more than the value derived from standard discounting of “known” royalty payments.

 

However the value of the recent acquisitions and investments are based on certain assumptions about commodity pricing in the future (near term). To answer if recent acquisitions are valuable and if Altius, as an entity, is a good investment at this point in time, one has to evaluate the outlook for commodity pricing especially in the light of management actions of the last three years.

 

The key question:

Is the recent rise in commodity prices signaling a new favorable cycle or not?

In others words, can one make an educated guess about the outlook?

 

It matters because timing of the expected cash flows may vary tremendously, especially under present circumstances. Cycles are impossible to predict consistently but, in order to evaluate the margin of safety and potential return, this aspect may be particularly important after what is probably the most important historical super-cycle.

 

If you feel that we are now at the beginning of a new up cycle and that this is business as usual (as seems to be the case for ALS top management), the potential for returns linked to the model and the optionality of projects look great.

 

I think investing in Altius is best viewed using a weighted probability scenarios. In a way, the valuation has to include a component allocated to the royalty streams and another component that can be assessed using a venture capital profile. Altius will continue to be involved in a cyclical game and “stable” growth will never occur but a modified concept of terminal value applies. It is very difficult to assess the “option” value as investments are often made very early in the life of projects. Investing in Altius is partly, just like with Franco-Nevada in the early days, an act of faith.

 

Under the right conditions, I would partner with them.

 

Very long term, commodities prices have been on the way down. A growing population and relatively scarce resources will likely reverse that trend (Grantham et al), but that may take a while.

 

In terms of where prices are going from here in the short to mid-term, it’s anybody’s guess with many variables, including India. But I submit that there is an elephant in the room: China, which has played a gigantic role in the recent super-cycle on the way up and which will be a determinant factor going forward. Not an “expert” on China and conclusions based on data described below.

 

In the last 30 years, in an unprecedented way, China, with its new and relatively unique model (state-controlled with a degree of free market incentives) has become an industrial and manufacturing powerhouse. From year 2000 to now, China’s share of global GDP went from less than 4% to more than 15%. China, from 2002 to 2015, went from 18% to 50% of the world’s consumption of base metals. Between 2002 and 2014, the increase in Chinese demand was large enough to absorb essentially all of the increase in global metals consumption. During that period, China, in substance, explained the exceptional and sustained upward cycle in commodity prices and the recent “slowing” in “official” rates of GDP growth (+ implicit effect of supply lag effect) explains the downward trend in commodity prices that occurred starting in 2011-2. China went through the largest capital spending boom of History.

 

Since the 2008-9 financial crisis, China has embarked on a large-scale and unprecedented stimulus program based on infrastructure, real estate and debt. Since 2008, China has constituted about 50% of global GDP growth. The numbers are staggering. IMO, China has become the biggest credit bubble of all times. This has been going on for about 10 years and there is apparently no end in sight.

 

The consensus view, despite some noise, is mostly benign. And, recently, commodity prices have started to trend upwards. If that’s the case (benign scenario), Altius returns look promising.

 

With all due respect, this is not my opinion. China has, in theory, entered a transition phase from production to consumption at a time when:

-there has been an amazing amount of capital misallocation

-a gargantuan stimulus program based on unsustainable debt continues to be deployed

-they have an institutional platform that is not adequate for creative destruction and transitions

-they recently modified the political platform resulting in a more rigid and extractive structure

 

IMHO, the consensus view does not discount appropriately the possibility of significant decrease in commodity demand due to China, a meltdown and regime disintegration. My take on the situation is that China will not simply muddle through; it will succeed or fail. Your pick.

 

Conclusion: Altius has great potential and possesses characteristics to be a long term survivor. However, my take on the short and mid-term commodity outlook is different. Using a weighted probability scenario analysis in connection with expectations of commodity prices going forward, I submit that the value potential is not there at this point.

 

Disappointment after all the time spent but, FWIW, that’s where I stand. Will keep following.

 

[hohi]

Tthanks for the input, much appreciated!

[nostradamus]

Thanks also Cigarbutt. I guess buying Altius and shorting mining in general may still make sense with your outlook.

 

FWIW: my view is that if the china credit bubble does pop (and pops in a way that stops it being able/willing to continue to buy large quantities of commodities, which is not a given), there will be lots of suffering in the mining industry that will provide opportunities for Altius. Leveraged companies will start off loading great long term assets just to stay afloat, which Altius can pick up. The possibility of a day of reckoning in the global credit bubble (not just China) is what makes me so keen for Altius to pay down/off its debt as soon as possible. Companies that go into that period with low leverage and high cash (or high cash flow), can make a killing. Obviously the Altius SP suffer during such a downturn, but the belief/expectation that it will ultimately be able to take advantage of the situation is what makes me comfortable with the downside risks.