ALS.TO - Altius Minerals

[Ross812]

- most geologists never even come close to finding a profitable mine

- exploration for resources is among the most risky of all businesses

- ALS does not want to find profitable mines (they want other people to find them)

- ALS wants other people to pay for the exploration that (hopefully) results in a discovery

- many of the best geologists work for big companies that have had JV's with ALS

- the exploration is only as good as the JV partners ability to do good exploration work

 

You have to understand what this mine exploration truly encompasses. Altius looks in areas that have nearby mines and infrastructure and dispatches their geologists to do a 30,000 view of the area and see there is a possibility of a deposit. I.e they look at rock types, nearby formations, geological maps. Most deposits exist in similar geological bands.

 

When they find a probable area, they form a JV and poke about 15 holes in the ground to see what they find.  It is an infinitesimally small sample size. Most projects stop here when they find nothing. If they find something, the junior raises money from gamblers and continues to drill the area and pays an engineering firm to perform a reconnaissance study of the area. If secondary drilling, 45+holes, still looks promising (most doesn't) they hire an engineering firm often gives a rosey estimate of the resource and costs to extract which allows the junior to get still more money from gamblers.

 

It is necessary for the junior to keep up the promotion and work the project from all angles to continue to get funding from their "investors". At some point they have to secure funding which requires another due diligence study that will not be so rosey as the bank wants a safety factor when they doll out a billion dollars.

 

I invested in Altius because I believed Hebei did their due diligence before comiting to the project. The French bank bailing either means there are structural problems with the mine. You can bet expenses were vastly understated in the BBA report because the bank would have signed off if the costs were around $50.

 

The story is meant to demonstrate how difficult it is to go from mineral rights to a producing profitable mine. Altius has never done it. Kami has checked off most of the boxes and has been 5+ years in the making. You haven't done very well in Altius in the passed few years... 

 

I like the JV approach to finding resources, but it is highly unlikely to work out. I think the key to Altius is focusing on their equity and royalty investments. This is where they have made their money. The PMRL and CDP deal appears to be ok on the surface; but they did pay 12x for coal and potash royalties which aren't hot by any means. They are going to spend the next 5 years paying off debt before looking for more deals. If you strip away the unlikely event of project generation, you aren't left with a remarkably profitable business.

 

In addition, you are going to see a bunch of volatility in the short term as MTM losses are going to make Altius look terrible on the surface.

 

I sold 1/3rd of my shares. Altius is worth $13-15 but that is not going to change at all over the next five years with their status quo. If financing is announced, you may loose the move from $15 to $20 but you can pick it up at 20 on its way to $30. Their is a lot of opportunity sunk into Alius. It really hasn't moved in 5 years.     

 

[Liberty]

I sold mine because I realized that I didn't want to own businesses that were dependent on commodity prices and multi-year cycles anymore. Lots of money to be made that way, I'm sure, but it's not what I want right now, even if Altius is the best model for one of these that I've seen so far.

 

Too many factors are out of management's hands. And needing to do big deals to unlock asset value, and needing lots of capex before any cash flows back, that's tough (even if it isn't Altius that is paying for the capex, someone has to spend all that money, and often it just won't happen for reasons that are totally out of anyone's control). I prefer businesses that are asset-light, non-cyclical, and with free-cash coming in the door all the time with an easily repeatable formula for value creation (ie.  you don't need to put together a new entirely unique deal out of thin air every time, just keep doing what you've been doing before -- some buybacks, some M&A, some organic growth, whatever). This makes the job of a good capital allocator much easier, and IMO increases the chances of success.

 

Altius is like the old Leucadia (and I mean that as a compliment). The level of difficulty is much higher. Dalton is very smart and will probably pull it off like Cummings and Steinberg did, but I had other opportunities that I felt more comfortable with.

 

If history is a guide, this probably means that ALS will be $30 soon, so brace yourselves ;)

[abyli]

So many folks sold some or all shares after 3-4 years. Has Dazel sold? Bad, he will not comment! :)

[Guest Dazel]

 

We have not sold.

 

Dazel

[FFHWatcher]

So many folks sold some or all shares after 3-4 years. Has Dazel sold? Bad, he will not comment! :)

 

If you have to ask that question, you haven't read any of this thread or any of Dazel's posts. 

How many times does everyone want Dazel to post the same stuff over and over. Perhaps he should be getting paid for doing all the work here?

Just read his posts.  Its all there.

