ALS.TO - Altius Minerals

[linealdin]

http://cdn.ceo.ca.s3-us-west-2.amazonaws.com/1cdtf24-high%20res%20map%20Finland.png

 

This is a map of Altius's exploration land in Finland. They seem to be piggybacking on recent excellent gold exploration results by Aurion Resources in the Central Lapland Greenstone Belt. The CLGP is supposed to be underexplored elephant territory.

 

Altius's land position is ~225,000 hectares and was staked in August 2016 (well before Aurion went parabolic in February of this year).

 

Aurion has been a 50 bagger in 2 or 3 years. Aurion's CEO Mike Basha is a Newfoundland guy and tries to run Aurion as an Altius-inspired prospect generator.

 

Anglo American's Sakatti Copper/Nickel/Platinum discovery is very close to Altius's claims, so there are non-gold targets as well.

 

We won't hear about Finland for a little while. First the exploration lands are reserved (the stage Altius is at), which allows for limited surface exploration, then drilling exploration permits are approved, which can take many months. Quite different from Canada.

[nostradamus]

linealdin, the amount of information that you are digging up and providing to us all on the activities of ALS is astounding. It's really appreciated, many thanks.

 

On their staking in Finland, you mention that this could be piggy backing off the gold exploration results of Aurion. However, the ALS corporate presentation from May seems to suggest that their Finland properties are related to Nickel, so I guess maybe this is the main target. (the grey dot on slide 12).

 

N

[linealdin]

linealdin, the amount of information that you are digging up and providing to us all on the activities of ALS is astounding. It's really appreciated, many thanks.

 

On their staking in Finland, you mention that this could be piggy backing off the gold exploration results of Aurion. However, the ALS corporate presentation from May seems to suggest that their Finland properties are related to Nickel, so I guess maybe this is the main target. (the grey dot on slide 12).

 

N

 

My mistake. It must be the nickel of Anglo American's Sakatti that has attracted their attention. That mine is right next door to Altius's reservations.

[linealdin]

Excelsior's slowly (it's summer and people are on vacation) getting its proper credit for its receipt of the draft state permit. Closed at 79 cents on July 13th, news came out the next day, right now the stock is at 87 cents, a 10% increase.

 

More derisking to come with final state permit, EPA permit in September (they mostly follow the lead of the state regulators who do the heavy lifting) and project financing for the $47 million which should follow the permits quickly.

 

If the copper price is stable I expect the stock to run up in the second half of the year. Excelsior has a strong following with the newsletter writers and the microcap resource websites (they pay for some of that coverage, of course).

 

http://repository.azgs.az.gov/sites/default/files/dlio/files/nid1641/cr-15-a_in_situ_copper.pdf

 

The above has a more skeptical view from David Briggs, economic geologist, of the technical challenges of ISR at Gunnison. Main objections: the presence of calcite, which basically gums up the works leading to less copper recovery, and how fractured the rocks are naturally. Less fractures = less flow and less copper recovery.

 

The previous successful examples of copper ISR cited by Excelsior have been brownfield mines. An open pit or underground mine comes to the end of its economic life, but then a bright engineer has the idea of injecting some solution into the pit walls to extract the rest of the lowgrade copper. Sometimes they blasted the ore with dynamite to create more fractures for the solution to flow through.

 

Taseko's Florence and Gunnison are greenfield projects and they won't be blasting the ore. They depend on the natural fractures and the existing condition of the ore. Florence is more fractured than Gunnison.

 

There certainly seems to be technical execution risk for Excelsior. Greenstone Capital supposedly spent $250K and 6 months vetting the Gunnison project before they made their significant investments. Hopefully they are the smart money and hired smarter geologists for due diligence than David Briggs.

 

If I were Altius I would decline the remaining 0.5% royalty option, sell the stock aggressively as it runs up before commercial production begins, and leave the 1% royalty to enjoy successful ISR execution.

 

If Altius times its trades right it could cash out $15 million to $20 million from its Excelsior shares. Will go a long way towards payback on the Callinan acquisition and knocking down more longterm debt.

