ALS.TO - Altius Minerals

[Guest Dazel]

 

 

China has been heading into a recession for  half a decade....I would suggest "Unbalanced" The Codependancy of America and China....by Stepen Roach he has spent his career running Morgan Stanley Asia. I agree with him....China is not getting the same news you are and there is a reason for that.

His  thesis is China will move more towards urbanization instead of exports....this change has scared everyone.....for a long period of time...a slow move is what will benefit Altius the most...so they can acquire more royalties at fair prices...with cashflow they add.

 

Franco Nevada did 40% a year in 1983 through 2002...the worst bear market on record without China...Slow growth is fine for Altius and longer term better.

 

If you are a trader Altius is not the stock for you.

 

 

[Guest Dazel]

In reference to the rationality of markets...Altius will be priced at a multiple that is comparable  to the peer royalty companies of the world. It is no longer the smaller players that are contemplating "the right valuation". SD is all over this...

 

There is a market multiple for royalty companies...sometimes it is irrationally high but is rarely irrationally low because of the high quality of a royalty business with long term royalties with excellent counter parties. If Altius is to lag it's peers in it's cashflow and pipeline multiples the higher multiple royalty  companies will try to take it over.

 

Why? Math.

 

If I trade at 25 times and Altius trades at 12.5 times...If I take it over anywhere below my multiple I have won for my shareholders....I have added longterm cashflow that will get paid out in dividends or stashed away to buy someone else at a multiple lower than me. And I eliminate a competitor that will be bidding up the individual royalties for sale in the private market as well royalty companies for sale in the stock market.

 

If the market is rational and all royalty companies and royalties trade at a similar multiple you will not

  see any company takeovers...However, once it becomes obvious that someone is cheaper than the rest of the high multiple royalty companies....it makes sense that bidders would try to take advantage of the inefficiency of the market price......and they will bid up the laggard. It is rare to

"ever" get a deal when buying royalty companies....you can see this from Altius presentation of what the latest multiples of takeovers are in the royalty space. If Altius does not get the same royalty market multiple as its peers it will get interesting quick.

 

[giofranchi]

Thanks all.

I get the long term story.... I'm not questioning if it is good or not... I think it is very good.  But my question is more about if buying /holding at the current time frame is being rational. The market can be irrational, but as investors we must be rational.

 

Gary,

I agree with Dazel.

 

And I would add that I look both at ALS and at VRX right now in my firm’s portfolio as kind of special situations… I mean this: they both enjoy the presence of near term catalysts. ALS may initiate a dividend some months from now, or may get approval for the financing of Kami and JL… If just one of these things happen before a China’s collapse, my best guess is that we will have to pay a lot more in the future to partner with Mr. Dalton… even if in the future a serious correction in ALS stock price might actually happen! ;)

(VRX: similarly, if the deal with Allergan goes through, VRX stock will experience a substantial increase in price.)

 

Gio

 

[gary17]

Thanks for your responses.....  I had thought these royalties are based on the prices of the metals....  so if the metal prices remain under pressure - would this also not affect the royalties & the multiples?  I am trying to  play the devil here''  8)

the market should be efficient 99% of the time....  why does the market not know all the stuff that's been discussed here, and re-price Altius? 

[giofranchi]

Thanks for your responses.....  I had thought these royalties are based on the prices of the metals....  so if the metal prices remain under pressure - would this also not affect the royalties & the multiples?  I am trying to  play the devil here''  8)

the market should be efficient 99% of the time....  why does the market not know all the stuff that's been discussed here, and re-price Altius?

 

Many of those royalties are based on tonnages…

 

Well, a catalyst is not a sure thing. Without a dividend, or Kami getting financed, ALS gets back to be just a good long-term investment… But, if you fix your attention on the “trouble in China” story, you could surely come to the conclusion that ALS, stripped of catalysts, might be purchased at a lower price in the future (despite being today a good long-term investment!).

