ALS.TO - Altius Minerals

[nsa122]

I was already fairly frustrated in April by all the dealmaking and dilution, but I guess I was temporarily mollified by some of the responses that I got from management.  On thinking about them more, they didn't hold water for me. 

In terms of Dalton, I suspect that the value of his future compensation as an executive outweighs his ownership stake in the company at this point, but I can't claim to know motivations. He puts the precious metals streaming companies out as models to emulate...if Altius grows 10x, his compensation will probably grow 10x, whether the stock price does or not.  The question is whether shareholders will benefit proportionally as Altius grows to 10x its current size, and that I am not sure about. And further, I'd say as opposed to megacaps where the CEO is scrutinized on a daily basis, Dalton is really not accountable to anyone; I highly doubt anyone on the board or beyond would challenge/question his authority as founder.

I would say that after the PMRL acquisition, if it were as great and transformative as they proclaimed it to be originally, why have they not been buying back shares like mad as the share price fell?  Instead, they've been issuing shares to do marginal deals IMO. And when I asked why they bought Callinan, the answer was that it gave them the "firepower" to buy Chapada. So you do one deal so that you can do another deal, and you issue shares in each?  I could not make sense of this logic other than that it was grow, grow, grow.  Bottom line, it set a disturbing precedent for me.  If their previous acquisitions (eg PMRL) were as great as they claimed they were at the time, they should have repurchased shares instead of diluting us. Instead, they seem to be fashioning an attractive story for investors, angling to be a diversified commodity darling. And in terms of Dalton's investing acumen, in hindsight I wonder how much was due to overall bull market in commodities and ability to promote/do deals. 

[mikek]

Fair enough,

 

Thanks for the response, appreciate it

[TwoCitiesCapital]

I was already fairly frustrated in April by all the dealmaking and dilution, but I guess I was temporarily mollified by some of the responses that I got from management.  On thinking about them more, they didn't hold water for me. 

In terms of Dalton, I suspect that the value of his future compensation as an executive outweighs his ownership stake in the company at this point, but I can't claim to know motivations. He puts the precious metals streaming companies out as models to emulate...if Altius grows 10x, his compensation will probably grow 10x, whether the stock price does or not.  The question is whether shareholders will benefit proportionally as Altius grows to 10x its current size, and that I am not sure about. And further, I'd say as opposed to megacaps where the CEO is scrutinized on a daily basis, Dalton is really not accountable to anyone; I highly doubt anyone on the board or beyond would challenge/question his authority as founder.

I would say that after the PMRL acquisition, if it were as great and transformative as they proclaimed it to be originally, why have they not been buying back shares like mad as the share price fell?  Instead, they've been issuing shares to do marginal deals IMO. And when I asked why they bought Callinan, the answer was that it gave them the "firepower" to buy Chapada. So you do one deal so that you can do another deal, and you issue shares in each?  I could not make sense of this logic other than that it was grow, grow, grow.  Bottom line, it set a disturbing precedent for me.  If their previous acquisitions (eg PMRL) were as great as they claimed they were at the time, they should have repurchased shares instead of diluting us. Instead, they seem to be fashioning an attractive story for investors, angling to be a diversified commodity darling. And in terms of Dalton's investing acumen, in hindsight I wonder how much was due to overall bull market in commodities and ability to promote/do deals.

 

Wasn't Callinan accretive on a per share basis? I'd prefer if they could organically fund acquisitions from cash flows instead of dilution; however, we're not large enough yet for that to happen for some of these larger opportunities. After the purchase of Callinan, Altius shareholders have more cash per share and more royalty revenue per share and it diversified royalty revenue. If anything, each share of Altius should be MORE valuable after that transaction unless if there are obvious reasons to question the quality of the Callinan assets.

 

The purchase of Callinan allowed Altius to delever their balance sheet quickly, but in a way that was still accretive to shareholders to offset the dilution. This gave them the flexibility of taking on more deals that came their way - like Chapada a year later.

 

I've been frustrated with the lack of movement in share prices too, but the company generally seems to moving the direction I envisioned even if the share price hasn't. Every year and every new deal leads to increases in royalty revenue per share and I only see that continuing. I'm happy to give them another 2-3 years to continue to watch how this plays out and will trade around the position as I've been doing in an attempt to increase returns/decrease losses from passive exposure.

