ALS.TO - Altius Minerals

[linealdin]

Thoughts on the Potash royalties:

 

My favorites in the Altius portfolio. Don't be fooled by the projected mine lives, which are based on proven & probable reserves only. For example Rocanville has a projected mine life of 74 years based on P&P reserves of 434 million tonnes. But there is an additional 3 billion tonnes of measured, indicated and inferred resources. If those resources are converted that's an additional 500 years of mine life. Similar numbers hold for most of the potash royalties (some of which could last 1000 years at current rates of production if all reserves and resources are considered).

 

The actual mine life of these royalties is: functionally forever.

 

The only dangers to these potash royalties are global apocalypse (the end of industrial farming) and technical innovation (a better and cheaper fertilizer completely replacing potash). Both of those things will eventually happen, but probably not in my lifetime.

 

How do you value a suite of royalties that will pay $6 million a year for the next 500 to 1000 years?The mind boggles.

[linealdin]

More on potash.

 

Greenfield potash mines are incredibly expensive to build, an estimated $1 billion per each million tonnes of annual production capacity.

 

I think of the Canadian potash producers as similar to the large Aussie and Brazilian iron ore producers: they have a stranglehold on the low cost, high quality resources. On price weakness they gain market share when smaller producers fail. Incredibly high capex costs for bulk commodity mines and infrastructure keep new mines from getting built.

 

In iron ore its good to be Rio Tinto and bad to be Alderon. In the potash space it's better to be Potash Corp than it is to be Sirius Minerals (small cap trying to build potash mine in England).

[TwoCitiesCapital]

Thoughts on the Potash royalties:

 

My favorites in the Altius portfolio. Don't be fooled by the projected mine lives, which are based on proven & probable reserves only. For example Rocanville has a projected mine life of 74 years based on P&P reserves of 434 million tonnes. But there is an additional 3 billion tonnes of measured, indicated and inferred resources. If those resources are converted that's an additional 500 years of mine life. Similar numbers hold for most of the potash royalties (some of which could last 1000 years at current rates of production if all reserves and resources are considered).

 

The actual mine life of these royalties is: functionally forever.

 

The only dangers to these potash royalties are global apocalypse (the end of industrial farming) and technical innovation (a better and cheaper fertilizer completely replacing potash). Both of those things will eventually happen, but probably not in my lifetime.

 

How do you value a suite of royalties that will pay $6 million a year for the next 500 to 1000 years?The mind boggles.

 

That's basically an annuity into perpetuity - divide the $6 million by the required rate of return and that gives you the value to you. A 5-7% required rate of return provides a value around ~$85M-120M

 

[netnet]

Thoughts on the Potash royalties:

 

My favorites in the Altius portfolio. Don't be fooled by the projected mine lives, which are based on proven & probable reserves only. For example Rocanville has a projected mine life of 74 years based on P&P reserves of 434 million tonnes. But there is an additional 3 billion tonnes of measured, indicated and inferred resources. If those resources are converted that's an additional 500 years of mine life. Similar numbers hold for most of the potash royalties (some of which could last 1000 years at current rates of production if all reserves and resources are considered).

 

The actual mine life of these royalties is: functionally forever.

 

The only dangers to these potash royalties are global apocalypse (the end of industrial farming) and technical innovation (a better and cheaper fertilizer completely replacing potash). Both of those things will eventually happen, but probably not in my lifetime.

 

How do you value a suite of royalties that will pay $6 million a year for the next 500 to 1000 years?The mind boggles.

 

That's basically an annuity into perpetuity - divide the $6 million by the required rate of return and that gives you the value to you. A 5-7% required rate of return provides a value around ~$85M-120M

 

Your simple rule is really the best, but one could complicate it by factoring in its (probable or at least theoretical) inflation protection.

[linealdin]

Potash production for Altius Royalty lands was up 45% in Q3 2017 versus Q3 2016. That is a big leap. Interesting to see if it holds or increases in Q4. Every one of the potash mines, excluding Patience Lake, has spent significant capex in recent years for brownfield expansion and debottlenecking. Increased use of that available capacity and a higher potash price pushes annual royalty revenue to $10 million or more.

 

This is the bottom, $6 million a year to Altius for potash is the bear scenario. I expect much more.

 

[linealdin]

Low share price just in time for reinvestment of the dividend payable on this Wednesday. And if the mining sector crashes another 50% that opens the possibility of another purchase of a PRODUCING royalty package. That $177 million Altius has in its quiver will look very enticing to a cash strapped miner. Bright side, lol.

[linealdin]

Yamana Gold management had some interesting things to say about Chapada on its Feb. 17th conference call.