 

This imo is Mr. Market thesis right now... Simply the perfect playbook of how to listen to the lemmings and overlook what you are actually getting for your money... ;)

 

Hope this helps. :)

 

Gio

 

[bizaro86]

Doubled position at $14.13, still annoyed they sold shares at $14, and even more annoyed that Scotia didn't allocate me any. It doesn't seem like the news on them winning the bid from the gov't of NL is priced in right now, imo. Adding that to the CDP assets, seems like there are a lot of ways to win here.

[JAllen]

Seeing as how Dalton says he wants to maintain a very conservative capital structure, and is even selling new stock to do so, what convinces those that believe Altius will pay a dividend soon?  I know Altius has stated the plan is to dividend out the royalties (at least I remember them saying this about Kami royalties), but that was prior to having quite a bit of debt.

 

 

Our guess is that any dividend will be small, something like 20% cash flow or less, until the debt is considerably reduced or a major liquidity event occurs.

 

 

Paying down > $100M in debt will either need quite a bit of time with ~$20M cash flow or a liquidity event.  We're hoping for a major Kami liquidity event over the next 12 months.

[bizaro86]

Seeing as how Dalton says he wants to maintain a very conservative capital structure, and is even selling new stock to do so, what convinces those that believe Altius will pay a dividend soon?  I know Altius has stated the plan is to dividend out the royalties (at least I remember them saying this about Kami royalties), but that was prior to having quite a bit of debt.

 

 

Our guess is that any dividend will be small, something like 20% cash flow or less, until the debt is considerably reduced or a major liquidity event occurs.

 

 

Paying down > $100M in debt will either need quite a bit of time with ~$20M cash flow or a liquidity event.  We're hoping for a major Kami liquidity event over the next 12 months.

 

Yeah, I wouldn't expect a re-rate from a dividend to occur until they sell their Alderon shares, and use that money to strengthen their balance sheet. Of course, then they'll have two re-rates (one from the deal one from the dividend...)

[alertmeipp]

Wow. Selling below offering price. I guess we wont see 20 let alone 30 anytime soon.

[Blue Macaw]

Wow. Selling below offering price. I guess we wont see 20 let alone 30 anytime soon.

 

It is ok, this often happens. We will see 20 by end of year.

[alertmeipp]

I don't see a reason to pay off the remaining debt (4x on solid revenue stream is solid IMO) and I don't want to see dividend. Is there anything stop them from buying back share?

 

[Williams406]

Altius accepting a $25 takeover bid is one of my nightmares. Not the worst one, mind you. I don't expect $25 overnight, but the fact is, I don't want to have to find another investment for the capital I have in Altius for a long time. It's hard work and while that is generally rewarded over time, laziness always pays off right now. Dazel's point about Altius deserving a royalty-company multiple fits the "sometimes the cheapest place to drill for oil is Wall Street" framework. Big valuation discrepancies often do get worked out by M&A. Naturally, I prefer to think about Altius as the acquirer but his point makes sense to me.

 

Good royalties are hard to find at good prices. Altius wanted PMRL for years before the "for sale" sign went up. Altius sat on a lot of cash for several years without buying any producing royalties though I'm sure they looked. Another data point is Callinan's inability to find producing royalties for sale. CAA has about $25 million in cash and yet in their struggle to replace 777's royalty (8-9 years of official mine life), they have only managed exploration/development deals. I presume in that case it is not for a lack of looking, but I'm not sure.

 

The durable cash flow stream we now have is valuable and rare. Be patient. I would have loved the blockbuster announcement last week of a Kami equity sale (to Cliffs Natural for $4.9 billion x 75% x 25%!), JL finalized deal, CDP assets sold for $75 million etc. We don't need to be in a hurry, though. Unless China crashes. Then, we should hurry. Altius may get some offers on things that will be several times that valuable down the road, either because the cycle turns up or projects get de-risked. 

 

I still really dislike the equity deal, but I think a lot of the motivation was to avoid running along the edge with more debt. I'll grit my teeth and bear it--there are worse things in a management team than a big dose of conservatism.     

 

[wisdom]

I had stayed away from commodities so far because of my fear of China slowing down. If you look at most commodity prices - they do not look as bad as they did 5-6 or even 3 years ago. I like the fact that they waited this long to deploy their cash. They are not buying at the high's from what I can tell. I do not expect them to time the bottom perfectly either - all that matters to me is the discipline of not buying at the top and keeping your debt at manageable levels.

