linealdin Posted March 4, 2019 Share Posted March 4, 2019 What competitive advantage does Altius have with renewable energy that would allow it to earn superior returns compared to other players in the space? Competitive advantage: first mover. Altius has invented the asset category of renewable energy royalties. They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. They will pay US$30 million for royalties which will pay US$400 million over the next 100 years. In the gold royalty space they pay $30 million for a royalty which will pay $45 million over the next 15 years and call it a victory. Link to comment Share on other sites More sharing options...
linealdin Posted March 4, 2019 Share Posted March 4, 2019 Yes, Wachtwoord that seems concerning to me too. Royalty model on land to build windmills or solar systems doesn't seem to work as well. No saying whether electricity will follow inflation. We could see a lot of deflation in energy prices or even particular types of energy like we are already seeing in Germany. It seems like lending money where they only pay interest IF they are generating revenue. Also not clear why (in case of a bankruptcy or something) another operator would take over and the royalty would remain valuable. I The wind farms will sign initial 20 to 25 year energy supply contracts. The revenue will be steady and predictable for that time period. Followup contracts will be in higher or lower electricity price environments. Altius is investing in the best wind farms on the planet. Those farm operators only go bankrupt if wind energy becomes a sunset industry. Link to comment Share on other sites More sharing options...
wachtwoord Posted March 4, 2019 Share Posted March 4, 2019 What competitive advantage does Altius have with renewable energy that would allow it to earn superior returns compared to other players in the space? Competitive advantage: first mover. Altius has invented the asset category of renewable energy royalties. They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. They will pay US$30 million for royalties which will pay US$400 million over the next 100 years. In the gold royalty space they pay $30 million for a royalty which will pay $45 million over the next 15 years and call it a victory. Two comments: 1) Those cash flows need to be discounted to present net value ($45M in 15 years CAN be vastly superior to $400M in 100 years). (I know you don't agree on discounting linealdin, so don't want to open up that can of worms ....) 2) Isn't the renewable exposure of Pardee Resources also in the form of royalties (or similar enough)? They don't own the facilities iirc (and have government guarantees for minimum prices and volume and were awarded tax credits to use on their other income). PS: thanks for answering my question. If I understand correctly you believe their moat is the superiority of the assets. I have my doubts (gut feeling) but can't disprove that so these investments are making me uncomfortable. I would prefer more iron or some nicely hated coal :p Link to comment Share on other sites More sharing options...
linealdin Posted March 4, 2019 Share Posted March 4, 2019 What competitive advantage does Altius have with renewable energy that would allow it to earn superior returns compared to other players in the space? Competitive advantage: first mover. Altius has invented the asset category of renewable energy royalties. They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. They will pay US$30 million for royalties which will pay US$400 million over the next 100 years. In the gold royalty space they pay $30 million for a royalty which will pay $45 million over the next 15 years and call it a victory. Two comments: 1) Those cash flows need to be discounted to present net value ($45M in 15 years CAN be vastly superior to $400M in 100 years). (I know you don't agree on discounting linealdin, so don't want to open up that can of worms ....) 2) Isn't the renewable exposure of Pardee Resources also in the form of royalties (or similar enough)? They don't own the facilities iirc (and have government guarantees for minimum prices and volume and were awarded tax credits to use on their other income). PS: thanks for answering my question. If I understand correctly you believe their moat is the superiority of the assets. I have my doubts (gut feeling) but can't disprove that so these investments are making me uncomfortable. I would prefer more iron or some nicely hated coal :p Option A: $45 million over 15 years. Then nothing. Option B: $400 million over the next 100 years = $60 million over the first 15 years. Then another $340 million over the next 85 years after that. Don’t be a speadsheet warrior. Just use your common sense. Link to comment Share on other sites More sharing options...
linealdin Posted March 4, 2019 Share Posted March 4, 2019 Pardee Resources owns small scale solar facilities. Not royalties. Link to comment Share on other sites More sharing options...
linealdin Posted March 4, 2019 Share Posted March 4, 2019 https://www.google.com/amp/s/www.businessinsider.com.au/iron-ore-price-china-smog-alert-2019-3/amp A clear example of the Asian Brown Cloud (mentioned by Brian Dalton as a key catalyst in commodities) in action. A Chinese steel producing city issues a smog alert and high grade iron ore prices leap. The higher grade ore yields more steel for the same level of air emissions. The ChiComs view air pollution as an existential problem. They need to eliminate the Brown Cloud to prevent large scale social unrest leading to potential regime change. It’s dead serious for them. Therefore the high grade, low contaminant ore from the Trough becomes more and more of a premium product over the next 20 years. Champion Iron closes at A$2 in the Aussie market. Equals C$1.88 per share. Incredible run since late December. Link to comment Share on other sites More sharing options...
