ALS.TO - Altius Minerals

[linealdin]

Royalty Payback calculations:

 

Prairie Royalties was purchased for $240.9 million. As of January 31st, there has been 2.75 years of revenue totaling $59.523 million. $59.523 million / $240.9 million = 24.7% payback.

 

CDP was purchased for $42 million. As of January 31st, there has been a total of 2.75 years of revenue totaling $5.228 million. $5.228 million / $42 million = 12.4% payback.

 

Another 8.5 years of production (bringing us only to mid-2025) should pay back the Prairie Royalties. The gross profit will consist of whatever's left of coal (5.5 years of Genesee at least) and a virtually perpetual royalty on potash.

 

 

 

[cwericb]

linealdin,

 

I just thought I would let you know that I, and I am sure many others, appreciate the education and information you are giving us on Altius. Thank you.

[redhots]

Yes!  Very much appreciated.  I look forward to your posts on Altius.  Thanks linealdin.

[linealdin]

https://beta.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/alberta-strikes-136-billion-deal-with-power-companies-to-end-coal-fired-electricity-by-2030/article33035325/?ref=http://www.theglobeandmail.com&

 

They quote Terry Boston, lead consultant for the coal phaseout, as saying the key to a smooth transition is allowing half of Alberta's 18 coal-fired plants be converted to natural gas. The utilities seem to be following that advice.

 

The 9 older plants set to be converted: Atco's Battle River 3, 4 & 5, and Transalta's Sundance 3, 4, 5, & 6, and Keephills 1 & 2.

 

The really old plants that will be retired: Sundance 1 & 2 and H.R. Milner.

 

What's left? The untouchable supercritical technology Genesee 3 and Keephills 3, and the younger subcritical plants Genesee 1 & 2 and Sheerness 1 & 2.

 

I think it is neither necessary nor desired (by the regulators, who wish to keep some baseload stability) that the younger coal plants close before 2030. According to Transalta's latest presentation the provincial plan is a $10 billion, 5000 MW renewables buildout in the province as coal phases out. The coal to gas conversions (CTG) are meant to be "critical standby power to support new renewables."

 

http://www.transalta.com/wp-content/uploads/2017/05/TransAlta-Investor-Presentation-FINAL-2.pdf

 

The CTG plants are strictly for backup peaking power for when the wind doesnt blow.

 

The total effect on Altius: the Paintearth and Highvale royalties will decrease or be eliminated in the 2020 to 2023 window. The cornerstone Genesee and Sheerness royalties (87.7% of total thermal coal royalties in the most recent quarter) are untouched.

 

(Mine life for Sheerness is only 8 years but Altius did option some CDP land to Westmoreland Coal for what is called Sheerness West. If there is enough coal there why not Sheerness royalties through 2030?)

[linealdin]

Interesting note on page 10 of the Transalta presentation http://www.transalta.com/wp-content/uploads/2017/05/TransAlta-Investor-Presentation-FINAL-2.pdf

 

"~3000 MW of capacity is eligible for conversion" from coal fuel to gas fuel.

 

What does eligible mean? The Alberta government wants half of the 18 coal plants converted. That could be 3000 MW of the existing 6000 MW capacity. So half converted, but the other half ineligible for conversion because some baseload coal power is desirable for a smooth transition?

 

Or is only 3000 MW of the coal plants suitable for the CTG conversion technology? CTG is supposed to be ideal for 50 plus year old plants with sub-300 MW of capacity.

 

I'm fine with either interpretation as long as it is a hard rule.

 

EDIT: best explanation is that is 3000 MW of Transalta's which is eligible for CTG. Add up Sundance 1&2 (technically available for conversion as 50 plus year old plants) to Sundance 3, 4, 5, 6 and Keephills 1 & 2 and you get ~3000 MW.

 

Their 50% stakes in Genesee 3 and Keephills 3 excluded from this 3000 MW. Not sure about their 25% stake in Sheerness, which amounts to 200 MW net.

 

 

[Liberty]

Just thinking out loud:

 

I know that what matters is the underlying business, IV, stock price doesn't matter, etc.. But at some point the stock price matters, because that's how you realize value in the end.

 

So does it bother any ALS shareholders that the stock has basically been flat just above $10/share for 10+ years (with that big spike and then crash around 2007-2008 cancelling each other out)?