[nsa122]

Callinan was "accretive" to revenue per share in the short run. If my math is right, Altius essentially spent C$76M for the 777 royalty. It paid C$10.6M last twelve months and has an estimated mine life of five years per Hudbay.  Frankly, I am missing the "opportunity" that Altius shareholders got.  If nothing changes from here, Altius won't even get its money back, not to mention giving away a chunk of what were purportedly world-class/unique PMRL assets.

If they needed to delever their balance sheet, they could have done it the old fashioned way and paid down the debt over a few years from the royalty revenue, especially if they truly had unique assets. But PMRL performance is underwhelming so far, so it appears they've got to keep the deal machine going to keep investors distracted.  In terms of the Chapada acquisition, I don't hate it in isolation.  The terms are somewhat better than what what Sandstorm got a few months before.  But the fact that they are essentially doing the same deal another company (with an unenviable track record!) did a few months before further disillusioned me from the idea that Altius is doing something unique or original.  Part of my original investment thesis was that Altius was a cut above the rest of the mining industry, but that looks naive to me now.

It may well be that things work out in Altius' favor. Maybe I'm being overly critical, but looking at the share issuance (and repurchase) history makes me feel like the shareholders are the chumps drinking the company koolaid and funding the empire building.  They sold shares at $28 in 2007, then at $14 in 2014, and now at $11.25.  I cannot mentally sidestep this or explain this away, and if they issued more shares at $9 for another promising acquisition, why would anyone be surprised. They surely know the business better than we do, and they haven't bought.  I'll continue to watch with interest to see how things play out.

[Williams406]

Capital allocation priority clue given in the below press release: $16.3 million debt repayment (some portion unscheduled). Cash at $13m, debt at $87.5m, public equity holdings at almost $30m.

 

http://altiusminerals.com/uploads/PR1610-Q1call.pdf

[Williams406]

https://canadianinsider.com/company?menu_tickersearch=Altius%20Minerals%20Corporation%20%7C%20ALS

 

Repurchase of 51,800 @ $9.57 done on September 2.

[wachtwoord]

https://canadianinsider.com/company?menu_tickersearch=Altius%20Minerals%20Corporation%20%7C%20ALS

 

Repurchase of 51,800 @ $9.57 done on September 2.

 

0.012% of the float ...

[TwoCitiesCapital]

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/equities/global-equities/an-investment-only-a-mother-could-love-the-case-for-natural-resource-equities.pdf?sfvrsn=3

 

GMO has had things to say on natural resource equities in the past, and was wrong with their forecasts, but this is more a generalized endorsement based on value and diversification benefits and not on a view of future prices.

 

Of course, I'm biased - I've been buying into natural resource stocks pretty heavily since early 2015 and have only been increasing my exposure through now.

[roundball100]

> 0.012% of the float ...

 

You are too low by a factor of 10, no?

[wachtwoord]

> 0.012% of the float ...

 

You are too low by a factor of 10, no?

 

Apologies, you are correct. This makes it a lot less bad.

 

Perhaps I shouldn't respond during work.

[netnet]

thanks nsa for being the devil's advocate, you have made me think about my Altius position.

 

So one thing that we all need to keep in mind is that this is a long, long game we are playing here.  I, for one, am kicking myself for making Altius a large position near the top of a commodity boom cycle.  One need only look at their own materials to realize that one should have been exiting these markets between 2011 and 2015. (Check out the "Mining Clock" here, http://csinvesting.org/2016/09/02/the-mining-clock/)

 

Now down to the specifics.  This is somewhat of a jockey stock, in that it depends on the acumen of Dalton, but it is also a stock with a good to excellent business model, counter cyclical royalty acquisition and prospect generation.  Is the business model broken (has the reputation of the business changed to paraphrase Buffett?) Answer-No.  Has the operator either taken stupid pills or looks to cheat shareholders. Answer-No.

 

It is in the downturn that you have to invest in this business.  If a little dilution happens, well welcome to the real world.  You can call it a deal machine if you like, but getting land cheaply is the lifeblood of this company.