Liberty Posted March 4, 2019 Share Posted March 4, 2019 What competitive advantage does Altius have with renewable energy that would allow it to earn superior returns compared to other players in the space? Competitive advantage: first mover. Altius has invented the asset category of renewable energy royalties. They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. Doesn't sound like a competitive advantage to me. A royalty is just a way to structure a financial deal and probably dates back to before the Pharaohs (what is a tax but a royalty on someone's income or revenue?), and I don't see how there's a first mover advantage in the field (this isn't technology where doing R&D takes time or there are trade secrets). Anyone with money can go offer it to RE developers on similar terms if it's somehow preferred by them. Without a competitive advantage, why do we expect the IRR on the money they invested in that wind farm to be much above the average return that some other source of capital would've gotten? They will pay US$30 million for royalties which will pay US$400 million over the next 100 years. In the gold royalty space they pay $30 million for a royalty which will pay $45 million over the next 15 years and call it a victory. If you invest 30m and get back 400m over 100 years, that's a CAGR of 2.62%. If you invest 30m and get back 45 over 15 years, that's a CAGR of 2.74%. (and this is the generous math where I assume the principal is received on top of the amounts you stated and that 100% of the amount is FCF) I can't say I find that very exciting... Link to comment Share on other sites More sharing options...
linealdin Posted March 4, 2019 Share Posted March 4, 2019 What competitive advantage does Altius have with renewable energy that would allow it to earn superior returns compared to other players in the space? Competitive advantage: first mover. Altius has invented the asset category of renewable energy royalties. They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. Doesn't sound like a competitive advantage to me. A royalty is just a way to structure a financial deal and probably dates back to before the Pharaohs (what is a tax but a royalty on someone's income or revenue?), and I don't see how there's a first mover advantage in the field (this isn't technology where doing R&D takes time or there are trade secrets). Anyone with money can go offer it to RE developers on similar terms if it's somehow preferred by them. Without a competitive advantage, why do we expect the IRR on the money they invested in that wind farm to be much above the average return that some other source of capital would've gotten? They will pay US$30 million for royalties which will pay US$400 million over the next 100 years. In the gold royalty space they pay $30 million for a royalty which will pay $45 million over the next 15 years and call it a victory. If you invest 30m and get back 400m over 100 years, that's a CAGR of 2.62%. If you invest 30m and get back 45 over 15 years, that's a CAGR of 2.74%. (and this is the generous math where I assume the principal is received on top of the amounts you stated and that 100% of the amount is FCF) I can't say I find that very exciting... The same mistake again and again. The $400 million is received in installments every month as royalty revenue. That monthly royalty revenue is in turn reinvested (interest-bearing account initially, then eventually into new royalties). Continual reinvestment means the total pot of money received in relation to the investment should be much larger than $400 million. Link to comment Share on other sites More sharing options...
bizaro86 Posted March 4, 2019 Share Posted March 4, 2019 Can we not do this discussion again? Link to comment Share on other sites More sharing options...
