ALS.TO - Altius Minerals

[linealdin]

Complaints about Callinan/777 royalty purchase also completely off base.

 

Callinan only cost C$67 million after subtracting the cash and investments (which have greatly appreciated) Callinan held at the time of purchase.

 

777 has returned roughly C$38.5 million through the end of 2018 (57.3% payback), with 3 years more mine life.

 

But Excelsior is going into production this summer. By my calculations Altius will receive C$110 million to C$140 million over the life of the mine (depending on recoveries and copper prices). Excelsior royalty and royalty options were inherited from Callinan. This is a huge potential win.

 

And I hold out hope for realizing option value from the Cuale and Adventus Irish royalties (all from Callinan).

 

 

 

[linealdin]

So the thesis that Altius’s stock price is suffering because it made bad deals with coal and 777? Dead wrong.

 

Altius’s stock price is down because the sellers are rock stupid.

[linealdin]

http://altiusminerals.com/uploads/2019--01-17-Corporate-Presentation-VRIC-FINAL-v2.pdf

 

Altius January presentation. Next to last slide shows Altius is very undervalued compared to its royalty peers in terms of EV/EBITDA, P/CF, and P/NAV.

[linealdin]

Altius is somewhat agnostic about about deal structure. They love royalties but they’ve spent many millions buying equity and issuing debt (Champion 8% interest debenture and Alderon 10% interest loan) in recent years. They go where the value is.

 

The nice thing about royalties is that they capture the long-dated revenue streams that the spreadsheet boys discount into non-existence.

[linealdin]

What’s the average price of copper for the next 10 years? $2 or $3.50?

 

I’m betting heavily on the latter (with short spikes to $5 and beyond). The spur is a lack of supply, a documented lack of new copper discoveries and aging existing mines. Facts, not speculation.

 

$2 copper for the next decade seems very unlikely but I will accept my losses if it becomes reality.

 

 

[Liberty]

Updated Prairie Coal Payback calculation (electrical and met coal):

 

C$77.338 million in royalties received (through 12/31/18).

 

C$120.45 million purchase price (50% of Prairie Royalties purchase price of C$240.9 million, the other 50% assigned to the potash royalties).

 

= 64.2% payback in 4.75 years.

 

Napkin math: So you're saying at that rate it would take them ˜7.4 years to achieve "payback" (which is a fuzzy term that doesn't include expenses, but let's say we assume that 100% of revenue is FCF, which it isn't). That's a return of about 13.5% year (non compounded, since it's not reinvested -- it would be 9.8% CAGR). But since the coal stream will end at some point in the not-that-distant future, it shouldn't be valued as an open-ended annuity-like stream that can grow (can't just slap a multiple on it to capitalize it), but rather DCF'ed as a melting ice cube where a lot of the return is basically a return OF capital rather than a return ON capital.

 

If you buy an operating business that yields 13.5% a year in FCF, you get that money, and then at some point in the future if you want, you can usually sell the business (and hopefully you have organic reinvestment opportunities at good ROICs). If it did well and grew and maintained competitive position, you can sell it for more than you paid for. If you have a royalty that returns 13.5% (non-compounded, and let's remember that this number is for revenues, not actual FCF) a year, but is known to end at some point, after a while you can't sell the royalty for more than you paid for, since there's left time left on the clock and less whatever the royalty is on left in the ground there. It's kind of like an option that is closer to expiration, on top of a mine with less ore left in it. So I'd guess the actual economic value accretion to a shareholder is probably somewhere in the mid-single digits.

[linealdin]

Why aren’t royalty revenues reinvested in your model? When Altius receives its monthly royalty payments the money goes into the interest-earning bank account. Then the money, along with any interest earned, is reinvested, eventually, in new royalties (or equity or loans or whatever).

 

This is not academic. The electrical coal royalties are currently being reinvested in new renewable energy royalties. Altius believes it can reinvest the C$120 million+ that it expects to receive from electrical coal into energy royalties with potentially infinite lifespans. See slide 15 of the Blue Sky presentation:

 

http://altiusminerals.com/uploads/Blue-Sky---Altius-Presentation-FINAL.pdf

[linealdin]

The hypothetical operating business yielding 13.5% cash flow sounds great. In reality that operating business faces uncertainties: outsize profits attract competition; management can get complacent; operating costs can rise; consumer tastes could change; etc. Operating businesses can lose money.