 

 

 

 

[linealdin]

Thought exercise: LIF and ALS merger

 

LIF trades at $16.25, 64 million total shares, ~$115 million annual revenue, zero debt

 

ALS trades at $10.28, 43.34 million total shares, ~$55 million annual revenue, $79 million debt

 

LIF shareholder receives 1 share of Newco for every LIF share.

 

ALS shareholder receives 1 share of Newco for every 1.6 shares of ALS.

 

Proforma: 91 million shares of Newco, ~$170 million in annual revenue

 

To satisfy LIF shareholders the $1.00 per share annual dividend is maintained in Newco. So $91 million in revenue goes to dividends, while $79 million in revenue is left to pay taxes, corporate expenses, pay down debt, build a cash position, etc.

 

Brian Dalton is CEO of Newco (only thing LIF management does is collect checks).

 

LIF shareholders keep their precious dividend but gain a growth profile, diversification, and excellent management.

 

ALS shareholders gain a huge dividend, an undervalued long life royalty, and Newco is rerated as the dominant diversified royalty company.

 

 

[mikek]

It would make great sense and very logical but I doubt it will happen.  The problem is that LIF's management is more than happy to just sit there and collect a paycheck.  It was more likely when Osisko had a big shareholding in LIF but they sold out of it.  You would need a big shareholder in LIF to make it happen and I don't think there is one.  I'm sure Altius management would be willing to do it but the other side has a management that isn't going to actively look for a deal like that.  They have big salaries and little stock.

[linealdin]

It would make great sense and very logical but I doubt it will happen.  The problem is that LIF's management is more than happy to just sit there and collect a paycheck.  It was more likely when Osisko had a big shareholding in LIF but they sold out of it.  You would need a big shareholder in LIF to make it happen and I don't think there is one.  I'm sure Altius management would be willing to do it but the other side has a management that isn't going to actively look for a deal like that.  They have big salaries and little stock.

 

LIF spends $2.7 million annually in administration expenses. $1.1 million of that goes to salaries for executives and directors, $250K to Scotiabank for the nuts and bolts of administration and investor relations, probably $250K to the auditors and another $200K to the lawyers. $76K for the TSX listing annual fee. It adds up.

 

You can't pay your CEO too little, even if their only job has fairly restricted duties. Everyone gets uncomfortable if the CEO of a billion dollar company makes less than a first year law associate.

[linealdin]

I think I understand better why Altius and Anglo Pacific are mostly alone in the diversified metals space while there are tons of competitors in precious metals royalties/streaming. Not great news.

 

In terms of development finance, which is where the new precious metals streamers get deal flow, there are reasonably sized, economic deals in the gold space. Orion Finance can do a $273 million deal with Pretium and get most of Brucejack mine's development financed. It looks like a very good mine.

 

In the diversified space all the really good projects are many multiples more expensive. An iron ore or copper mine needs significant infrastructure (rail lines, ports etc) and the mine has to be very large and very long life to justify the expense.

 

Who has the really good diversified metal mines? The big boys: BHP, Vale, Rio Tinto, etc. Those big companies don't seem to want or need to sell royalties/streams on the best non-previous metals mines they are building and even if they were willing I'm not sure Altius has the dry powder necessary to make a mega-deal.

 

So the available development stage opportunities in the space are with dodgy juniors. A very dangerous game, even for smart money players. Blackrock Mining Trust gave $110 million to London Mining for an iron ore royalty. Anglo Pacific gave London Mining $30 million for an iron ore royalty. Both those investments were wiped out. Sandstorm Metals blew up hundreds of millions trying to develop coal, natural gas, copper etc with juniors.

 

I kind of hope Altius doesn't buy a significant development stage royalty, though the Fairfax money must seem very attractive to use. Many pitfalls.

 

(Buying the Voiseys Bay royalty was different, the operator Vale was a major, and the royalty wasn't part of the project's financing package. The mine was already financed and construction was well underway in 2003. Altius was just taking the royalty off the hands of the prospectors who found the mine.)