[beerbaron]

Funny how people say they are contrarian but, even in a value forum ask for group reinforcement...

 

I have a few points:

-The price of iron ore is pretty much efficient. Nobody can forecast it or else they would be richer than god.

- Iron Ore suck right now. Half of Altius values lies with Iron Ore price.

- I don't know much about commodity, if you are like me and don't know commodity, invest with someone that knows it.

- Investing with someone that knows commodities does not protect you from a commodity slump.

- The value of Altius is easy to calculate within a 20% range. Buy low, sell high should be profitable while we wait for Alderon or Julienne Lake.

 

BeerBaron

 

 

 

 

[abyli]

I have read every posts in this thread a few times. Honestly I am surprised that so many folks sold. I am contrarian, but more importantly make sure I am right. I keep asking myself, why those folks sold now? Is there anything they see I missed?

 

Like Beenbaron said, I do not know much about commodity, that is why we invest in Altius. Altius has a great business model. But there is a problem with his model: so many things out of control of Altius. And worse, so much value of Altius now is dependent on Kami and JL, hence iron price. But Altius has no control on iorn price, has no say about how Anderon operates. Is this weakness of Altius business model?

[JAllen]

Is it more than two people here that sold?  Gio sold partially because of another stock - not solely because of Altius' fundamentals and there is one more person that sold because of recent ADV non-news.  Any more? What's the big deal?

 

 

We haven't sold a share either and the thought never crossed our minds.  China or no China, these minerals will have to be mined.  It's not gold they're mining, after all.

 

 

ADV may get built in a year or two yet.

 

 

Meanwhile, we anxiously await CDP developments and ALS profiting from the mining slow down.  There are good assets in this industry despite any slowdown.  That's why we hired great managers - they'll only buy the best - they've proven that. 

 

 

Let's be patient.

[ItsAValueTrap]

But Altius has no control on iorn price, has no say about how Anderon operates.

 

Dalton sits on Alderon's board.  Altius has some control over Alderon and insight into Alderon.

[hohi]

But there is a problem with his model: so many things out of control of Altius. And worse, so much value of Altius now is dependent on Kami and JL, hence iron price. But Altius has no control on iorn price, has no say about how Anderon operates. Is this weakness of Altius business model?

 

I am curious, how is so much value of ALS dependent on Kami and JL? How much downside do you see? In my opinion ALS is a much safer vehicle after the royalty acquisition. Steady cash flow from world class royalties. Lots and lots of optionality for free. That's what made Franco-Nevada great btw.

 

Still actively buying your shares. I love the negativity. Keep it up!

[abyli]

But there is a problem with his model: so many things out of control of Altius. And worse, so much value of Altius now is dependent on Kami and JL, hence iron price. But Altius has no control on iorn price, has no say about how Anderon operates. Is this weakness of Altius business model?

 

I am curious, how is so much value of ALS dependent on Kami and JL? How much downside do you see? In my opinion ALS is a much safer vehicle after the royalty acquisition. Steady cash flow from world class royalties. Lots and lots of optionality for free. That's what made Franco-Nevada great btw.

 

Still actively buying your shares. I love the negativity. Keep it up!

At this price, I do not see much downside and you definitely did not buy shares from me. :) I totally agree with you, we are a safer vehicle after the royalty acquisition with stable cash flow. But what about upside? What If Kami can not be built? In near term, we are dependent on iron to unlock value, right?

 

Yeah, let's be patient. Thank you.

[Williams406]

Link: Sprott Group Interview with Pierre Lassonde.

 

http://www.mining.com/web/pierre-lassonde-franco-nevada-very-few-get-this-but-its-worth-so-much-money/

 

"Here’s the thing – why the Franco business model is so incredibly powerful – and very few people understand this. None of our competitors do. They don’t understand what we have when we create a royalty. I’m not talking about a stream; I’m talking about a royalty — like the GoldStrike royalty or the Detour royalty. We get a free perpetual option on the discoveries made on the land by the operators, and we get a free perpetual option on the price of gold. Think about this – if someone hands you a free perpetual option on 6 million acres of land, and you don’t have to put up a penny, don’t you think that at some point, you’re going to get lucky?

 

That’s what it is. We have put together a land package by purchasing and creating royalties where we end up with a free perpetual option. It’s the optionality value of the land, the value of the operator spending money on our land, and the optionality to higher gold prices. And that is worth so much money. And yet, when the analysts calculate an NAV, none of them ever look at the optionality that we have in our portfolio. Frankly, it’s what’s worth the most. It’s absolutely what’s worth the most, and it’s what’s given us the GoldStrike billion dollar royalty, the Detour billion dollar royalty, the Tasiast royalty, and so on."