Liberty Posted March 4, 2019 Share Posted March 4, 2019 Can we not do this discussion again? Agreed. You can bring a horse to the water, but you can't make him drink. Link to comment Share on other sites More sharing options...
linealdin Posted March 4, 2019 Share Posted March 4, 2019 To calculate CAGR you need a start value and an end value. The end value can only be established if you reinvest the expected monthly royalty payments at an appropriate interest rate. This is noncontroversial. Link to comment Share on other sites More sharing options...
hohi Posted March 4, 2019 Share Posted March 4, 2019 [...] They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. [...] O'RLY? :) 1.) not best wind farms on the planet 2.) not best/"ideal" locations on the planet 3.) not massive scale Sorry, could not resist. I come from a place where a lot of wind energy is created... I still think it is a good deal though. imho the projects will be expanded by at least a factor of 2-3 over time. Link to comment Share on other sites More sharing options...
linealdin Posted March 4, 2019 Share Posted March 4, 2019 [...] They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. [...] O'RLY? :) 1.) not best wind farms on the planet 2.) not best/"ideal" locations on the planet 3.) not massive scale Sorry, could not resist. I come from a place where a lot of wind energy is created... I still think it is a good deal though. imho the projects will be expanded by at least a factor of 2-3 over time. Aside from offshore locations (different ball of wax) what’s a better place to build wind farms than West Texas? Link to comment Share on other sites More sharing options...
wachtwoord Posted March 5, 2019 Share Posted March 5, 2019 [...] They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. [...] O'RLY? :) 1.) not best wind farms on the planet 2.) not best/"ideal" locations on the planet 3.) not massive scale Sorry, could not resist. I come from a place where a lot of wind energy is created... I still think it is a good deal though. imho the projects will be expanded by at least a factor of 2-3 over time. Aside from offshore locations (different ball of wax) what’s a better place to build wind farms than West Texas? Off shore like you say. There's a lot of offshore in the world. Anyway it's not this specific wind investment I'm not happy with, it's basically all alternative energy investments. I doubt any of those have good risk adjusted returns. It's way too trendy right now and a lot of naive interest (countries looking to go 90% "green" in a decade LMAO), government support etc. I'm expecting it to be priced to perfection (of course I know little to nothing about individual projects, but I'm arguing it's the wrong market right now). Coal on the other hand is hated but won't go away for decades. I'm a contrarian at heart, I thought Altius and Dalton were too ... Link to comment Share on other sites More sharing options...
SharperDingaan Posted March 5, 2019 Share Posted March 5, 2019 [...] They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. [...] O'RLY? :) 1.) not best wind farms on the planet 2.) not best/"ideal" locations on the planet 3.) not massive scale Sorry, could not resist. I come from a place where a lot of wind energy is created... I still think it is a good deal though. imho the projects will be expanded by at least a factor of 2-3 over time. Aside from offshore locations (different ball of wax) what’s a better place to build wind farms than West Texas? Off shore like you say. There's a lot of offshore in the world. Anyway it's not this specific wind investment I'm not happy with, it's basically all alternative energy investments. I doubt any of those have good risk adjusted returns. It's way too trendy right now and a lot of naive interest (countries looking to go 90% "green" in a decade LMAO), government support etc. I'm expecting it to be priced to perfection (of course I know little to nothing about individual projects, but I'm arguing it's the wrong market right now). Coal on the other hand is hated but won't go away for decades. I'm a contrarian at heart, I thought Altius and Dalton were too ... Think of a wind farm as a patch of farm land on which you are getting a small share of the energy crop. Over time there will be a bigger crop as farming methods change. Bigger, cheaper, more efficient, more effective windmills producing more electricity per sweep of the blade, and more sweeps/second at all windspeeds. But you are not having to pay any of the capital costs in replacing/upgrading those windmills. You get the benefits - but none of the costs. No different to getting a royalty on a mines production, and a royalty extension if new deposits are found adjacent to the mine. Or discovering that the existing mine tailings (ie: cobalt) are now commercially viable to re-process. Hence not really a big stretch. SD Link to comment Share on other sites More sharing options...
linealdin Posted March 5, 2019 Share Posted March 5, 2019 http://altiusminerals.com/uploads/PDAC-Corporate-Presentation-02-07-19-Printable-Version-FINAL.pdf Altius PDAC presentation with some news about Lithium Royalty Corp. Altius has exercised its co-participation right on 3 lithium royalties: Mt Cattlin from Galaxy Resources (currently yielding A$2.7 million annually to LRC) Tres Quebradas from Neo Lithium (1% royalty) Groto do Cirili from Sigma Lithium (1% royalty) Link to comment Share on other sites More sharing options...