 

 

[linealdin]

Altius's strengths are project generation, contrarian market timing, and big single stock investments (I'm thinking of the IRC and Virginia investments which were cashed out in takeovers).

 

They should do very well continuing to do those things. Why go into the business of providing project finance for developing mines?

[linealdin]

Orion Finance, which just sold a $1.15 billion royalty portfolio to Osisko, has had illustrative experiences.

 

In 2013 they financed $200 million for Nevada Copper. No mine in sight, the debt repayments keep getting pushed forward, and loss of the $200 million principal is probable.

 

In 2015 they gave $203 million to Lydian for a gold project in Armenia. Good progress so far and the stream likely becomes a cornerstone for Osisko.

 

Lots of good moderate size gold projects, very few good moderate size base/bulk projects. That is the environment Altius operates in. Buyer beware.

[linealdin]

What makes Altius unique: no other company has so much weight as both a prospect generator and a royalty financier.

 

As a prospect generator Altius has closed over $400 million in partner spending.

 

As a financier Altius has spent $435 million buying royalties and streams.

 

No other company has come close to this "Double 400." The skill sets are quite different for mineral exploration (creative, technical, adventurous) and for financing (numbers, banking, deal-focused mindset). Exploration takes place outdoors; financing is an indoor activity lit by the glow of computer monitors. To me, it is remarkable how Altius management excels in both skill sets.

 

I love that Roland Butler is back out in the field cracking rocks open. Gets Altius back to its exploration discovery roots.

 

*

 

I know some of you are skeptical of some of the royalty purchases (Callinan and coal). I will note that some of the smartest and best connected players in mining have been blown up over the last 5 years of the bear market. I think of Evy Hambro at Blackrock with his disastrous $110 million royalty purchase from London Mining (100% written off), and his top of the market investments in Glencore, First Quantum, Freeport etc. Hambro's Blackrock World Mining Trust lost 80% of its market value from 2011 to 2016.

 

Altius has avoided disaster in the bear market, and is now poised for the next bull. The likelyhood is that every royalty package it bought will both pay back the original investment and yield significant profit. No bombshells. That is about the best you can do in a bear market that savaged everyone, including the smart money.

[linealdin]

Paladin Energy looks like it might go bankrupt. They owe $277 million to Electricite de France (EDF),  now trying to sell stake in African uranium mine to the Chinese to cover that debt. Stock is in voluntary suspension pending outcome of negotiations between parties.

 

Any of you market timers going all in on uranium? Even I can tell this is probably the bottom.

 

CMB properties will be tied up in bankruptcy for a while.

 

 

[mikek]

Annual report out

 

Pretty boring stuff, nothing really new or any surprises that I'm seeing.

 

The only new thing was "The corporation continues to seek positive engagement with key political decision makers within the government of Alberta to explain the expropriation-like negative impacts that the policy change has had on its investments in Alberta, but we have thus far been ignored.  We have therefore, now been forced to begin to explore our various legal options."

 

I don't think Altius is going to get anything from the government regarding the coal royalties.  I think the probability of that happening is very low and would be surprised if they were to get any compensation regarding the coal investments in Alberta.

 

 

[linealdin]

The Labrador Iron Ore Royalty equity position has increased from 1.15 million shares on January 31st to 1.7076 million shares on April 31st.

 

Buying the additional 557,000 shares of LIF probably cost over $10 million, depending on their market timing. Debt repayment was the minimum required during the quarter, so this is how Altius is spending its free cash flow.

 

This is becoming a fairly substantial equity and royalty position. The recently announced quarterly regular and special dividend of 60 cents per share means Altius gets paid $1.02 million in revenue on July 25th.

 

(With the recent weakness in iron ore equities I suspect Altius is buying even more LIF shares this quarter.)

[linealdin]

777 royalty had quite a quarter: $3.341 million in revenue.

 

Updated Callinan payback calculation:

 

$18.825 million in revenue / $60.43 million purchase price = 31.2% payback in 2 years.