 

Now can one disagree with some of the purchases and clearly some investors on this board clearly have disagreed with Dalton.  Given his and the company's expertise, I would wonder whether the interpretation of the Callinan deal is really correct, but let's look at this first. 

If my math is right, Altius essentially spent C$76M for the 777 royalty. It paid C$10.6M last twelve months and has an estimated mine life of five years per Hudbay.

This may be a liquidity and royalty acquisition deal.  I would hope that it is more than that, but clearly some think it was a bad deal.  The mine's life seems to have been extended before, but let's call it a relatively low cost equity raise, if the mine's life is not extended and that the royalty lands around the mine will not result in any more mining/royalties.  So this is a wash, but then you get the Arizona royalty for free.  That is not a bad deal for an equity raise. (This again assumes that the 777 mine will not yield any more.) May not be great, but it should turn out in the end, that is the royalty in Arizona may turn out well.  Remember nobody is perfect, Buffett bought a broken down textile company, issued shares for a doomed shoe company, and bought a department store.

 

 

 

But PMRL performance is underwhelming so far, so it appears they've got to keep the deal machine going to keep investors distracted

The lands they have in Michigan and the former Canadian Rail lands are really quite valuable in their hands, just don't expect immediate performance either in the stock price or in the deals.

 

They sold shares at $28 in 2007, then at $14 in 2014, and now at $11.25.

As far as issuing shares at the peak, tell me again why that was a bad idea?  They are debt averse.  Well, I'm not sure that is a bad thing either.

 

They surely know the business better than we do, and they haven't bought.

They have not bought much, but frankly in this environment I want them investing.

 

so it appears they've got to keep the deal machine going to keep investors distracted.

Cheap shot, at least in my opinion.  There are no facts here. (Or I could say that my two cents are that your two cents are worth...two cents...Canadian, sorry couldn't resist)

 

 

[Williams406]

RE 777 extension/Callinan deal:

 

http://www.thereminder.ca/news/local-news/no-more-targets-hudbay-ends-drilling-to-prolong-777-mine-1.2129162

 

This part of the commodity cycle stresses almost all participants in some way. In some respects that's opportunity--land assembly, producing streams/royalty acquisition as operators seek capital, etc. But operators also become very cost-conscious here. Perhaps that's behind the Voiseys Bay issues, not sure.

 

Also, Voiseys Bay, the electrical coal royalties uncertainty, and Callinan's past 777 royalty litigation against HudBay all serve as reminders that royalties--while they can have attractive economics--aren't problem free.

 

 

 

[nsa122]

Netnet, thanks for the response and I'll try not to antagonize. I'll continue to follow Altius to try to understand whether my mistake was buying it in the first place or "losing the faith".

 

I guess I am trying to understand your characterization of the 777 deal as a cheap equity raise.  My calculus of the deal would be...Altius gave away ~20% of the pre-deal company (~8m new shares, 32m previously outstanding) plus $10m cash to Callinan shareholders. In return, got $36M cash on Callinan balance sheet plus the 777 royalty plus the Arizona royalty. So 8m new shares for $26m net cash plus the two royalties.  How much do you value each royalty at? Do you think that Altius valued these royalties conservatively when purchasing?

 

With respect to Buffett, I think one of the things that earns most people's trust/respect is that he is willing to point to his mistakes and discuss them (and he is reluctant to dilute shareholders :-)).

 

With respect to Altius business model, I'd argue it's changed dramatically in the past couple years.  Cheaply "creating" royalties out of thin air through their own brilliant geological work is of course a great model and everyone's dream come true would be to invest alongside that. In the past couple years, however, they have become major consumers of capital, acquiring lots of royalties at prices that will supposedly turn out to look cheap in the future. But their acquisitions don't appear to be terribly original of late.

 

I would not say that Altius management is out to "cheat" shareholders, obviously even Jeff Skilling never believed that he was cheating shareholders.  But I do personally think that they haven't admitted their mistakes, are not conservative in terms of valuation, and are fairly self-promotional.  Altius' present path (gradually dwindling insider stake and gradually increasing annual compensation) leads to progressively less alignment in management and shareholders' interests.