 

Also in the full interview, Lassonde comments on how the mining business is Russian roulette, speculation. I've often thought it interesting that I really like the royalty business model that is so linked to one I hate--mining. If we weren't discussing a company with Kami and JL, I might call that irony.

 

I'll breathe easier once Altius has it's debt principal repayment addressed.

[giofranchi]

Link: Sprott Group Interview with Pierre Lassonde.

 

http://www.mining.com/web/pierre-lassonde-franco-nevada-very-few-get-this-but-its-worth-so-much-money/

 

"Here’s the thing – why the Franco business model is so incredibly powerful – and very few people understand this. None of our competitors do. They don’t understand what we have when we create a royalty. I’m not talking about a stream; I’m talking about a royalty — like the GoldStrike royalty or the Detour royalty. We get a free perpetual option on the discoveries made on the land by the operators, and we get a free perpetual option on the price of gold. Think about this – if someone hands you a free perpetual option on 6 million acres of land, and you don’t have to put up a penny, don’t you think that at some point, you’re going to get lucky?

 

That’s what it is. We have put together a land package by purchasing and creating royalties where we end up with a free perpetual option. It’s the optionality value of the land, the value of the operator spending money on our land, and the optionality to higher gold prices. And that is worth so much money. And yet, when the analysts calculate an NAV, none of them ever look at the optionality that we have in our portfolio. Frankly, it’s what’s worth the most. It’s absolutely what’s worth the most, and it’s what’s given us the GoldStrike billion dollar royalty, the Detour billion dollar royalty, the Tasiast royalty, and so on."

 

Also in the full interview, Lassonde comments on how the mining business is Russian roulette, speculation. I've often thought it interesting that I really like the royalty business model that is so linked to one I hate--mining. If we weren't discussing a company with Kami and JL, I might call that irony.

 

I'll breathe easier once Altius has it's debt principal repayment addressed.

 

Thank you!

Very interesting. :)

 

Gio

[SharperDingaan]

Clearly, there is nothing wrong with the business model. If you thought that ALS might not be very attractive to an FNV, which knows this model very well .... any doubts have now probably been answered.

 

We now also know that analyst valuation (sales) models cannot handle optionality.

You cannot spin the FCF of deals that haven't happened yet, & for solid projects - long delays promote negativity, & increase the probability of deal occurrence. The UW has incentive to time shorts, but if there is no option market - is exposed to price spikes if/when the deal materializes. Large shareholders may lend shares for shorting purposes, but they aren't going to sell a sizeable call option at market. Uncomfortable for the UW, negativism feeds on the share price (increasing short gains), but the upside includes short cover spikes (which could well wipe out those gains).

 

Recognize the weakness in those analyst models, & you've just helped yourself to a few extra $  ;)

 

SD

 

 

 

 

 

[TwoCitiesCapital]

how are you guys that are knowledgable about mining handicapping these probabilities? I'm simply relying on a good buying price relative to asset value and optionality but would love to have a more informed and accurate understanding of the real likelihood behind Kami and JL. The following questions come to mind.

 

 

Is it often that massive deposits that are well located don't get developed or has it traditionally forced people to get creative to reduce expenses?

How much are massive reserves that can't be profitably developed worth? Surely not 0 due to optionality.

What does the expected profit on the mine have to be for people to be willing to buy it/develop it? I know that we probably agree estimates of OpEx for the mine are too rosy, but even $80/ton would be profitable for Kami is it currently appears on paper.

 

Wanted to bring these questions back to front to help us think through the worst case scenario. I too am surpised so many have sold - and not even at the $15 highs!

 

[giofranchi]

Clearly, there is nothing wrong with the business model. If you thought that ALS might not be very attractive to an FNV, which knows this model very well .... any doubts have now probably been answered.

 

I don’t think my doubt has been answered yet.

 

Franco-Nevada has no debt. They could go on buying royalties in the market, whenever they find attractive deals. Altius, instead, has debt. And it will take some years before the debt is eliminated, or sufficiently reduced.

 

On the other hand, they could rely on the project generation side of the business… if it works well. And my doubt is: to work well, isn't it supposed to discover at least one profitable mine? Otherwise, on which other metric could you judge a project generator in the resource market?