 

Royalty holders just collect checks every month. They never contribute more cash after their initial royalty purchase and they never suffer the type of operating loss that operating businesses sometimes suffer.

[nostradamus]

https://www.businesswire.com/news/home/20190121005076/en/Altius-Announces-Purchase-2-NSR-Royalty-Curipamba

 

Altius Announces Purchase of 2% NSR Royalty on Curipamba Copper-Gold-Zinc Project, Ecuador

 

Altius Minerals Corporation (“Altius”) (TSX: ALS; OTCQX: ATUSF) reports that it has entered into an agreement to acquire a 2% Net Smelter Return Royalty covering the Curipamba copper-gold-zinc project (the “Curipamba Project”) from Resource Capital Fund VI L.P. and RCF VI SRL LLC (collectively, “RCF”) for US$10 million in cash.

 

The Curipamba Project, located in central Ecuador, is being developed under a 75:25 partnership between Adventus Zinc Corporation (“Adventus”) (TSX-V: ADZN; OTCQX: ADVZF), and Salazar Resources Ltd. (TSX-V: SRL). Altius currently holds 21% of the outstanding shares of Adventus.

 

The Curipamba Project includes the resource stage El Domo deposit, a near-surface, copper and gold rich massive sulphide deposit that has seen more than 50,000 metres of drilling to date, including approximately 18,000 metres in 2018. On January 31, 2018 Adventus announced the El Domo resource consists of Indicated Mineral Resources of 8.8 million tonnes grading 1.62% copper, 2.42% zinc, 0.27% lead, 2.34 g/t gold, and 48 g/t silver and Inferred Mineral Resources of 2.6 million tonnes grading 1.29% copper, 1.51% zinc, 0.14% lead, 1.09 g/t gold, and 29 g/t silver. An updated mineral resource estimate and Preliminary Economic Assessment is currently underway and is expected to be released during the first half of 2019. The Curipamba Project also encompasses more than 22,000 hectares of mineral rights that host several other prospective targets, many of which are expected to be advanced and tested during 2019.

 

[Liberty]

Why aren’t royalty revenues reinvested in your model? When Altius receives its monthly royalty payments the money goes into the interest-earning bank account. Then the money, along with any interest earned, is reinvested, eventually, in new royalties (or equity or loans or whatever).

 

This is not academic. The electrical coal royalties are currently being reinvested in new renewable energy royalties. Altius believes it can reinvest the C$120 million+ that it expects to receive from electrical coal into energy royalties with potentially infinite lifespans. See slide 15 of the Blue Sky presentation:

 

http://altiusminerals.com/uploads/Blue-Sky---Altius-Presentation-FINAL.pdf

 

I'm not saying they are not reinvesting them, I'm saying the royalty itself doesn't have internal, organic reinvestment opportunities, unlike a lot of operating businesses. If they do re-invest the money in other things that have similar rates of return, then yes, they'll get that single-digit CAGR over time, but historically they haven't been able to deploy everything and have sat on a lot of cash for many many years, so it's hard to argue that they can - on average - reinvest everything.

[linealdin]

Why aren’t royalty revenues reinvested in your model? When Altius receives its monthly royalty payments the money goes into the interest-earning bank account. Then the money, along with any interest earned, is reinvested, eventually, in new royalties (or equity or loans or whatever).

 

This is not academic. The electrical coal royalties are currently being reinvested in new renewable energy royalties. Altius believes it can reinvest the C$120 million+ that it expects to receive from electrical coal into energy royalties with potentially infinite lifespans. See slide 15 of the Blue Sky presentation:

 

http://altiusminerals.com/uploads/Blue-Sky---Altius-Presentation-FINAL.pdf

 

I'm not saying they are not reinvesting them, I'm saying the royalty itself doesn't have internal, organic reinvestment opportunities, unlike a lot of operating businesses. If they do re-invest the money in other things that have similar rates of return, then yes, they'll get that single-digit CAGR over time, but historically they haven't been able to deploy everything and have sat on a lot of cash for many many years, so it's hard to argue that they can - on average - reinvest everything.

 

Organic reinvestment opportunities: a nice way of spinning the unrelenting annual costs of capital expenditures just to “sustain” the operating business.