 

1) The new Baru discovery, which is right on top of Sucupira (inferred resources of 535 million pounds of copper), could change the mine plan to open pit. Sucupira was originally intended for underground mining starting from bottom of Chapada pit. If Sucupira/Baru are open-pittable the plan will be to increase the rate of annual production, not just extend the mine life. It all depends on the next couple of Baru drill holes.

 

2) Formiga, which is 15km away from the Chapada/Sucupira/Baru complex, is near surface and higher grade than Chapada. Sounds like another open pit.

 

Chapada complex has 4.5 billion pounds of copper currently, not including anything from Baru or Formiga, a 30 year mine life at current production rates. How big can it grow?

[linealdin]

Chapada expansion incentive rate:

 

At current production level of 120 million pounds Altius is entitled to 3.7%, or 4.44 million pounds of copper.

 

If Chapada expands to a minimum of 150 pounds of annual copper production the royalty rate lowers to 2.65%.

 

At the lower royalty rate for Altius to receive the same 4.44 million pounds of copper Chapada would have to produce 167.56 million pounds.

 

So Altius roots for a very large expansion, if one takes place.

[mikek]

"Thoughts on Excelsior Mining Royalty:

 

Altius has already declined to purchase additional Gunnison royalties 2 times. Declined a 0.5% Royalty for $3 million in 2015, and another 0.5% Royalty for $3 million in 2016. The only remaining option is a construction option after Excelsior has obtained 50% of construction financing: Altius will be able to purchase a 0.5% Royalty for $5 million.

 

My guess is they pass yet again. Significant skepticism about the project. Heap leaching not 100% proven method?"

 

 

I think this one becomes a mine.  I don't think financing is going to be an issue on this project.  I think they declined those because at that stage the project was more risky.  At this stage it really is just waiting to see if they get the permits.  The initial capex is way too low for it not to become a mine if they get the permits.  I would bet Altius takes that final 0.5% royalty on that last option because if it gets to that point the risk is extremely low that it doesn't get built.  It will not be material right away but if it gets built it's likely to expand over time and could become material if they expand to the planned year 4 and 7 amounts.  This one is really all about the permits IMO.

[linealdin]

"Thoughts on Excelsior Mining Royalty:

 

Altius has already declined to purchase additional Gunnison royalties 2 times. Declined a 0.5% Royalty for $3 million in 2015, and another 0.5% Royalty for $3 million in 2016. The only remaining option is a construction option after Excelsior has obtained 50% of construction financing: Altius will be able to purchase a 0.5% Royalty for $5 million.

 

My guess is they pass yet again. Significant skepticism about the project. Heap leaching not 100% proven method?"

 

 

I think this one becomes a mine.  I don't think financing is going to be an issue on this project.  I think they declined those because at that stage the project was more risky.  At this stage it really is just waiting to see if they get the permits.  The initial capex is way too low for it not to become a mine if they get the permits.  I would bet Altius takes that final 0.5% royalty on that last option because if it gets to that point the risk is extremely low that it doesn't get built.  It will not be material right away but if it gets built it's likely to expand over time and could become material if they expand to the planned year 4 and 7 amounts.  This one is really all about the permits IMO.

 

I agree Gunnison looks like its going to get built. Low capex for what will essentially be a 25 million pound per year demonstration project. If it works the market gives them the financing to quintiple production capacity. If it fails, it fails.

 

I disagree that Altius will pay $5 million for a 0.5% royalty. Gunnison will have to produce 400 million pounds to achieve payback on that $5 million (400 million pounds x 0.005 x $2.5 per pound of copper = $5 million). At Gunnison's current staged startup plan it will take 7 years to produce 400 million pounds. That is assuming everything goes smoothly, which it usually doesnt.

 

The ideal is that the project is partnered with a major mining company with mine building experience. That would take away some risk for Altius's royalty.

 

In November Greenstone bought a 1% royalty on Gunnison for just $4 million (they also did a $10 million private placement at 45 cents, which has doubled their money). If Altius is going to buy additional royalty from Gunnison it should be on similar terms, not the bad terms Callinan negotiated years ago.

 

 

[linealdin]

Met coal prices on a rollercoaster. Dropped to US $150 per tonne, but has doubled in just 2 weeks to over US $300 per tonne. On fire. The Cheviot royalty this quarter will be strong if Teck has timed its sales well.

[linealdin]

Tomorrow April 25th Labrador Iron Ore Royalty Corporation (LIORC) pays a regular dividend of 0.25 CAD and a special dividend of 0.25 CAD. Altius as owners of 1.15 million shares receives $575,000 CAD. The last time LIORC paid a special dividend was 2014, and they ended up paying a special dividend every quarter of that year. Lets hope for the same policy in 2017.

[linealdin]

Strange things happening with Bitterroot Resources, which Altius owns 4.05 million shares of in the Voyageur Nickel Project. On January 16th a share of Bitterroot was trading for 0.04 CAD. Yesterday it closed at 0.28 CAD. That is a 7 bagger in a few months. Only material change is that Bitterroot optioned a silver project. No discovery.