 

If IV has been building at a high rate during all that time, doesn't it mean that those who bought around $10 in the past massively overpaid? Or was it undervalued then (when the company was doing buybacks) and it's just much more undervalued now? Or did maybe the IV not go up quite that much during that time (commodity cycle impact, China cycle didn't last as long as expected, etc?)? Why is the market unwilling to assign much more than C$10/share to ALS? Just Mr. Market being crazy or maybe this business model is tougher than initially thought?

 

I'm not saying I know, I've just always found it interesting that apparently nothing can unstick this stock for $10-12 even over what most would consider a decently long period.

[cwericb]

They were up in the $14 range for a while and they also had a bit of boom and bust back when they were involved in the refinery.

 

However as you say, the stock price seems stuck. Investors may not recognize that the company has changed its focus in recent years to becoming a royalty company. A name change might help.

 

Going forward, if commodity prices, particularly iron ore, start to rebound it should have a positive impact on share price. Iron had made it back up to about $88 then dropped back to the low $60's a month ago.

 

One might hope that now that ALS has caught the attention of FFH, their visibility should rise - just so FFH doesn’t ever get anyway near a controlling interest.

 

Anyway that is just my 2 cents worth.

[mikek]

"Just Mr. Market being crazy or maybe this business model is tougher than initially thought?"

 

I don't think Mr. Market is being crazy, I can see a bullish and bearish outcome to Altius.  I can see how people can say it's fairly valued and I can see how others can see it as cheap.  I don't think the business model is tougher than people thought either.  I think Altius is in a good position because there just aren't many royalty companies in commodities other than precious metals.  The precious metals royalty companies pretty much have to stay at 80% of their royalties in precious metals so they usually will not even compete with Altius.  The market simply has questions whether the investments they have made over the last 3-4 years have been value creative or destructive.  The 777 mine is done in the 2020-2021 timeframe and the market isn't sure about the coal royalties.  The big factor will be whether Altius can continue to find attractive royalties such as the Chapada deal and can continue to grow the royalty income.  I have no concerns over the prospect generator side, they have proven that they can be very successful in that department.

 

The market is saying the royalty deals they have made haven't been good deals.  Only time will tell whether that statement is true or false.

 

 

 

 

[linealdin]

For non-precious metals we are still in the first inning of what will hopefully be a long bull market.

 

Altius is being punished for ADV not going into production and a wild fear of coal.

 

I love the coal assets. All I see is money flowing in every quarter. That cash flow and the dividends will eventually convince the market.

[linealdin]

Callinan payback calculation:

 

$15.484 million revenue received / $60.43 million purchase price = 25.6% payback in 1.75 years.

 

(Yes, it was just $60.43 million CAD net, not the $112 million sticker price once the cash, investments, existing ownership stake Altius held are considered. Confirmed with Altius management.)

 

Payback should be achieved in mid-2021 when 777 reserves run out. Profit will be whatever the Excelsior royalty produces, and the 3% royalty on whatever mines Hudbay discovers in Flin Flon. Callinex royalty options also. They are going to find something--26 producing mines found in the area over last 100 years.

 

Any wild runup in value in shares of Excelsior, Adventus, and some other legacy junior explorers from the acquired Callinan portfolio can also partially be considered Callinan related profit. The Excelsior equity stake by itself is worth over $5 million today. Evrim stake worth over $2 million.

 

Does that $7 million matter? In terms of the Callinan acquisition, yes, because the net price paid was just $60 million.

[linealdin]

http://www.labradorironore.com/News-Releases/Press-Release-Details/2017/Iron-Ore-Company-of-Canada-Dividend/default.aspx

 

IOC pays LIF a big $15 million dividend. LIF likely passes it on as a special dividend to its shareholders. I expect another $0.50 dividend announced in early June ($575K for Altius).

 

IOC doing well. If they have a bad year (like 2015) they pay zero dividends.

 

 

[linealdin]

ADV stock up 42.5% in a week (while iron ore price has been tumbling) from 27 cents last Thursday to 38.5 cents at closing today. Must be some good company news slowly leaking out.

 

Wabush Mines's bankruptcy protection only lasts until June 30th, 2017. The monitor will likely want to make a decision on a buyer for the mine soon. ADV, of course, wants to use the mine as a tailings pit, saving it a couple of hundred million.

[linealdin]

I think Alberta utilities will bide their time, see who wins the 2019 election, and see what policies will be in place once most of the PPA's expire at the end of 2020.

