ALS.TO - Altius Minerals

[linealdin]

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.

 

Altius monetized a little under $10 million from the junior equity portfolio since May 2016. See project portfolio "proceeds" in recent presentations.

 

The shares will be sold. If this is inning one of a bull market there will be plenty of profittaking at the top.

[SharperDingaan]

Most would agree that ALS is a well-managed company; but nothing lasts forever, and everything is relative. ALS plays in just one sector of the mining food-chain, at times other sectors may offer higher quality, and far better value.

 

As Liberty points out, ALS is a continuous cluster of mining options riding on top of a royalty stream. But as mining is their business, they should be a lot better at picking the likely winners than either you or I. Over time, success should mean a bigger royalty stream and even more options – offset against a dividend stream (maybe). ALS essentially becomes a mining based hedge fund (using Talebs anti-fragile long straddle), paying a dividend. And the more change (or rapidity of change) in their world, the better they do.

 

The other similar quality type of mining based hedge funds, paying a dividend – are the actual big miners: Anglo, Glencore, Goldcorp, RTZ, BLT, etc. Yes it is different risks but it’s the same game, and you can even pick which minerals/risks you prefer. Many of these firms are currently 3-5 baggers since their lows – not that long ago.

 

Just as we rotate business sectors through the economic cycle, we also rotate business models. It’s a dance, partners change, and it’s well understood by everyone in the resources business. As at all dances – manners matter.

 

ALS has some solid options, but most would recognize that they will not all work out as originally hoped. Most often things take longer, & don’t end up as rewarding. Kami’s very short payback pretty much ensures that it will eventually get built, but it’s not a guarantee that it will be on this cycle. That’s the nature of the business.

 

Re disclosure; we sold 50% of our ADV position when we side-pocketed it, and have recently bought it back at lower prices. We are now back to our 100% position.

 

SD

 

[no_free_lunch]

I have a very small position here, probably just under 0.5% of portfolio and have been loosely following for the past 5 years.  Basically I have bought and sold it on dips a few times but got stock buying a "dip" at $13 a couple years ago.  I think you are right to be skeptical liberty.  Even if you compare to say xma.to the performance has been very mediocre relative to their benchmark assuming share price is a reasonable proxy.  The reason I mention my position size is I am not exactly beholden to the company.  All that being said, I think of it similar to SD, sort of like the stock itself is a low-priced option and an inflation hedge.  That is ALL it is to me though, I don't think of it as a compounder.  It would have to drop quite a bit more before I added beyond my small position.

[linealdin]

Anglo ran from a high of 3421 in 2011 to 226 in early 2016. Not a rollercoaster I am interested in riding. Do you have the stomach to lose 94% in value?

 

Altius has a tremendous margin of safety. Very low risk of ruin. Debt is very low compared to cash, equities and royalty receipts. Bear market could begin tmrw and Altius will be fine. Some of those large mining conglomerates wont be.

 

And if there is a long bull run I expect Altius to multiply its stock price.

[SharperDingaan]

Anglo ran from a high of 3421 in 2011 to 226 in early 2016. Not a rollercoaster I am interested in riding. Do you have the stomach to lose 94% in value?

 

Altius has a tremendous margin of safety. Very low risk of ruin. Debt is very low compared to cash, equities and royalty receipts. Bear market could begin tmrw and Altius will be fine. Some of those large mining conglomerates wont be.

 

And if there is a long bull run I expect Altius to multiply its stock price.

 

Invert this, & think again.

It's highly unlikely that ALS will increase 15x (3421/226) in 5 years - even if every one of their options came in wildly successful.  Yes, all these big miners cratered - but not one of them went under; in large part because they had production they could sell via royalty to repay debt. Size mattered.

 

And that is the point ...

From time to time these things WILL happen, and when they do; an Anglo becomes a far better INVESTMENT than an ALS - because it can be bought so cheaply. Both may be very well run, but the case for Anglo becomes compelling.

 

SD

 

[netnet]

I suggest that all of us re-read SD's comments on mining.  I have come to realize that not only is mining a commodity business, duh, no one in the sector, even Altius is a reliable compounder.  Altius is not like the bad juniors (or even majors) in that it does not destroy capital.  Dalton is probably one of the best in the industry, but you still have to pay close attention to mining and financial cycles in the business, as the sharp Sharper has pointed out.