linealdin Posted March 5, 2019 Share Posted March 5, 2019 The Tres Quebradas PEA states that the project will produce US$7.7 billion in revenue over a 20 year mine life. LRC’s 1% gross overriding royalty would yield US$77 million. Altius’s 10% direct participation in that royalty yields US$7.7 million. Or C$514K annually over a 20 year mine life. * By my rough estimate Groto do Cirilo’s initial projects (Xuxa and Barreiro) yield US$6.2 billion in revenue, mine life unknown. LRC’s 1% gross overriding royalty yields US$62 million. Altius’s 10% direct participation yields US$6.2 million, or C$8.7 million over the life of the first 2 projects (there are additional deposits). * These are small royalties for Altius but I’m happy LRC has been able to execute on its plan. LRC is a source of regular royalty deal flow for Altius. Link to comment Share on other sites More sharing options...
wachtwoord Posted March 5, 2019 Share Posted March 5, 2019 [...] They’ve secured a package of royalties on the best wind farms on the planet. Ideal location, massive scale, ideal social acceptance, best available turbine technology. [...] O'RLY? :) 1.) not best wind farms on the planet 2.) not best/"ideal" locations on the planet 3.) not massive scale Sorry, could not resist. I come from a place where a lot of wind energy is created... I still think it is a good deal though. imho the projects will be expanded by at least a factor of 2-3 over time. Aside from offshore locations (different ball of wax) what’s a better place to build wind farms than West Texas? Off shore like you say. There's a lot of offshore in the world. Anyway it's not this specific wind investment I'm not happy with, it's basically all alternative energy investments. I doubt any of those have good risk adjusted returns. It's way too trendy right now and a lot of naive interest (countries looking to go 90% "green" in a decade LMAO), government support etc. I'm expecting it to be priced to perfection (of course I know little to nothing about individual projects, but I'm arguing it's the wrong market right now). Coal on the other hand is hated but won't go away for decades. I'm a contrarian at heart, I thought Altius and Dalton were too ... Think of a wind farm as a patch of farm land on which you are getting a small share of the energy crop. Over time there will be a bigger crop as farming methods change. Bigger, cheaper, more efficient, more effective windmills producing more electricity per sweep of the blade, and more sweeps/second at all windspeeds. But you are not having to pay any of the capital costs in replacing/upgrading those windmills. You get the benefits - but none of the costs. No different to getting a royalty on a mines production, and a royalty extension if new deposits are found adjacent to the mine. Or discovering that the existing mine tailings (ie: cobalt) are now commercially viable to re-process. Hence not really a big stretch. SD Who is investing in the energy farm though if they have to share the profit with you (who is not contributing capex)? Why would someone do this and not just start a new energy farm on a fresh patch of land with no pre-existing royalty deals? This is not possible with metals since they are in 1 physical location. Not true for energy generation however. Link to comment Share on other sites More sharing options...
linealdin Posted March 5, 2019 Share Posted March 5, 2019 It is much more expensive and time-consuming (permitting and social license) to build a wind farm from scratch versus repowering or expanding an existing wind farm. Don’t make too much of Altius’s 3% royalty as a burden. All the landowners and stakeholders receive royalties under Tri Global’s development model. That’s how they gain 100% social license. It’s been very successful for them over the last 10 years. Altius is a small slice of the total royalty payout. And you can’t just build a wind farm whever you like. It has to be located somewhere with excellent wind conditions and transmission lines. Texas spent $10 billion building a transmission grid connecting West Texas to major population centers like Dallas-Fort Worth and Houston. Tri Global believes it has locked up some of the best development sites for wind energy in the US. Don’t underestimate Tri Global’s work to obtain social license. Popular opposition and lawsuits killed the Cape Wind project near Nantucket. The Northeast liberal elite like renewable energy in theory but don’t want turbines obstructing their million dollar ocean views. Link to comment Share on other sites More sharing options...
linealdin Posted March 5, 2019 Share Posted March 5, 2019 Was it a competitive advantage for Franco Nevada to have invented the gold royalty business? Was it a competitive advantage for Silver Wheaton to have invented the streaming business? Will it be a competitive advantage for Altius to invent the renewable energy royalty business? Yes, yes, and most likely. Link to comment Share on other sites More sharing options...