 

With debt to be brought down, how else to increase their portfolio of royalties, if not through successful project generation? At least for the next 2-3 years? Will Kami or JL be that profitable mine? Will that profitable mine be found in the land now owned thanks to the CDP acquisition? For some fast growth also in the next 2-3 years?

 

This is not very clear to me yet.

 

Gio

 

[finetrader]

The reality is that Altius was worth about 9-11$/share without Kami and Julienne before the royalty deal.

 

And it is now worth about 11-13$ into those same circonstances. One has to valued these free options that Altius has on those two projects and others. And iron ore price is a big factor in assessing the value of these options for the two projects, because if iron ore price stays low or go lower they might not build these mines in the short to medium term.

[ap1234]

Zach,

 

The topic of a trough valuation was discussed earlier in the thread. Based upon my math, I pegged the stock price at $9-11 in a commodity downturn. Other people seemed to suggest that $13-14 was a trough price but I think that’s too optimistic. As it turns out, we are not as far away from that trough scenario as we were just a few months ago!

 

To arrive at a trough NAV, I simply haircut the public equity stakes in junior mining co’s (Alderon, Cranberry, etc.). I then valued the acquired royalty portfolio at Altius’ cost base (as opposed to assuming they bought it at 9-10x EBITDA and immediately revalue it at a much higher multiple). I also assigned a very nominal value to the pre-production royalties (Kami, JL, etc) which under the trough scenario may not get built for many years. In my mind, this is a conservative way to value the assets of the company.

 

To be very clear…this is NOT to say that I think $10 is the intrinsic value of the business. I think $9-11 is too conservative for the ‘fair value’ of the business. But I do believe this is how the market would value the business during a true commodity bear market. And as such, this is how I think about the trough value for the company.

 

I hope this helps.

 

[TwoCitiesCapital]

Zach,

 

The topic of a trough valuation was discussed earlier in the thread. Based upon my math, I pegged the stock price at $9-11 in a commodity downturn. Other people seemed to suggest that $13-14 was a trough price but I think that’s too optimistic. As it turns out, we are not as far away from that trough scenario as we were just a few months ago!

 

To arrive at a trough NAV, I simply haircut the public equity stakes in junior mining co’s (Alderon, Cranberry, etc.). I then valued the acquired royalty portfolio at Altius’ cost base (as opposed to assuming they bought it at 9-10x EBITDA and immediately revalue it at a much higher multiple). I also assigned a very nominal value to the pre-production royalties (Kami, JL, etc) which under the trough scenario may not get built for many years. In my mind, this is a conservative way to value the assets of the company.

 

To be very clear…this is NOT to say that I think $10 is the intrinsic value of the business. I think $9-11 is too conservative for the ‘fair value’ of the business. But I do believe this is how the market would value the business during a true commodity bear market. And as such, this is how I think about the trough value for the company.

 

I hope this helps.

 

Thanks, but this wasnt my questions. Even if Kami and JL aren't built, and iron ore remains at $80 indefinitely, these royalty interests and mine ownership aren't worthless. I'm trying to understand what the probability of a mine in Kami's position not being built AND how much a massive, undeveloped reserve of iron is worth. Surely there are ways of estimating this.

 

I've been assessing these at 0 just to be cautious but I want a better understanding. How would industry vets value this sort of thing?

[Ross812]

I have read every posts in this thread a few times. Honestly I am surprised that so many folks sold. I am contrarian, but more importantly make sure I am right. I keep asking myself, why those folks sold now? Is there anything they see I missed?

 

Like Beenbaron said, I do not know much about commodity, that is why we invest in Altius. Altius has a great business model. But there is a problem with his model: so many things out of control of Altius. And worse, so much value of Altius now is dependent on Kami and JL, hence iron price. But Altius has no control on iorn price, has no say about how Anderon operates. Is this weakness of Altius business model?

 

I still hold two thirds of my original position, but I won't ignore facts. Let's review:

 

1. Estimates for PMRL + CDP was 28M - 30M in EBITA.

 

In reality, it is adding $26M

 

2. The VB nickel royalty is worth about 3.4-4.5M per year in EBITA.

 

In reality, after the restructure, they now expect 2.5M per year in EBITA.

 

3. I had Kami handicapped at a 75% chance of success at Fe ore prices of $110 per ton

 

This is closer to a 50/50 chance now at $85.

 

4. JL was handicapped at 25% chance at Fe $110.

 

It is a 5-10% chance below $90

 

5. Short term MTM losses on Alderon stock are going to be ~14M as it stands today which is $0.50/share in "losses" reported next quarter.