 

On the other hand, one should not believe that the stock price necessarily reflects value.  Is Altius a more valuable company now versus 5 years ago, if you can not answer the question, then you should not be in the stock and if the answer is no you also (probably) should not be in the stock.

 

Furthermore, properly played, mining's volatility can produce incredible returns to disciplined investors, the following off their lows produced great gains:

• major's debt
  
• Champion
  
• Alderon
  

 

 

Mining can produce incredible losses as well.  The question is how do you time your purchases?  That is difficult, but a good rule of thumb is wait at least 4 years after the peak to buy, and again only buy along side the smart money.

 

See SD's comments on this thread:

http://www.cornerofberkshireandfairfax.ca/forum/strategies/mining-debt-and-investing-in-miners-generally/

 

My nomination for quote of the month:

A thick skin, deafness, and a hairy arse

[linealdin]

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.

 

I do agree I would never buy junior equities with my own money. But Altius has access to vend-out shares if they found the property, they have relationships with management, they typically receive warrants and sometimes royalties to go with their private placement.

 

I have to emphasis that Altius not being able to sell shares is dead wrong. Altius sells junior mining shares whenever it likes, often taking advantage of full warrants they are granted. They are very mercenary when a stock has moved up significantly.

 

Example: in 2009 thay did a $930K private placement with Millrock. 22 cents a share with full warrants at 30 cents. When the stock reached 50 to 80 cents they exercised the warrants and sold more than half the position to ensure a healthy profit on the original investment. They still have a legacy 5% equity stake in Millrock to participate in any major discoveries (equity stake was 15% of Millrock at one point).

 

Did that aggressive selling please Millrock? Did it help their ability to finance? Hell no. But Altius needed to make a profit. That is business.

 

This profitable deal also created a number of royalties for Altius. Option value.

 

The strategy continues. $10 million in junior equities monetized last year. It went towards debt repayment.

 

 

 

 

[linealdin]

They make major motion pictures about people who correctly call the top or bottom of a market. See The Big Short.

 

I have no interest in timing, which I am almost certainly going to get wrong, and no interest in the risks that come with pursuing 15 baggers in 5 years.

 

Our hope is that we have reached a bottom in iron ore, potash, and nickel, and that the bull market in copper and zinc is in the early stages.

 

Altius either drowns in revenue in a bull market, or it stagnates for another 10 years. But the downside is very limited.

[SharperDingaan]

Everybody has different risk appetites and investment horizons - there is no 'one' solution.

 

We just take a much more granular view than most others, and prefer to focus on the businesses themselves and their relevant risks - not industry 'valuation'. Ultimately we're optimizing for greatest amount of quality, at the lowest possible price, over an extended time frame. We're also training nephews in risk management, in the expectation that they become very good at it.

 

In theory, over time we will end up looking something like WEB; core portfolio of very high quality bought at very cheap prices, and a whole pile of promising nominal/zero-cost options funded from annual dividend and hedging gains. Within mining; growing positions in the majors, and a few development positions in maybe the top 10-15% of the more junior firms.

 

Long term, very strategic, and no particular time-horizon.

 

SD

 

 

[linealdin]

The stupidest thing Altius ever did was let Paul van Eeden invest $25 million of their money at what turned out to be the top of the market.

 

When van Eeden bought his juniors he didnt get any royalties. He didnt get full warrants. The equity positions didnt become strategically important. And he invested in things like Sparkfly, some kind of shopping software? What a mess.

 

I like the way Altius is investing now. Building up a significant stake in Evrim, with warrants, with an existing royalty on an Evrim property, at what looks like the beginning of a bull market (it's certainly not the top of a bull market, anyway).

[linealdin]

https://www.millrockresources.com/news/millrock-sells-stellar-copper-gold-project-for-equity-stake-in-new-alaska-exploration-and-development-company-polaris-minerals

 

Millrock sells Stellar copper/gold property. New company, Polaris Minerals, is raising $10 million to drill the property. Altius owns a 2% royalty on precious metals and 1% on base metals.

 

[linealdin]

https://www.millrockresources.com/news/millrock-sells-stellar-copper-gold-project-for-equity-stake-in-new-alaska-exploration-and-development-company-polaris-minerals

 

Millrock sells Stellar copper/gold property. New company, Polaris Minerals, is raising $10 million to drill the property. Altius owns a 2% royalty on precious metals and 1% on base metals.