 

Altius has reinvested all C$200 million plus from their big Aurora uranium score. Altius has deployed all C$100 million from the Fairfax investment into accretive royalty, equity and debt purchases. They just bought an excellent potash royalty portfolio for C$65 million. Deal sheets are now concluding for new lithium and renewable energy royalties. Facts not fantasies.

 

Reinvesting their very healthy monthly royalty revenue is not an issue in this target rich environment. Opportunities will decrease, of course, as commodity prices run through the apex of a bull market (but that seems a long ways off).

 

Liberty is still stuck in the perspective of 2012-era Altius, when the main concerns were Alderon and when Brian Dalton would pull the trigger on a major royalty purchase. Oudated old school concerns.

[linealdin]

The seed equity investments in Lithium Royalty Corp and Blue Sky Royalties, and the related co-investment rights, are a means of creating continual royalty deal flow for reinvestment purposes. The principals of those firms will do the legwork of creating deal flow and presenting Altius with coinvestment opportunities.

 

One lithium royalty has been purchased so far. Lots more deals in the works right now.

[Liberty]

Organic reinvestment opportunities: a nice way of spinning the unrelenting annual costs of capital expenditures just to “sustain” the operating business.

 

No. I'm talking about growth investments at high ROIC, not maintenance capex. You know, like when Texas Instruments invests in designing a new chip and then keeps selling it for decades at 60% gross margins or whatever.

 

Altius has reinvested all C$200 million plus from their big Aurora uranium score. Altius has deployed all C$100 million from the Fairfax investment into accretive royalty, equity and debt purchases. They just bought an excellent potash royalty portfolio for C$65 million. Deal sheets are now concluding for new lithium and renewable energy royalties. Facts not fantasies.

 

Reinvesting their very healthy monthly royalty revenue is not an issue in this target rich environment. Opportunities will decrease, of course, as commodity prices run through the apex of a bull market (but that seems a long ways off).

 

Liberty is still stuck in the perspective of 2012-era Altius, when the main concerns were Alderon and when Brian Dalton would pull the trigger on a major royalty purchase. Oudated old school concerns.

 

I know you're very happy with your mid-to-high single digit returns, but by your own logic, if commodity prices go back up, they'll probably be lacking re-investment opportunities because things will be too expensive, so looking at it from the point of view of the whole cycle - which includes the past decade - makes more sense than cherry-picking only what fits your narrative.

[linealdin]

WHEN commodity prices go sky high there will be fewer accretive reinvestment opportunities for a period. Fewer reinvestment opportunities for smart people, anyway. But commodity bubbles eventually pop (because everyone else in the industry is making top of the cycle investments). When that bubble pops Altius will be sitting pretty with C$500 million or so in hard cash to redeploy aggressively at the very bottom of the cycle. Rinse and repeat. It just takes discipline and a contrarian mindset.

[linealdin]

https://www.businesswire.com/news/home/20190121005076/en/Altius-Announces-Purchase-2-NSR-Royalty-Curipamba

 

Altius Announces Purchase of 2% NSR Royalty on Curipamba Copper-Gold-Zinc Project, Ecuador

 

Altius Minerals Corporation (“Altius”) (TSX: ALS; OTCQX: ATUSF) reports that it has entered into an agreement to acquire a 2% Net Smelter Return Royalty covering the Curipamba copper-gold-zinc project (the “Curipamba Project”) from Resource Capital Fund VI L.P. and RCF VI SRL LLC (collectively, “RCF”) for US$10 million in cash.

 

The Curipamba Project, located in central Ecuador, is being developed under a 75:25 partnership between Adventus Zinc Corporation (“Adventus”) (TSX-V: ADZN; OTCQX: ADVZF), and Salazar Resources Ltd. (TSX-V: SRL). Altius currently holds 21% of the outstanding shares of Adventus.

 

The Curipamba Project includes the resource stage El Domo deposit, a near-surface, copper and gold rich massive sulphide deposit that has seen more than 50,000 metres of drilling to date, including approximately 18,000 metres in 2018. On January 31, 2018 Adventus announced the El Domo resource consists of Indicated Mineral Resources of 8.8 million tonnes grading 1.62% copper, 2.42% zinc, 0.27% lead, 2.34 g/t gold, and 48 g/t silver and Inferred Mineral Resources of 2.6 million tonnes grading 1.29% copper, 1.51% zinc, 0.14% lead, 1.09 g/t gold, and 29 g/t silver. An updated mineral resource estimate and Preliminary Economic Assessment is currently underway and is expected to be released during the first half of 2019. The Curipamba Project also encompasses more than 22,000 hectares of mineral rights that host several other prospective targets, many of which are expected to be advanced and tested during 2019.