 

In terms of the capital raise at $28 back in 2008, I guess it depends on from whose perspective you are looking.  If you were management, it was no skin off your back.  If you were an existing shareholder, I suppose you'd wish you had sold your shares then too.  If you were a buyer in the offering, you'd be pretty disillusioned. If I personally were Dalton, I think I would feel some regret/remorse for that nameless someone who bought at $28, and after 8 years, is sitting on losses of 2/3 of their money.

 

In the end, I do think this is a 100% "jockey stock" because no one three years ago could have predicted the particular path Altius has taken, and I would say Altius is very difficult to value quantitatively. So while I hesitate to pass judgment on others, in Altius' case, you have to have more trust in management than for other more predictable/inertial businesses.

 

Just out of curiosity, has anyone calculated how Altius' returns would look if their uranium deal had never happened, and has that find panned out for whoever bought it? I'm asking because I don't know. 

[Williams406]

NSA,

 

Thanks for sharing thoughts post-sale and I do hope you stick around and continue to post here.

 

I wasn't in Altius during the $28 equity raise, but keep in mind they had the NLRC project in the hopper then and it was potentially pretty big. It was probably to Altius 2008 2-3x what Kami/Julienne Lake were in 2013/14. I don't know much about that project. Clearly Altius failed to get that across the goal line and they blew quite a bit of money in the process. An interesting question for management would be what they've learned from that failure. But I do think that context matters.

 

Altius is not a "3 yards and a cloud of dust" stock a la Woody Hayes. It's all about optionality. Options don't always pay off. But occasionally you'll get a big payout. Not everyone will be comfortable with this model.

 

The uranium deal made Altius. No question. Fukushima was a big deal to uranium prices.

 

I viewed Callinan as a "heads Altius wins a bit (777 life extension), tails Altius doesn't lose too much." We'll see what copper/zinc prices do in the next few years and watch Gunnison (Arizona copper project) and Callinex's projects at the time of the deal. Perhaps in the final analysis the Callinan deal proves to be value destructive. The info thus far is negative, but I wouldn't expect Altius management to self-flagellate at this point other than to say they are disappointed with 777 extension developments.

 

NSA, I'm not trying to rebut your points. You raise some good ones. You've also had direct conversation with management that you've committed to not sharing, so I don't know how things were presented to you. As I said, I hope you keep posting here.

[netnet]

NSA,

 

Again, thanks for your thoughts and your input and for taking my jabs in such a good natured way.  Also, I'm a bit uncomfortable with arguing for Altius for two reason,

[*]I am by temperament the skeptic

[*]and, as Munger suggests, if you publicly espouse a position, you are pounding it into your own head.

Now that said let's address some of your points:

I guess I am trying to understand your characterization of the 777 deal as a cheap equity raise.  My calculus of the deal would be...Altius gave away ~20% of the pre-deal company (~8m new shares, 32m previously outstanding) plus $10m cash to Callinan shareholders. In return, got $36M cash on Callinan balance sheet plus the 777 royalty plus the Arizona royalty. So 8m new shares for $26m net cash plus the two royalties.

I was being kind of flip here.  Basically, I'm saying that worst case this is a little worse than breakeven deal, once you factor in the time value of money.  The options of 777 mine extension plus the Arizona royalty make it net positive.  (Strictly speaking options have a value, so even if they do not work, they still at the time of acquisition represent value.)

 

With respect to Altius business model, I'd argue it's changed dramatically in the past couple years.

Buying royalties has been a part of their business model for a number of years, see for example the MD&A of 2012.

 

I would not say that Altius management is out to "cheat" shareholders, obviously even Jeff Skilling never believed that he was cheating shareholders.

Skilling?? that's a bit of a stretch. And self-promotional, even outside of the Canadian junior mining space, they are not. (Compared to the junior miners, well let's just say that sainthood awaits.)

 

In terms of the capital raise at $28 back in 2008, I guess it depends on from whose perspective you are looking.  If you were management, it was no skin off your back.  If you were an existing shareholder, I suppose you'd wish you had sold your shares then too.