 

See what Transalta is doing: decommissioning and/or mothballing Sundance 1 & 2 at the end of 2017 means very little. Both plants were scheduled to close at the end of 2019. Zero dollars are actually being spent.

 

The planned coal to gas conversions are scheduled for 2021 to 2023. In that time frame there will be much more certainty about how to proceed.

 

The mayor of Hanna, where Sheerness is located, has suggested the town take a portion of the $195 million in compensation the NDP has allocated to coal towns. Then hope for a united conservative election win in 2019 and allow their coal plant more life. The united conservative party has a clear agenda: kill the carbon tax and reverse the NDP's electricity policy. That is what they will campaign on. The utilities will wait out the election before spending serious cash on conversions or buildouts.

 

All delays are good for Altius.

[linealdin]

The 2015 election win by NDP could not have been foreseen by Altius when it bought the Prairie Royalties in 2014. Lefties hadn't won in Alberta since 1935!

 

A business as usual conservative government would have negotiated extensions with the federal government past 2030 for its coal plants, just like SAS and Nova Scotia.

 

Just an incredible piece of bad luck, which hopefully will be mitigated in 2019. Notley and NDP are unpopular and would lose an election if held today.

[linealdin]

http://www.marketwired.com/press-release/canex-metals-inc-completes-gibson-option-agreement-with-altius-resources-inc-announces-2217448.htm

 

http://www.evrimresources.com/s/news-releases.asp?ReportID=790605

 

Canex Metals completes option agreement for Gibson property. 1.15 million shares to Altius, and 1.5% royalty.

 

Altius participates in Evrim private placement, spending $1.2 million to buy 4 million shares at 30 cents (and 2 million warrants). Altius now holds 11.453 million shares, or 17.5% of Evrim. Current value of Evrim stake is $3.32 million.

 

Buying shares of a junior prospect generator instead of paying off more of the $79 million in debt. Altius must be fairly comfortable with the debt level, and like Evrim's prospects.

 

 

 

[linealdin]

Everyone's investment timeframe is different. Mine is forever for my Altius shares. They stay in my tax shielded retirement account until I die, then my daughters inherit. As Rick Rule says, hopefully the kids will be smart enough to hold on to the shares.

 

In the short term a low stock price can be disadvantageous to management (private placements would dilute too much) but I like dividends being reinvested at low prices, and cheap buybacks. And if we get to ridiculous territory I might get a chance to double my holdings.

 

I do argue strongly for a consistent and growing dividend. The compounding of reinvested dividends in very troubled periods can eventually lead to tremendous total gains. See Philip Morris during its decades of litigation problems. Best blue chip stock in history.

[linealdin]

Base Case

 

Gross oversimplification of the Prairie, CDP, 777, and Chapada purchases: $424 million paid upfront for ~$50 million in annual revenue. 8.5X annual revenue.

 

$103 million in revenue paid back so far (24.3%).

 

2017 - 2020: $200 million in revenue expected

 

2021 - 2030: $250 million in revenue expected (only Chapada, Genesee, Potash and CDP producing; every other royalty is extinguished on December 31st, 2020)

 

Beyond 2030: to be conservative only 6 more years of Chapada revenue: $60 million

 

                    and 30 more years of Potash and CDP revenue: $210 million.

[linealdin]

Base Case

 

Gross oversimplification of the Prairie, CDP, 777, and Chapada purchases: $424 million paid upfront for ~$50 million in annual revenue. 8.5X annual revenue.

 

$103 million in revenue paid back so far (24.3%).

 

2017 - 2020: $200 million in revenue expected

 

2021 - 2030: $250 million in revenue expected (only Chapada, Genesee, Potash and CDP producing; every other royalty is extinguished on December 31st, 2020)

 

Beyond 2030: to be conservative only 6 more years of Chapada revenue: $60 million

 

                    and 30 more years of Potash and CDP revenue: $210 million.

 

The Positive Case

 

Squeeze one extra year beyond 2020 from 777 mine: $10 million

 

Squeeze 3 extra years beyond 2020 from Sheerness, Paintearth and Highvale: $21 millon

 

A mine life extension to 2027 for Cheviot: $12 million

 

Total: $43 million

[bizaro86]

Callinan payback calculation:

 

$15.484 million revenue received / $60.43 million purchase price = 25.6% payback in 1.75 years.

 

(Yes, it was just $60.43 million CAD net, not the $112 million sticker price once the cash, investments, existing ownership stake Altius held are considered. Confirmed with Altius management.)