 

Beautiful royalty purchase. I’ve long believed Curipamba is destined to become a mine: one of the highest grade VMS deposits on the planet.

 

More copper! More zinc! Nice gold and silver credits too.

[linealdin]

Back of the envelope calculation for the Curipamba 2% royalty:

 

Purchase price: US$10 million

 

Potential revenue: 11.4 million tonne resource x 5.5% copper equivalent x 75% metal recovery x $3 per pound copper x 2% royalty = US$62 million

 

Adventus promises to deliver a new resource estimate based upon the successful 2018 drill program before PDAC in March. Altius, with board seats and advisors at Adventus, likely has a good idea of what the new resource will deliver.

 

I want to see 15 million tonnes at 6% copper equivalent.

[Liberty]

WHEN commodity prices go sky high there will be fewer accretive reinvestment opportunities for a period. Fewer reinvestment opportunities for smart people, anyway. But commodity bubbles eventually pop (because everyone else in the industry is making top of the cycle investments). When that bubble pops Altius will be sitting pretty with C$500 million or so in hard cash to redeploy aggressively at the very bottom of the cycle. Rinse and repeat. It just takes discipline and a contrarian mindset.

 

Ok, so you're agreeing with me that they don't have reinvestment opportunities through the cycle. I'm not saying it's the worst thing in the world, but it definitely should be taken into account when you look at what kind of returns they're able to generate, and you can't extrapolate from one period as if it would keep going on. If you have to spend many years with a large portion of your market cap sitting in cash earning nothing, it can't help but lower your overall returns (time value of money). Your obsession with absolute dollar amounts rather than relative amounts (ROIC, ROE, IRR) tends to hide rather than reveal what is going on.

 

Book value per share at ALS was C$6.59 in 2009, and last Q, almost 10 years later, it was C$8.29. This isn't the stock valuation, this is the equity, so don't talk to me about it being a bubble valuation or whatever. In fact, the P/BV has actually gone up since then, from about 1X in 2009, 1.13x in 2012, 1.46x in 2014, to about 1.69x recently... An increase is normal since they converted some of their cash to cashflowing assets, but it shows that it's not like they've been creating a ton of value under the water line and a dropping multiple has been hiding it.

[Liberty]

Back of the envelope calculation for the Curipamba 2% royalty:

 

Purchase price: US$10 million

 

Potential revenue: 11.4 million tonne resource x 5.5% copper equivalent x 75% metal recovery x $3 per pound copper x 2% royalty = US$62 million

 

Adventus promises to deliver a new resource estimate based upon the successful 2018 drill program before PDAC in March. Altius, with board seats and advisors at Adventus, likely has a good idea of what the new resource will deliver.

 

I want to see 15 million tonnes at 6% copper equivalent.

 

Over how long do you expect to see this $62m?

[linealdin]

Back of the envelope calculation for the Curipamba 2% royalty:

 

Purchase price: US$10 million

 

Potential revenue: 11.4 million tonne resource x 5.5% copper equivalent x 75% metal recovery x $3 per pound copper x 2% royalty = US$62 million

 

Adventus promises to deliver a new resource estimate based upon the successful 2018 drill program before PDAC in March. Altius, with board seats and advisors at Adventus, likely has a good idea of what the new resource will deliver.

 

I want to see 15 million tonnes at 6% copper equivalent.

 

Over how long do you expect to see this $62m?

 

I expect much, much more than US$62 million if the deposit is put into production. The last resource update of 11.4 million tonnes didn’t include the 18,000 meters of successful 2018 drilling at Curipamba. The VMS experts expect Curipamba to yield a minimum of 20 million tonnes of mineralization (El Domo as the giant surrounded by 4 or 5 satellite deposits like Sesmo).

 

The Adventus PEA due before PDAC will give a preliminary mine life. It obviously depends on how big a processing facility will be built. How many tonnes processed per day? How big can the deposit grow? Lots of variables. We will know more by March.