 

http://coventryres.com/editor/articles/getfile.php?productindex=673&mode=1

 

Presentation on the Polaris Minerals acquisition of Stellar. Shows the Altius royalty claim blocks. Australian investors are funding $10 million, partially for a drill program this summer.

[linealdin]

http://www.explorationmidland.com/en/Communique.aspx?ResourceId=bc34b058-0a51-461d-8a83-5cc5ac414bce

 

Update on Midland Exploration alliance for gold exploration in James Bay region. Searching for next Eleonore mine. $500K allocated for mapping, prospecting and till sampling at 4 exploration projects.

[linealdin]

https://www.albertaoilmagazine.com/2010/08/replacing-coal-with-gas-fired-peaking-plants-is-no-quick-switch/

 

Article from 2010 with Nancy Southern, CEO, talking about conversion of ATCO's coal plants to peaking natural gas plants, at the annual meeting in May.

 

"We certainly see a role for replacing some of our older thermal generating units as gas peaking units," she told Canadian Utilities shareholders in May. She pointed to the firm's Battle River power station as an example of the switch.

 

Flashforward to 2017. Seven years later and still no definite plans released regarding a Battle River conversion, though Nancy Southern is still blathering on about gas conversions at the May annual meeting. (And I hope I'm not wrong but I don't think Sheerness is as high a priority for conversion as Battle River). I don't believe the hype, I do believe the facts of electricity usage.

 

In 2010 coal accounted for 60% of Alberta's electricity usage. I check AESO for daily electricity reports and coal today accounts for around 50% of Alberta's electricity usage. Let's hope for another 7 years of dithering and slow drawdown.

[linealdin]

https://www.aeso.ca/grid/forecasting/

 

Check out the AESO 2016 Long Term Outlook. The document presents an appendix with coal plant retirement date assumptions. There is a reference case (backloaded retirements in late 2020's) and an alternate policy case (frontloaded retirements in early 2020's).

 

Genesee Royalty

Genesee 3: Dec. 31, 2029 (Ref); Dec. 31, 2029 (Alternate)

Genesee 1: Dec. 31, 2029 (Ref); Dec. 31, 2028 (Alternate)

Genesee 2: Dec. 31, 2027 (Ref); Dec. 31, 2026 (Alternate)

 

Sheerness Royalty

Sheerness 2: Dec. 31, 2027 (Ref); Dec. 31, 2027 (Alternate)

Sheerness 1: Dec. 31, 2027 (Ref); Dec. 31, 2026 (Alternate)

 

Highvale Royalty

Keephills 3: Dec. 31, 2029 (Ref); Dec 31, 2029 (Alternate)

Keephills 2: Dec. 31, 2028 (Ref); Dec. 31, 2024 (Alternate)

Keephills 1: Dec. 31, 2028 (Ref); Dec. 31, 2023 (Alternate)

 

Sundance 6: Dec. 31, 2028 (Ref); Dec. 31, 2020 (Alternate)

Sundance 5: Dec. 31, 2027 (Ref); Dec. 31, 2020 (Alternate)

Sundance 4: Dec. 31, 2026 (Ref); Dec. 31, 2020 (Alternate)

Sundance 3: Dec. 31, 2026 (Ref); Dec. 31, 2020 (Alternate)

Sundance 2: Dec. 31, 2019 (Ref); Dec. 31, 2019 (Alternate)

Sundance 1: Dec. 31, 2019 (Ref); Dec. 31, 2019 (Alternate)

 

Paintearth Royalty

Battle River 5: Dec. 31, 2028 (Ref); Dec. 31, 2021 (Alternate)

Battle River 4: Dec. 31, 2025 (Ref); Dec. 31, 2019 (Alternate)

Battle River 3: Dec. 31, 2019 (Ref); Dec. 31, 2019 (Alternate)

 

The only coal plant retirements actually announced are by Transalta: Sundance 1 & 2 mothballed at end of 2017, all other Sundances and Keephills 1 & 2 converted from coal between 2021 and 2023. These dates are roughly in line with the Alternate Case scenario envisioned by AESO, the electrical system operator.

 

Nancy Southern's goal for ATCO to convert its coal plants earlier to gas than its competitors certainly makes sense in terms of Battle River. Those plants are older than their competitor's plants, therefore will convert earlier.