 

Payback should be achieved in mid-2021 when 777 reserves run out. Profit will be whatever the Excelsior royalty produces, and the 3% royalty on whatever mines Hudbay discovers in Flin Flon. Callinex royalty options also. They are going to find something--26 producing mines found in the area over last 100 years.

 

Any wild runup in value in shares of Excelsior, Adventus, and some other legacy junior explorers from the acquired Callinan portfolio can also partially be considered Callinan related profit. The Excelsior equity stake by itself is worth over $5 million today. Evrim stake worth over $2 million.

 

Does that $7 million matter? In terms of the Callinan acquisition, yes, because the net price paid was just $60 million.

 

Couple questions on this. It seems that the equity stake they had prior to the full takeover should be accounted as part of the cost of the acquisition, given that they paid for it with money.

 

Also, is your $7 MM for excelsior/evrim profits you can deduct from your cost, as weren't the values of those investments already deducted from the $112 MM to get you down to $60? Seems like potentially double counting...

 

Anyway, long ALS, but thought I'd see what you thought about those points.

[mikek]

I thought some people might find these attachments interesting from the book- Potash- An Inside Account of Saskatchewan's Pink Gold by John Burton.

 

The first attachment shows how the Potash production looked like in 1972.  I put a - by all mines that Altius has royalties on.  Rocanville is at the very bottom.

 

The next two images show Potash Sales value from 1962 until 2012.

 

2013- 5.6 billion

2014- 5.7 billion

2015- 6.1 billion

 

The last attachment shows how Saskatchewan looks like today.  Altius has royalties on the majority of these mines other than  Lanigan, Belle Plaine and K&S Legacy. 

 

One thing that I found out that I had never heard about is that the Government of Saskatchewan was threatening to expropriate the potash mines in 1975.  The government basically forced the private companies to sell the mines to the government.  The government purchased about 40% of the potash capacity of Saskatchewan.  The industry was private from 1962-74, public from 75-88 and back to private again from 89- until current.  One other interesting thing was that BHP kept mentioning that the Jansen mine would be built in 2009, 2013, 2017 and now they are saying 2023.  That is good for Altius that they seem to keep pushing it off until the market warrants it.  The book gives a pretty good history of how the potash market was formed and how it has developed over the years.  It only goes to 2013 so it's not exactly current but it does give me a better view of the industry.

[linealdin]

Callinan payback calculation:

 

$15.484 million revenue received / $60.43 million purchase price = 25.6% payback in 1.75 years.

 

(Yes, it was just $60.43 million CAD net, not the $112 million sticker price once the cash, investments, existing ownership stake Altius held are considered. Confirmed with Altius management.)

 

Payback should be achieved in mid-2021 when 777 reserves run out. Profit will be whatever the Excelsior royalty produces, and the 3% royalty on whatever mines Hudbay discovers in Flin Flon. Callinex royalty options also. They are going to find something--26 producing mines found in the area over last 100 years.

 

Any wild runup in value in shares of Excelsior, Adventus, and some other legacy junior explorers from the acquired Callinan portfolio can also partially be considered Callinan related profit. The Excelsior equity stake by itself is worth over $5 million today. Evrim stake worth over $2 million.

 

Does that $7 million matter? In terms of the Callinan acquisition, yes, because the net price paid was just $60 million.

 

Couple questions on this. It seems that the equity stake they had prior to the full takeover should be accounted as part of the cost of the acquisition, given that they paid for it with money.

 

Also, is your $7 MM for excelsior/evrim profits you can deduct from your cost, as weren't the values of those investments already deducted from the $112 MM to get you down to $60? Seems like potentially double counting...

 

Anyway, long ALS, but thought I'd see what you thought about those points.

 

Great points. The 6% stake  in Callinan was purchased way before the Callinan merger. Like in 2011. Not sure exactly how much those shares cost originally. Given the time gap I considered those shares separately as sunk costs. Maybe that isnt sensible.

 

The whole equity position Altius received from Callinan in May 2015 was only worth $5 million. Now the Excelsior shares alone are worth $5 million. There has been a significant run-up in that Callinan equity position. Maybe a triple. The Excelsior shares have quadrupled since May 2015. The run-up (including share sales) of ~$10 million has not been double counted.

 

Adventus IPO would never have happened if Altius hadnt acquired Callinan's minority stake in Adventus Exploration. Callinan planted that seed in 2012. We shall see if Adventus Zinc can really make that seed blossom over the next few years.