 

Market mania. I would cash in those shares and knock another $1.134 million from the longterm debt.

 

 

[linealdin]

First $25 million tranche of Fairfax investment in Altius has closed.

[nostradamus]

Strange things happening with Bitterroot Resources, which Altius owns 4.05 million shares of in the Voyageur Nickel Project. On January 16th a share of Bitterroot was trading for 0.04 CAD. Yesterday it closed at 0.28 CAD. That is a 7 bagger in a few months. Only material change is that Bitterroot optioned a silver project. No discovery.

 

Market mania. I would cash in those shares and knock another $1.134 million from the longterm debt.

 

 

I doubt they could off load the shares at anywhere near current prices in such a small cap illiquid stock. Unless of course there is something happening that we don't know about and an insider wants to buy, in which case maybe Altius should hold on to them.

[mikek]

I wonder when we will get more information on the Voisey Bay situation.  I remember Royal Gold mentioning on a conference call about 6-9 months ago that they would probably have an update in early 2018 or mid 2018 on that situation.  I highly recommend anyone interested in Voisey Bay, junior mining or Robert Friedland to check out the book The Big Score- https://www.amazon.com/Big-Score-Robert-Friedland-Voiseys/dp/0385259069

 

The upcoming quarter should be pretty good year over year.  The 777 mine looks like production was down this quarter but they must have had a backlog of product because it looks like the royalty will be about 3.37 Canadian if I'm reading it right.  The Chapada mine looks pretty steady and potash seems to be getting a little price increase.  Altius will be getting volume increases on that but I don't really expect too much difference year over year for royalty amounts until price goes up.  I would sell the LIF equity position and buy a different royalty if I were Altius.  It looks like Glencore is putting some royalties on the market and there are some other attractive royalties out there right now.  Adventus Zinc is very quiet and the Telka project seems to be moving ahead.  Alderon seems to be waiting on the Wabush situation but I really don't expect any market moving news on that one.  Alderon hired some guy from the medical field today to be on the board.  Not sure how in the world this guy is going to provide any value to a Iron ore company that is trying to get built.  A very strange hire.

[linealdin]

I wonder when we will get more information on the Voisey Bay situation.  I remember Royal Gold mentioning on a conference call about 6-9 months ago that they would probably have an update in early 2018 or mid 2018 on that situation.  I highly recommend anyone interested in Voisey Bay, junior mining or Robert Friedland to check out the book The Big Score- https://www.amazon.com/Big-Score-Robert-Friedland-Voiseys/dp/0385259069

 

The upcoming quarter should be pretty good year over year.  The 777 mine looks like production was down this quarter but they must have had a backlog of product because it looks like the royalty will be about 3.37 Canadian if I'm reading it right.  The Chapada mine looks pretty steady and potash seems to be getting a little price increase.  Altius will be getting volume increases on that but I don't really expect too much difference year over year for royalty amounts until price goes up.  I would sell the LIF equity position and buy a different royalty if I were Altius.  It looks like Glencore is putting some royalties on the market and there are some other attractive royalties out there right now.  Adventus Zinc is very quiet and the Telka project seems to be moving ahead.  Alderon seems to be waiting on the Wabush situation but I really don't expect any market moving news on that one.  Alderon hired some guy from the medical field today to be on the board.  Not sure how in the world this guy is going to provide any value to a Iron ore company that is trying to get built.  A very strange hire.

 

The positive case for the Labrador Iron Ore Royalty equity position:

 

Big dividends. Including the special dividend paid in Q1 LIF is set to pay a 7% dividend yield this year. That assumes no more special dividends this year, just the regular 25 cents a quarter.

 

Long resources and expansionary movements. 26 years of proven & probable reserves. Another 40 years of resources beyond that. We will all be dead by the time this mine runs out of ore.

 

IOC has increased production each of the last 5 years, reaching 19.2 million tonnes in 2016. Guidance for 2017 is 22 million tonnes. The Wabush 3 pit recently approved for development, which adds another potential 5 million tonnes of annual production capacity sometime in 2018.

 

Plenty of profit even at the current price of $62.49 USD per tonne, so the plan seems to be to keep increasing production despite the choppy iron ore market. Very good for the LIF royalty.

[linealdin]

What I would like from Altius over the next 3 years:

 

Sell down the junior equity portfolio at the right prices, pay off the $81 million in debt, and triple their dividend. Dividend yield would inevitably drive the stock price up.  (Setting the $25 million in Fairfax debt aside.)

 

My guess is Altius will end up paying off a little under $30 million in debt for the fiscal year ending on April 31st, 2017. Once the debt is erased some of that cash should flow towards increased dividends.