[Liberty]

I expect much, much more than US$62 million if the deposit is put into production. The last resource update of 11.4 million tonnes didn’t include the 15,000 meters of successful 2018 drilling at Curipamba. The VMS experts expect Curipamba to yield a minimum of 20 million tonnes of mineralization (El Domo as the giant surrounded by 4 or 5 satellite deposits like Sesmo).

 

The Adventus PEA due before PDAC will give a preliminary mine life. It obviously depends on how big a processing facility will be built. How many tonnes processed per day? How big can the deposit grow? Lots of variables. We will know more by March.

 

So you don't know. Ok.

[linealdin]

The recent copper price drop likely lowered the asking price for the Curipamba royalty. If copper were $3.30 instead of $2.69 the royalty becomes much more expensive.

 

There’s some blood in the streets and Altius is on the bid for bargains.

 

RCF paid Salazar Resources US$4.75 million for the royalty in 2017. They decided to play it safe and cash out 2 years later with more than double their original investment.

 

RCF periodically closes out funds (every 5 to 7 years?) and returns profits to investors. They don’t hold investments forever. Altius will hold the Curipamba royalty permanently. Win win deal?

[linealdin]

I expect much, much more than US$62 million if the deposit is put into production. The last resource update of 11.4 million tonnes didn’t include the 15,000 meters of successful 2018 drilling at Curipamba. The VMS experts expect Curipamba to yield a minimum of 20 million tonnes of mineralization (El Domo as the giant surrounded by 4 or 5 satellite deposits like Sesmo).

 

The Adventus PEA due before PDAC will give a preliminary mine life. It obviously depends on how big a processing facility will be built. How many tonnes processed per day? How big can the deposit grow? Lots of variables. We will know more by March.

 

So you don't know. Ok.

 

FYI Mine lives are determined by determined by 43-101 compliant reports like the Curipamba PEA (due in February or early March) or bankable feasibility studies (begun by Adventus and likely to be delivered by late 2019). Adventus will publically disclose the exact expected initial mine life at Curipamba. It won’t be a mystery for long.

[linealdin]

Altius could reinvest royalty proceeds evenly throughout the commodity cycle but that would be rock stupid. It obviously makes more sense to be ultra-aggressive at the bottom of the cycle and restrained at the top of the cycle. It’s a strategy.

 

Right now we seem to be at a trough. Investors shun commodities, are scared of China, the TSX Venture index is decimated. That’s why Altius is buying: Liberty potash in Q2 2018, another tranche of LIF in Q3 2018, an unnamed lithium royalty in Q4 2018, and now the Curipamba royalty early in Q1 2019.

 

Expect more.

[Liberty]

FYI Mine lives are determined by determined by 43-101 compliant reports like the Curipamba PEA (due in February or early March) or bankable feasibility studies (begun by Adventus and likely to be delivered by late 2019). Adventus will publically disclose the exact expected initial mine life at Curipamba. It won’t be a mystery for long.

 

I was trying to nudge you in the direction of taking time into account. Multiplying a bunch of numbers together based on press releases and going "$62m!" is of little value, and it makes a big difference if they get that money over a few years or over a few decades. Not to mention that they have no control over the price of the commodity, so if lucky it'll be high, but if unlucky, it could stay low for extended periods and make the deal a mediocre one.

[Liberty]

Altius could reinvest royalty proceeds evenly throughout the commodity cycle but that would be rock stupid. It obviously makes more sense to be ultra-aggressive at the bottom of the cycle and restrained at the top of the cycle. It’s a strategy.

 

Right now we seem to be at a trough. Investors shun commodities, are scared of China, the TSX Venture index is decimated. That’s why Altius is buying: Liberty potash in Q2 2018, another tranche of LIF in Q3 2018, an unnamed lithium royalty in Q4 2018, and now the Curipamba royalty early in Q1 2019.

 

Expect more.

 

I know the theory of buying low and selling high. I'm saying that once in a while, you have to stop looking at the theory and see if it has been working in practice. In this case, I'm not seeing anything very impressive in a long long time, ever since they were a tiny micro cap that nobody here knew about.

 

Whether they invest more in the bottom of the cycle or not doesn't change that the cash drag impact must be taken into account, and whatever value they can add by timing things has to more than make up for years of little-to-no-returns on that cash. There are businesses out there that can consistently reinvest retained earnings year after year, and sometimes it's better to do 10-15% consistently every year than to do 20% for 1-2 years and then 4% for 5-6 years...