 

[Liberty]

Everyone's investment timeframe is different. Mine is forever for my Altius shares. They stay in my tax shielded retirement account until I die, then my daughters inherit. As Rick Rule says, hopefully the kids will be smart enough to hold on to the shares.

 

In the short term a low stock price can be disadvantageous to management (private placements would dilute too much) but I like dividends being reinvested at low prices, and cheap buybacks. And if we get to ridiculous territory I might get a chance to double my holdings.

 

That sounds great, but I think if you think about it some more, you can't make decisions like that rationally because you don't know how the business and management will evolve in the coming years. I suppose it could be an aspirational goal, but personally I'd keep an eye on things and revisit periodically and sell if I discover I'm wrong. I used to own Altius, and I used to look at the commodity sector and listen to a bunch of Rick Rule interviews. He's a very articulate guy, and he has great things to say about Altius (even though he never says the name). But ALS has been underperforming something like a SP500 ETF for over tens years, and has way underperformed even something pretty vanilla like MKL.  At some point you have to decide if your capital is actually compounding faster than the market or not, and once you're behind by that much, what kind of returns would you need going forward to do decently, and is that realistic...

 

Still thinking out loud here... ALS has a bunch of cheap call options on potential mines and royalties. But they had a bunch of cheap call options 10 years ago too, and I can't say that where they are today is exactly a huge success compared to that. 1% dividend yield, still debt to pay down for a while longer, then maybe the dividend will increase a little and finally help move the stock a bit.. But what CAGR are you getting after a decade?

 

I think one of the biggest misconceptions about the ALS model back from when I was following it was the whole "royalties are great because you don't have to spend the capital to build the mine and take the risk yourself". That model takes you up to a point, but *someone* still has to spend all that capital and take all that operational risk, and if they can't make it, you don't get your royalty, or it's delayed potentially by years and years, as we've seen with Alderon (which many expected to be becoming a working mine by now). If your partners go bust because they're a mismanaged junior mining POS or if the commodity cycle whacks them (China slowdown, US slowdown, whatever), you still take a hit to your royalty. You also have political risk, always, mines have to be approved, are regulated (burden could go up, making some mines uneconomic) etc. Coal could be phased out faster in Alberta at the stroke of a pen (just like the pendulum in the US could swing hard the other way in a few years).

 

All this to say that the model doesn't sound nearly as low-risk, predictable, and simple as it once did to me. But I could be wrong.

[linealdin]

$98 million in cash and public equities.

 

$79 million in debt.

 

$200 million in revenue to collect until 2020.

 

$250 million to collect from 2020 to 2030.

 

This is the base case with disaster for Cheviot, Sheerness, Paintearth, Highvale in 2020, and Alderon and Excelsior getting mothballed for the next decade, and losing the Voiseys Bay lawsuit and never getting another dime from Vale.

 

I see the debt being wiped out within 2 to 3 years. I understand the gloom over the performance over the past 10 years. I just don't get the gloom as I look to the future.

[bizaro86]

The only comment I would make about the public equities is I personally don't like valuing them all dollar for dollar. The LIF, sure, they're a producing royalty on a big mine. But all the exploration juniors are something I would never buy with my own money. Altus can't really sell the shares, because it would hurt the companies ability to finance exploration and potentially build a mine, which is where the really big payout is. Also, it would hurt their ability to do future deals.

 

 

[Liberty]

$98 million in cash and public equities.

 

$79 million in debt.

 

$200 million in revenue to collect until 2020.

 

$250 million to collect from 2020 to 2030.

 

This is the base case with disaster for Cheviot, Sheerness, Paintearth, Highvale in 2020, and Alderon and Excelsior getting mothballed for the next decade, and losing the Voiseys Bay lawsuit and never getting another dime from Vale.

 

I see the debt being wiped out within 2 to 3 years. I understand the gloom over the performance over the past 10 years. I just don't get the gloom as I look to the future.

 

It's not gloom, just skepticism that this is quite what people thought it was even 5 years ago, and that outperformance is as likely as some think. This is a tough industry. Expectations for Sandstorm Metals & Energy were really high too.

 

I wish shareholders that everything starts working and that your patience is finally rewarded. But even if it doubled overnight, it would still be lagging the sp500 for long term holders. Newer shareholders would be the ones getting a better deal...