 

All of this can happen with Alderon and Excelsior both sticking in the mud and doing nothing.

 

Altius destiny is to be longterm dividend compounding monster.

[Haasje]

I disagree with the comments about selling off junior mining equities and dividends etc. I like the company for its assets but also its management and the team's ability to generate value by allocating capital within this industry. I want them to retain as much capital as possible until they get to a size where additional internal funding depresses aggregate IRR too much.

 

 

[mikek]

Hopefully they are taking a strong look at that Glencore royalty package- Antamina copper-zinc mine in Peru.  I know that Altius is very positive on  Zinc and copper long term.  If the numbers make sense I wouldn't mind Altius trying a joint bid with another royalty company.  I could see Osisko and Altius going after it with a joint bid.  That mine seems to fit the qualifications that Altius would look for if the terms make sense.  Bank of Nova Scotia which is Altius lender on the term loan/ line of credit is in charge of selling that portfolio for Glencore.  You have to figure that Altius is getting a chance to discuss the deal.  Some things that I found interesting on the loan documents that I haven't seen mentioned here.

 

The last paragraph of Section 1.1(40) of the Credit Agreement (definition of "Debt") is deleted and replaced with the following:

"except that current trade payables, share-based payment reserves and obligations and deferred taxes, in each case incurred in the Ordinary Course, do not constitute Debt and, for certainty, indebtedness owing under the Preferred Securities does not constitute Debt."

 

If I am reading that correctly the lenders don't consider the preferred debt as actual debt for debt ratio considerations.  That would make the preferred debt very attractive.  Don't get me wrong, I'm not a fan of the warrants if they use the debt but that preferred debt is permanent capital and at least Altius put $15 a share on those warrants.  Altius has consistently had to pay anywhere from 1.5 to 2 million each time they take on a new term loan/line of credit while the preferred securities are 5% fixed until April 26, 2077.  The lines of credit/ loans have to keep being refinanced every 2-5 years and there is a cost to that.  In an industry where Altius can find royalties at todays commodity prices that will earn 8-12%, 5% fixed rate interest only for that length of time is quite attractive.  I'm never a fan of diluting equity but after thinking about it some more I wouldn't mind Altius using that money if the right royalty deal is presented to them.  I still am of the opinion that this money will only be used if they can purchase a royalty that will pay immediately.

 

Section 6.4(22) of the Credit Agreement is deleted and replaced with the following:

"Coal Investments It shall not make any direct or indirect investment in thermal or metallurgical coal, other than (a) expenditures required to maintain investments in thermal or metallurgical coal that are owned as of the date of this Agreement and (b) purchases of interests in the Partnerships from other partners using the Fairfax Proceeds. In addition, the Parent shall ensure that none of the Partnerships does so."

 

I guess we will not be purchasing any new thermal or metallurgical coal royalties.

 

 

[Gamecock-YT]

Looks like they might be able to put the Fairfax cash to work if prices stay supressed for a meaningful amount of time.

[linealdin]

Got to be a market bottom for coal. Lenders so afraid of coal they are writing amendments into contracts against it. Most hated commodity.

[linealdin]

What is allowed in the amended credit agreements: buying the stakes of the other Prairie Royalties partners who own the remaining 47.64%. Liberty Mutual has the lion's share and John Tognetti, Chairman of Haywood Securities has a few percentage points. Fear of coal and/or longterm potash bear market creates desire to sell?

 

Also cheap royalties may be available in nickel and iron ore (two open spots in Altius's producing royalty mix), two commodities that have been hammered in recent years. A contrarian buys those commodities now.

[linealdin]

I disagree with the comments about selling off junior mining equities and dividends etc. I like the company for its assets but also its management and the team's ability to generate value by allocating capital within this industry. I want them to retain as much capital as possible until they get to a size where additional internal funding depresses aggregate IRR too much.

 

The junior mining equities are held to be sold. At the right price of course. They rocket to the moon, then fall back to earth. Altius timed its sale of 20% of Aurora Energy equity perfectly and pocketed $208 million (Aurora eventually acquired by Paladin, now Paladin as a whole with its producing mines and the Aurora property is worth less than that).

 

Alderon equity sale not timed correctly and Altius missed cashing out $120 million.

 

Dividends are a philosophical issue. Berkshire vs. Philip Morris. But Altius has indicated they will become dividend machine eventually. Their plan had been to pay a significant dividend fueled by the Alderon royalty. I believe the plan is to increase dividends once Altius is free of traditional debt (the preferred securities will stay on the books until 2022).

[Williams406]

The coal amendment in the credit agreement is interesting. Apparently, though, not all coal assets are out of favor:

 

http://www.reuters.com/article/us-australia-coal-m-a-idUSKBN1810UC