 

Commodity prices could drop further due to the supply that will be coming online and a temporary slow down in China, but, the royalties and hopefully liquidity events at ALS will provide them with additional cash to take advantage if prices drop further.

[BRK7]

Seeing as how Dalton says he wants to maintain a very conservative capital structure, and is even selling new stock to do so, what convinces those that believe Altius will pay a dividend soon?  I know Altius has stated the plan is to dividend out the royalties (at least I remember them saying this about Kami royalties), but that was prior to having quite a bit of debt.

 

 

Our guess is that any dividend will be small, something like 20% cash flow or less, until the debt is considerably reduced or a major liquidity event occurs.

 

 

Paying down > $100M in debt will either need quite a bit of time with ~$20M cash flow or a liquidity event.  We're hoping for a major Kami liquidity event over the next 12 months.

 

J Allen,

 

I agree with you.  I believe that the dividend, IF ANY, will be small until the debt is reduced significantly or until there is a major liquidity event (e.g., Kami).  In the absence of such events, I am hopeful that we will NOT see a dividend (or any other capital return for that matter.)

 

The credit facility is due in 5 years.  Quarterly principal prepayments of $2million begin October 31, 2014.  Perhaps more importantly, there is a requirement (per the prospectus, page 58) that $60 million be re-paid on or before the second anniversary (April 28, 2016).  Thus, there are significant near-term interest/principal payments that need to be dealt with.  The good news is that the royalties have a much longer expected life than the credit facility debt.

 

I wish the offering had taken place at a higher price, but it did not.  However, I don’t see that management had much choice in raising equity for at least a portion of the royalty acquisition price.  Said another way, I don’t think the equity raise was overly conservative; rather, I think it was necessary in order to avoid imprudent financial leverage.

 

 

[alertmeipp]

Re: equity raise, if the market tanks in next few months, the $14 raise will look awesome. Better be safe than sorry.

[alertmeipp]

I had stayed away from commodities so far because of my fear of China slowing down. If you look at most commodity prices - they do not look as bad as they did 5-6 or even 3 years ago. I like the fact that they waited this long to deploy their cash. They are not buying at the high's from what I can tell. I do not expect them to time the bottom perfectly either - all that matters to me is the discipline of not buying at the top and keeping your debt at manageable levels.

 

Commodity prices could drop further due to the supply that will be coming online and a temporary slow down in China, but, the royalties and hopefully liquidity events at ALS will provide them with additional cash to take advantage if prices drop further.

 

China is growing slower than before, but it is also a much better economy. It's interesting that they go for Potash and Coal.

[Gamecock-YT]

After about a week, I've finally been able to read the entire thread. Many thanks to Dazel for the incredible job following Altius all these years. I'll be putting in an order this week.

[Blue Macaw]

Cliffs has decided not to go for Blooms lake phase II and will now only focus on making phase I working to perfection. Cash cost is down from 89 to 87 dollars over the quarter.

 

Blooms lake is not considered the "future" for Cliffs anymore. Text extracted from latest presentation "All options remain on the table for the Bloom lake asset, with extracting the highest value for shareholders the top priority"

 

So what we are seeing is a possible sale of asset in near future. Cash cost is really too high for a super profitable business. Only the Chinese could benefit from this at these costs as I see it. Likely takeover together with Kami? Wabush as I see it has no future what so ever. It is a dead mine and should be left as one.

[SharperDingaan]

Dividends & debt repayment. They will dividend in line with industry expectation, there is a time limit on how long they can take, & they will match their LT debt maturity profile to the royalty life profile. If they choose not to, or choose to excessively delay; they will be acquired by someone else - who will not hesitate to do it for them.

 

There is nothing to prevent ALS from refinancing their quarterly debt payments with ST floating rate debt, renegotiating, or an acquirer immediately paying it off & refinancing ST at LIBOR. All an acquirer need do is pay a premium over the market, pay in stock, & we're all happy campers - with zero tax impact. Would you rather own shares of a reinvigorated & higher priced (multiples) FNV (via acquisition), or an ALS that isn't meeting market expectations? Show me the numbers, in reasonably short order, or its gone?