 

I would be thrilled if the actual retirement dates align with either the Reference or Alternative Case retirement dates for Genesee and Sheerness. Plenty of money left in those royalties.

 

We have to remember that AESO doesnt want Genesee and Sheerness retired tomorrow. That would throw the grid into chaos. The plan is to slowly build 4000 MW of renewable energy by 2030 to replace 2/3 of the coal power. The remaining third of the coal capacity will be replaced by lower emission natural gas.

[mikek]

http://www.marketwatch.com/story/champion-iron-completes-sale-of-10-million-convertible-debenture-2017-06-01-19160139

[linealdin]

http://www.marketwatch.com/story/champion-iron-completes-sale-of-10-million-convertible-debenture-2017-06-01-19160139

 

Brilliant.

 

1) More fruit borne from the relationship with Michael O'Keeffe, Chairman of Champion. A couple of years ago Altius sold Snelgrove Lake to Mamba Minerals, his vehicle. Mamba then merged with Champion, then Champion bought the rights to Bloom Lake in bankruptcy. O'Keeffe gets things done (previous venture was selling a coal explorer for four billion at the top of the market).

 

Over the long term O'Keeffe may have the firepower to consolidate the Trough if good projects like Kami and Julienne Lake don't make it on their own. (IOC is also located very close to Julienne Lake and Kami, they will eventually need more ore to expand production or extend life of processing plant.)

 

2) Altius deploying some of that Fairfax cash. Paying Fairfax 5% interest, receiving 8% interest from Champion.

 

3) Interesting bet. If Champion gets the minimum $212 million master financing by November that would be most of the capex required for mine restart. The feasibility study plans for mining to begin in Q1 2018. A successful mine restart should send the stock price soaring. Converting at $1 per share could be quite a bargain.

 

4) If Champion doesnt get the $212 million then the stock likely tanks, the share conversion price gets cheaper, the debenture may not be repaid and a royalty is possible. Most likely Altius wants to convert the $10 million to Champion shares. I don't think the primary purpose of this deal is making $800K in interest.

 

5) 7.4 million tonnes X 0.21% royalty X $65 per tonne iron ore price = ~$1 million USD annual royalty revenue.

 

6) Dalton made a comment in the last quarter review about believing that the high quality Trough iron ore has a place in the market. This debenture financing and the investment in LIF attests to that belief.

 

7) I remember a debate on this board about what the Fairfax money was for: financing Kami or investing in new deals? Answer is new deals. I'm sure Alderon could use the $10 million, too, but it looks like Champion is a much easier mine to put back into production.

[linealdin]

Champion needed $40 million in bridge financing to finance construction activities this summer. My guess is Altius certainly would have provided that $40 million in a royalty financing. 1.5% gross revenue royalty for $40 million, something in that range, but Champion preferred the structure they chose.

 

Royalty financing still in play if Champion gets desperate for capex.

[linealdin]

Contrarian play. Investing in iron ore when others are scurrying for cover.

 

Vote of confidence in O'Keeffe's ability to obtain financing. I don't think Altius makes this investment unless they have a strong belief that the mine will indeed restart, and very soon.

 

Quebec government owns more than a third of the Bloom Lake project. They are putting significant government funds towards both the debt and equity portions of the mine financing. Quebec wants to put iron ore miners back to work. What the hell is the NL government doing to help out of work miners?

 

 

 

 

[linealdin]

http://www.globalminingobserver.com/okeeffe-buying-opportunity-labrador-trough-108-1

 

Article from December 2014 is interesting. Dalton and O'Keeffe are friends with shared interest in Montreal Canadiens hockey.

 

Discusses how Kami, Julienne Lake, Bloom Lake etc could eventually be under a "consolidated umbrella" according to O'Keeffe.

 

Discusses how Chinese steelmakers are on the sidelines, but Japanese steelmakers are very interested in low impurity Trough iron ore. That turned out to be true. Champion recently signed offtake with Sojitz Corporation, a Japanese trading firm.

[netnet]

http://www.globalminingobserver.com/okeeffe-buying-opportunity-labrador-trough-108-1

 

Article from December 2014 is interesting. Dalton and O'Keeffe are friends with shared interest in Montreal Canadiens hockey.

 

That was the article, plus a former CoBF member, Dazel, that turned me on to O'Keefe and Champion.