[bizaro86]

Annual report out

 

Pretty boring stuff, nothing really new or any surprises that I'm seeing.

 

The only new thing was "The corporation continues to seek positive engagement with key political decision makers within the government of Alberta to explain the expropriation-like negative impacts that the policy change has had on its investments in Alberta, but we have thus far been ignored.  We have therefore, now been forced to begin to explore our various legal options."

 

I don't think Altius is going to get anything from the government regarding the coal royalties.  I think the probability of that happening is very low and would be surprised if they were to get any compensation regarding the coal investments in Alberta.

 

I hope they don't spend much on legal fees here. The government won't settle with them (as I predicted upthread), and I don't think there is any legal case here for compensation here. Just because ALS owns some land doesn't mean they are entitled to have burning coal be legal here. They will still own the land and the coal afterwards, and the AB gov't isn't precluding them mining it.

[linealdin]

Updated Prairie Royalties payback calculation:

 

$64.652 million in revenue / $240.9 million purchase price = 26.8% payback in 3 years.

 

Updated CDP royalties payback calculation:

 

$5.652 million in revenue / $42 million purchase price = 13.5% payback in 3 years.

 

 

 

 

[linealdin]

Annual report out

 

Pretty boring stuff, nothing really new or any surprises that I'm seeing.

 

The only new thing was "The corporation continues to seek positive engagement with key political decision makers within the government of Alberta to explain the expropriation-like negative impacts that the policy change has had on its investments in Alberta, but we have thus far been ignored.  We have therefore, now been forced to begin to explore our various legal options."

 

I don't think Altius is going to get anything from the government regarding the coal royalties.  I think the probability of that happening is very low and would be surprised if they were to get any compensation regarding the coal investments in Alberta.

 

I hope they don't spend much on legal fees here. The government won't settle with them (as I predicted upthread), and I don't think there is any legal case here for compensation here. Just because ALS owns some land doesn't mean they are entitled to have burning coal be legal here. They will still own the land and the coal afterwards, and the AB gov't isn't precluding them mining it.

 

I wouldn't be concerned about excessive legal fees. This is why Altius's Executive Chairman is a senior law partner with deep knowledge of mining law. Free or cheap counsel, advice and negotiation until actual litigation begins.

 

It's a negotiating tactic. A strongly worded letter from a major law firm prods a risk-averse government bureaucrat into giving Altius a meeting to air grievances. Maybe this meeting leads to something mutually beneficial. Example: Altius gets $50 million in compensation contingent on Altius re-investing that $50 million, plus an additional $50 million, into Alberta wind farms.

 

If Altius doesn't agitate, threaten and cajole then it is 100% certain to get zero compensation. This low-cost tactic at least creates some option value. Plus, this government may ignore Altius's grievances, but maybe the next government won't.

[linealdin]

Altius has monetized $12.651 million in junior equity shares in fiscal year ended April 2017. I expect continued monetization in the upcoming year in order to chip away at debt.

 

There is no doubt that the junior equity shares are held to be sold. Aggressively and for a profit. No one at Altius gives a damn how selling a large equity position might affect a junior.

 

*

 

In the MD&A Champion's Bloom Lake is given as an example of the type of development stage asset coming to the market for various types of finance. The $10 million debenture, backstopped by a royalty, is Altius's first foray into development stage project finance.

 

Caution, selectivity, and careful deal structure are musts in the project finance game. Small bets are probably smart, too.

 

[linealdin]

Debt stood at $79.737 million at end of April. Subsequent to the close of the fiscal year voluntary debt repayment of $3.418 million was made (assumed to be on the revolver). A scheduled principal payment on the term facility of $2 million will be paid at the end of July.

 

So debt at the end of Q1 should be $74.319 million, assuming no additional voluntary debt repayments in the quarter.

 

Back on track to very quickly chopping down the debt. Altius should be debt free in another 2 or 3 years.

 

*

 

It is a fine balance between aggressively repaying debt and leaving enough cash to take advantage of various market opportunities. The roughly $21 million recently invested in Labrador Iron Royalty, Champion and Evrim could easily have gone towards cutting debt to $50 million. Altius must feel comfortable with the interest rate and the covenants of their longterm debt.