 

This quarter was an 8M loss, as it stands now, next quarter even with increased reported royalty revenue is a 10-11M loss.

 

6. ANY JV announced at any time is at least 3-4 years from production. They have no very little money to pursue additional royalties for sale until 2016. (They should be doing well after the big debt payment is made baring the need to fire sale depressed assets).

 

I have no problem with their business plan, but I am holding an outsized position in a company that: is earning 10% less in EBITA than expected, has no growth prospects in their main business until after 2016, Kami and JL are significantly less likely to be completed at current Fe prices, and next quarter is going to look worse than the current one. I sold after earnings because royalty revenue is not where I expected. I also stupidly assumed MTM was reported as a quarterly average, in that I was assuming AXX was carried at ~1.25 instead of 1.41 (July 31 price). I didn't do the math and it cost me. 

[SharperDingaan]

Is it often that massive deposits that are well located don't get developed or has it traditionally forced people to get creative to reduce expenses?

These  deposits almost always get developed first; location gives them a significant operating cost advantage (lower haulage cost) & materially lowers the cost of development (fewer & shorter roads to be built, less costly construction camps, less complexity, etc.

 

How much are massive reserves that can't be profitably developed worth?

According to Mr Market – zero. To the majors - reserves like this are company builders. If 1 of the big 4 in iron does not take ALS out, there will 5 players for the next 80yrs+; & it will hurt for a very long time - if ALS ends up selling the vast bulk of its production directly to China.

 

What does the expected profit on the mine have to be for people to be willing to buy it/develop it? I know that we probably agree estimates of OpEx for the mine are too rosy, but even $80/ton would be profitable for Kami is it currently appears on paper.

The mine will be built because it is strategic, short-term ROI is irrelevant to the decision. Delay construction any length of time & replacement cost will rise, & significantly if the Wabush infrastructure can no longer be used; todays 1.3B could very well become 2.0B  - & fairly quickly. The higher the development cost the better the moat will be as well, as very few competitors could raise the funds required - & even then, only in optimal conditions.  Then add in that 4 yrs+ after production, the mine is paid off, & anything over cash cost + royalty + shipping  - FOR MULTIPLE CYCLES OVER 75 YEARS+ (assuming JL & Wabush consolidation), is gravy.

 

All kinds of examples in the Tar Sands (Suncor), of huge projects being built that were uneconomic at the time, but massively strategic, & funded via various collaborative PP schemes. Today syncrude is very competitive, & Tar Sands annual production can more or less replace the entire annual Saudi supply of light crude to the market. It is also standard corporate finance practice to over-ride strategic plan ROI & ROE hurdles when looking at regulatory or strategic projects. We weight the odds of a successful financing at around 90-95%, but trying to put a time limit on it is simply counter-productive.

 

SD

[SharperDingaan]

 

Our point was that FNV’s BS gives them the flexibility to easily make a bid, there would be very high synergies, & they (& us sellers) would have a bias towards getting paid in stock (tax free roll-overs) versus cash. ALS shareholders would get less than the long term value of ALS, but would receive the more marketable; re-energized & less risky FNV.  Obviously, it will not be at today’s price.

 

SD

 

Clearly, there is nothing wrong with the business model. If you thought that ALS might not be very attractive to an FNV, which knows this model very well .... any doubts have now probably been answered.

 

I don’t think my doubt has been answered yet.

 

Franco-Nevada has no debt. They could go on buying royalties in the market, whenever they find attractive deals. Altius, instead, has debt. And it will take some years before the debt is eliminated, or sufficiently reduced.

 

On the other hand, they could rely on the project generation side of the business… if it works well. And my doubt is: to work well, isn't it supposed to discover at least one profitable mine? Otherwise, on which other metric could you judge a project generator in the resource market?

 

With debt to be brought down, how else to increase their portfolio of royalties, if not through successful project generation? At least for the next 2-3 years? Will Kami or JL be that profitable mine? Will that profitable mine be found in the land now owned thanks to the CDP acquisition? For some fast growth also in the next 2-3 years?

 

This is not very clear to me yet.

 

Gio

[EliG]

Altius Executes Telkwa Coal Property Agreement With Australian Venture

 

http://finance.yahoo.com/news/altius-executes-telkwa-coal-property-120000936.html

[abyli]

Thank you, Dazel!

[wachtwoord]

Why is Altius down so much today? Any real reason to no increase my position at these prices?