 

Wabush. The mine will be sold for next to nothing, what can be salvaged will be, & mothballed. Its value is as potential swing production to hold global iron ore prices down, & its purchase would be a common practice. Diamonds are routinely mined, & warehoused, to hold production off the market & modulate prices; same thing with the various oil/gas tech alternatives, & 'nth'G IT technologies. Routine.

 

However, the presence of Wabush will support larger handling facilities, & their associated scale savings; simply because that ore in the ground still has to get into a boat, & that cannot happen if there is no idle processing capacity - available at very low cost. Wabush is shut-in & no price threat, ONLY IF that ore cannot be economically moved to the port facility. What is saved on the mine - will be spent on joint, & bigger, processing facilities.

 

Todays capital raise is going to continue hurting them until they demonstrate why they needed to raise so much, at such a low price. It implies they have other deals/capital requirements they cannot disclose yet; which is great - but the clock is ticking. The FNV's of the world are not going to sit on their hands forever, & pass on the current shareholder unhappiness.

 

SD

 

 

 

[gary17]

I did some back of envelop calcs too -

 

I get book value of about $13.45/share and EPS of $0.58... but if we reduce this by the interest expense the amount available for dividend seems to be only $0.18/share. 

 

(31M revenue; 12M general expense; 13M interest expense)

 

Gary

 

EDIT : the book value should be $10/share -

[giofranchi]

I get book value of about $13.45/share

 

That’s why I said ALS is a strong long term investment, even without catalysts: selling barely above BV… a company which grew 29% compounded for 17 years… which has just turned into a cash cow… and which can undoubtedly grow for many more years (still very small size, still very young and entrepreneurial founder/manager, huge market)… ;)

 

But, of course, China might crash… ::)

 

Gio

 

[Guest Dazel]

 

Gary,

 

 

How did you get $12m general expense and $13m interest expense?

 

What did you use to value the  Kami royalty, JL equity, JL royalty at in terms of book value for Altius?

 

Dazel

[gary17]

I basically modified the results at year end 2013

 

the new assets they bought has royalty of 28M i believe

their voisey bay royalty is about 3M - but has a royalty tax of 0.627M  (20%)

so after the purchase new revenue is about 31M and royalty tax of $6.5M (assuming same 20% rate)

other expenses at year end was $6M  so give or take I called the 'expenses" about 12M

 

I believe they have $140M loan at 8.85%  and an unsecured 7M loan as well (not sure what's the interest - I also assumed 8.85%) -- so that's about $13M / year

 

So given they don't have amortization or depreciation... EBITDA = 31M - 12M = $19M

cash flow to equity would be $19M - $13M (interest) = $6M or $0.183/share or 1.3% yield

 

I calculated their outstanding shares to be 32.7M (new issued + amount stated at end of 2013)

 

---

 

On book value I get

 

Asset side - 70M cash ; 407M existing asset (sorry - I did not include JL - believe this was not at end of 2013)

Liabilities - minimal short term liabilities ; 147M debt

 

70M + 407M - 147M = 330M

 

divide by 32.71M shares = $10/share book 

 

--

 

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

 

so the price we are paying today (whether you are buying or holding) is about $14/share... 

what are we getting in exchange for $14/share?

 

- $10 of book value + ____ for JL

- 1.3% yield (assuming 100% payout) - stable/ long-life

- potential upside for Kami & JL developments -- but this can be affected by macros in China

- a management team that just diluted us 10% but otherwise has a very good record

 

[Guest Dazel]

 

 

Thanks Gary,

 

I see flaws in your calcs....numbers are off....I do not have time to go through now...expenses and interest costs are high....

 

 

 

Kami royalty, JL, JL royalty are together valued at $1.5 m in Altius book value calc..

 

You are assuming that the financing does not go through with your calcs?

 

Dazel.

[gary17]

when you say financing you mean for Kami right?

 

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 - but I need a few key questions answered / figured out to get comfortable.

 

It'd be great if you could run your calcs for us too, thanks :)

 

Gary