Liberty Posted March 5, 2019 Share Posted March 5, 2019 Was it a competitive advantage for Franco Nevada to have invented the gold royalty business? Was it a competitive advantage for Silver Wheaton to have invented the streaming business? Will it be a competitive advantage for Altius to invent the renewable energy royalty business? Yes, yes, and most likely. If these companies have a durable competitive advantage, it's not because they have invented a model that can be copied by anyone. Maybe they are better at sourcing deals than others or have more talented management or whatever (which is an open question for Altius), but inventing a financing contract that anyone else can copy isn't a competitive advantage. Being a first mover can provide an advantage for a time, but if what you're doing is providing good returns and nothing stops others from doing the same, that advantage will be competed away. It's capitalism 101. That's what a competitive advantage is, it keeps competition away so that you can maintain higher ROIC. But what keeps competition away when you invent a new financing contract? Link to comment Share on other sites More sharing options...
linealdin Posted March 5, 2019 Share Posted March 5, 2019 Was it a competitive advantage for Franco Nevada to have invented the gold royalty business? Was it a competitive advantage for Silver Wheaton to have invented the streaming business? Will it be a competitive advantage for Altius to invent the renewable energy royalty business? Yes, yes, and most likely. If these companies have a durable competitive advantage, it's not because they have invented a model that can be copied by anyone. Maybe they are better at sourcing deals than others or have more talented management or whatever (which is an open question for Altius), but inventing a financing contract that anyone else can copy isn't a competitive advantage. Being a first mover can provide an advantage for a time, but if what you're doing is providing good returns and nothing stops others from doing the same, that advantage will be competed away. It's capitalism 101. That's what a competitive advantage is, it keeps competition away so that you can maintain higher ROIC. But what keeps competition away when you invent a new financing contract? I agree it's not a permanent advantage. But Altius will have a few years to lock in accretive royalty deals with the best players in renewable energy. (I'd like to see another US$30 million deployed into solar and hydro.) Tri Global Energy has been the leading developer of wind energy in the United States in recent years (in terms of MW installed). Altius hooked the biggest fish in the pond. It helps that there are no other fishermen. Link to comment Share on other sites More sharing options...
Cardboard Posted March 6, 2019 Share Posted March 6, 2019 I think you will appreciate this Linealdin! https://www.bnnbloomberg.ca/investing/video/rick-rule-s-past-picks~1628128 Link to comment Share on other sites More sharing options...
Liberty Posted March 6, 2019 Share Posted March 6, 2019 Rick Rule is the best and slickest salesman in the industry. I know because about 10 years ago, I found all his interviews and loved listening to him. He sounds so smart and thoughtful and knowledgeable. Doesn't sound at all like he's selling you something. I remember back in the day he was really pounding the table on some of the geothermal power companies... I looked up a few. Ram Power has a website that hasn't been updated since 2012 and isn't listed anymore, Magma Energy merged with some other players (probably in distress) who then got bought be Alterra, a company who's stock hasn't been going anywhere... Rule was saying similarly glowing things about Altius many years ago, back when the stock was the same price as now but the SP500 was probably around 1100-200. Link to comment Share on other sites More sharing options...
linealdin Posted March 6, 2019 Share Posted March 6, 2019 Rick Rule is the best and slickest salesman in the industry. I know because about 10 years ago, I found all his interviews and loved listening to him. He sounds so smart and thoughtful and knowledgeable. Doesn't sound at all like he's selling you something. I remember back in the day he was really pounding the table on some of the geothermal power companies... I looked up a few. Ram Power has a website that hasn't been updated since 2012 and isn't listed anymore, Magma Energy merged with some other players (probably in distress) who then got bought be Alterra, a company who's stock hasn't been going anywhere... Rule was saying similarly glowing things about Altius many years ago, back when the stock was the same price as now but the SP500 was probably around 1100-200. Rule’s geothermal theme did NOT work out. For the sake of accuracy (because Liberty is so often wrong when it gets to the detail level): Ram Power is now Polaris Infrastructure. It still trades. Alterra was acquired by a utility for $1.1 billion a few years ago. I won’t go into the counterexamples of when Rule’s picks have made extraordinary gains because it is too boring to play that game. Link to comment Share on other sites More sharing options...
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