 

Here is another article two years later from the same publication and the stock had barely moved a year and a half from the first mention. Then bang now it is up 4x, (but there was also a general mining uptick too): http://www.globalminingobserver.com/flying-michael-okeeffe-champion-iron-172

 

[linealdin]

Window of royalty buying should still be open. If Altius bought something today the Dow Jones Mining Index would be lower than when they bought Sherritt, only marginally higher than when they bought Callinan. We are still in the trough of the cycle.

[linealdin]

http://osiskogr.com/en/osisko-acquires-orion-mine-finance-royalty-portfolio-2/

 

Osisko buys royalty package for $1.125 billion. When they bought Virginia Mines it was considered that they paid full price. This is even more of an overpay.

 

If you add up the expected payments from the listed royalties and streams it doesn't get to a billion.

 

Worst thing in the portfolio: Brucejack is a cornerstone stream which will bring in net CAD $356 million at current prices over life of stream but it could be repurchased at the end of 2018. Osisko's share of repurchase price will amount to US $119 million or CAD $160.44 million at current exchange rates.

 

This is how you outbid major precious metals royalty players like Franco Nevada and Royal Gold. Overpay and hope for the best.

 

Relevance to Altius: It is better to be in the base/bulk space, much less competition. Actually no obvious competition since Sandstorm Metals is dead. Coal and potash are hated and/or boring but that Prairie deal will be ~27% paid off at April 30th, despite all the politics and hoopla.

 

*edit* I forget Anglo Pacific Group, which is the main competitor in the base/bulk space. They just invested $43 million in a uranium tolling agreement with Denison. It takes brass balls to invest in uranium right at the bottom of the market.

[linealdin]

http://ets.aeso.ca/ets_web/ip/Market/Reports/CSDReportServlet

 

In looking at the electricity generation numbers over the last couple of weeks I see the same trends:

 

1) Paintearth royalty will be very, very low. Battle River 3 and 4 are never up and running, even in peak demand periods during the day. Battle River 5 is running at half capacity or less. Those plants just seem to be uncompetitive for ATCO. I understand ATCO's desire to convert them from coal to gas. They are useless right now.

 

The other option for ATCO is to just shut all or some of the Battle River plants down. Not sure the Alberta system needs the gas peaking plants that CTG would create. The existing gas peaking plants are hardly ever in use.

 

The system needs credible baseload power to replace coal: efficient combined cycle natural gas, hydro or nuclear.

 

2) Both Sheerness plants running at full capacity.

 

3) Genesee 1 is down for scheduled maintenance. The other 2 Genesee plants are fine.

 

4) The Highvale royalty plants are up and running most of the time. I'm still highly skeptical that the system can afford to lose the 2930 MW of baseload power that Sundance and Keephills 1 & 2 provide by the end of 2023. CTG doesnt provide baseload power. Not the solution.

 

5) Renewables are supposed to be part of the solution. But wind is a small player. It's only available a third of the time. So you spend billions and billions to build 6000 MW of wind capacity but you are only adding 2000 MW of net generation to the grid. At best.

 

 

[linealdin]

http://altiusminerals.com/uploads/2016-NOV(BMO)--Altius.pdf

 

Check out slide 8 from this Altius presentation from November 2016.

 

Free Cash Flow Allocation: "As debt declines we can consider an increased shareholder capital return allocation."

 

On November 8th, when that statement was made, net debt (debt minus cash/equities) was $42 million. As of May 6th cash/equities surpassed debt by $19 million. That is a swing of $61 million in the right direction, in only 6 months. Where are we going to be in November 2017?

 

That is the plan. As they continue to do a tremendous job paying off the debt ($25 million paid off in FY 2017), they will turn their attention to the dividend. I expect a bump up to 4 cents per quarter in the first or second quarter. 1.6% yield at current stock price.

 

First quarter (announcement due June 21st) is the appropriate time to announce the 33% dividend increase to recognize: 1) the annual royalty revenue record; 2) the elimination of net debt position; 3) the beginning of a new financial year; 4) and to reward longtime shareholders for persevering through the bumps in the road.

 

Once the debt is eliminated in 2 or 3 years that really opens the possibility of having one of the highest yields in the sector.

 

Significant yield will bring in a whole new set of investors. Dalton wants Altius to become a long term compounder. Something investors arent used to in the mining sector.