[linealdin]

Just caught the Q4 conference call. John Baker the senior law partner and Altius Chairman featured. Yes, he is obviously providing lots of legal advice and strategy behind the scenes relating to Alberta coal and Voisey's Bay.

 

Basic strategy with the Fairfax money seems to be to make a number of smaller investments in development stage assets: copper, zinc and nickel mentioned. Champion ten million debenture perhaps an example of the bet size. Not too much exposure to any particular asset not working out. High risk, higher reward, therefore diversification is a must.

 

Some disagreement about whether more iron ore royalties will be purchased. John Baker says Altius has enough iron ore exposure with Alderon and other assets. Lewis really likes the Bloom Lake project and thinks additional royalty financing opportunity might be available there.

 

Wells somewhat skeptical scientifically of the Excelsior ISR mining method, but expresses confidence Gunnison will reach production because of low capex and support of Greenstone Capital. Lewis has very strong confidence Bloom Lake restarts production, after doing due diligence.

 

A new staffperson has been hired to review worldwide royalty opportunities.

 

Trial date for Voisey's Bay set for September 2018. Baker praised attorneys for both sides for good progress advancing a complex case.

 

Baker is involved in Alberta coal talks. Lower level Ministry of Energy officials are sympathetic to Altius's claims, but have no power to offer compensation. Only high level political officials can decide to offer compensation. Altius roadblocked by politicians at moment, not fulfilling Premier's promise to compensate investors for stranded assets. Other legal options being considered.

 

 

[bizaro86]

If conservatives take over again, they might allow the supercritical plants to produce power longer, but they are even less likely than the NDP to pay Altius anything.

[linealdin]

If conservatives take over again, they might allow the supercritical plants to produce power longer, but they are even less likely than the NDP to pay Altius anything.

 

Compensation is unlikely (but not impossible) and should be pursued vigorously. Sending letters and making your case at meetings with politicians costs very little. Threatening litigation is also virtually cost free. It is a form of due diligence. See if anyone responds to pressure.

 

Filing a lawsuit (and publicizing a lawsuit) sends a signal to other investors that Alberta is a terrible place to do business. Is that the message that the government wants publicized? I don't think so. And it doesn't have to be expensive. Altius could give 25K to John Baker's firm to file a lawsuit. Call the government's bluff.

 

I would be very disappointed with Altius if it didn't pursue compensation with these hardball methods. This is how business works.

[cwericb]

It is a simple strategy: "the squeaky wheel gets the grease" and/or "nothing ventured, nothing gained".

[linealdin]

There are medium and long game opportunities for the 12 billion tonnes of undeveloped coal reserves in CDP's portfolio. It's not going to be burned in traditional coal mines but those reserves of potential energy are not just going to sit there for eternity.

 

Medium term: coal bed methane (CBM). Existing technology for extracting natural gas from coal beds. Altius received $229K last quarter in coal bed methane royalties. Alberta is estimated to have 500 trillion cubic feet of natural gas trapped in coal beds. I'm sure CDP has a big chunk of that capacity. Right now CBM doesn't compete well with cheap conventional natural gas (nothing does). But cheap gas won't last forever. Eventually the extractive industries will look for unconventional sources of energy.

 

The legal squabbles between coal and gas rights owners over CBM will have to be settled.

 

Long term: new technologies like coal gasification and crazy sounding things like in-situ bioconversion of coal. That is a real thing scientists are working on right now, check it out:

 

http://www.ptac.org/attachments/2089/download

 

http://www.jwnenergy.com/article/2017/3/how-legacy-underground-coal-mines-could-become-part-worlds-alternative-energy-infrastructure/

 

Dump biomass like manure or organic waste into abandoned coal mines and collect the methane, which then feeds into a power plant. The coal/biomass potential is best in the prairies, where CDP holds extensive reserves.

 

Technology and investment will free those stranded coal assets once natural gas prices rise. It is inevitable.