If this is your stance, which by the way is somewhat contrary to the way capital markets work, you should be equally aghast on repurchasing stock, as you are depriving the selling shareholders of potential gains.

Personally, I think that selling your stock when it is high is totally reasonable.  We are not talking about a pump and dump here.  What you are saying is that a company should only sell its share to the public when it is absolutely at what you believe the intrinsic value is. (Does that mean that you should not sell to buy an even cheaper asset?)

 

By the way, management generally included a graph of the stock along with the mining cycles, the more astute (not including me!) should have taken this as a signal to wait for the crash to buy.

 

 

 

[Williams406]

Q results: http://altiusminerals.com/uploads/PR1611-Q1.pdf

 

Conference call Wednesday. Have they done those before?

 

MD&A page 5 excerpt: "We  have  shifted  gears  operationally  in  accordance  with  a  cyclical  sentiment  shift  that  has  occurred  for

select mineral commodities. Capital has become available again for high quality projects involving gold,  zinc and to a lesser extent, metallurgical coal and copper.

 

In addition to continuing our efforts to assemble quality exploration lands we are now also actively engaging in discussions involving project vend-ins and spin-outs for the portfolio projects that we have accumulated over  the  past  several  down-cycle  years.  We  believe  that  these  projects  represent  above  average  quality speculative opportunities and are deserving of concerted investment."

 

I realize that striking an exploration agreement with a miner still often has a long lead time before any real return to Altius in the rare successful case, but it would exceed my expectations if they got the clock ticking on a couple of land exploration deals. We'll see if they can pull anything off. From the Outlook section on page 5 of the MD&A, it doesn't sound like royalty/streaming deals on producing properties are prevalent in the current market. 

[mikek]

"Conference call Wednesday. Have they done those before? "

 

I don't think so.

 

Regarding the comment about Altius being self-promotional-

 

I would say that they are the opposite of self promotional, Rick Rule said a couple of years ago that there are only about 12 people in the US that even know of the company.  Obviously he was joking but I can't say that these guys are what I would consider self promotional.  I would actually prefer them to get out there a little more and tell the story.

[nostradamus]

So I guess this means that the Telkwa coal property is still moving forward:

 

http://www.miningweekly.com/article/allegiance-makes-a-play-for-canadian-firm-2016-09-16

 

[TwoCitiesCapital]

http://altiusminerals.com/uploads/PR1613-wilding.pdf

 

Gold found out Wildling Lake. Altius to retain a 2% net smelter royalty and 4.5 million shares of Antler Gold.

[Crip1]

Any reason for Altius to be up 5% on triple normal daily volume?

 

 

-Crip

[Williams406]

I noticed that too. Other than Royal Gold and Abitibi Royalties, don't see much else running on my short list of miners/royalty co's.

[TwoCitiesCapital]

Copper prices having a nice recovery this year. Makes the Chapada deal look like a reasonable win. At current spot prices, Altius will bring in ~$7.5M USD ($10M CAD) next year from the ~$65M purchase.

 

At current exchange rates and production, if copper returns to $3.50 (Altius' estimates of cost of production), Altius would bring in $10.5M per year. If we averaged that over the 17-year mine life, it would be a 6.1% compounded annual return (pre-tax). Not a home run, but a solid investment in this environment with the additional upside optionality if mine life extends OR production increases.

 

 

[mikek]

You mean 16%+?

 

I would be shocked if this mine only goes 17 years at current production, I would bet it's more likely to be around 30 years.

 

Edit

 

Yeah you're right, my mind saw IRR instead of compound annual return on a 3.50 copper price- Twocities is correct.

 

As for the mine production, I think under Canadian law they can only say the mine life on proven and not probable.  So definitely not a definite thing but usually as they continue to drill they can move probable into proven reserves if it warrants it.  Please correct me if I am incorrect.

[Liberty]

I would be shocked if this mine only goes 17 years at current production, I would bet it's more likely to be around 30 years.

 

Out of curiosity, how do you estimate that? I don't know much about how long a mine can operate.

[wachtwoord]

You mean 16%+?

 

I would be shocked if this mine only goes 17 years at current production, I would bet it's more likely to be around 30 years.

 

16%+? Where are you getting that number from?