ALS.TO - Altius Minerals

[hohi]

In the last years ALS has been putting money to work. That translates into revenue and ultimately earnings as margins are 70%+

[SharperDingaan]

We hear you, and all the firms/majors mentioned are good at what they do.

 

Point is that all those firms would be better buys than ALS when the commodity hits the low point. And they both have the same risk - if the mine stops production there is no revenue/royalty for either them or ALS. It becomes shares of the major at 30c on the IV dollar, or shares of ALS at 65c in the IV dollar - not much of a decision.

 

Doesn't mean anything is wrong with ALS - it just didn't stack up against the alternatives at the time.

Investment versus operating views.

 

SD 

 

[linealdin]

It's not about expecting a replay. It is happening before our eyes. Chapada royalty was bought with copper at $2.20. Copper is trading at $3 today. Yamana is going to spend $10 million this year drilling new deposits near Chapada to extend mine life and create expansion scenarios.

 

I believe Chapada royalty will hit C$4 million in Q2 and near C$5 million in Q3 (strong seasonal effects + lag effects, full impact of commodity price increase).

[linealdin]

We hear you, and all the firms/majors mentioned are good at what they do.

 

Point is that all those firms would be better buys than ALS when the commodity hits the low point. And they both have the same risk - if the mine stops production there is no revenue/royalty for either them or ALS. It becomes shares of the major at 30c on the IV dollar, or shares of ALS at 65c in the IV dollar - not much of a decision.

 

Doesn't mean anything is wrong with ALS - it just didn't stack up against the alternatives at the time.

Investment versus operating views.

 

SD

 

You are making the case that Yamana, who pays the royalty, is a better investment than Altius, who receives the royalty.

 

This is terribly wrong. Yamana, like many producers, has a ridiculous amount of debt and little diversification. If Cerro Morro were flooded during the first month of production Yamana may go bankrupt. Way too many debt repayments in 2018 - 2020 period. If gold drops like a rock bankruptcy also looms.

 

Very little danger of that for Altius, that's why I am comfortable being all in. Too much commodity diversification and manageable debt that they could wipe out today (pushing sell button on LIF and using some cash).

[linealdin]

Altius has a prime seat to watch how the resources world moves. There was a long period of zero partner funded meters of drilling. From late summer 2013 (after Anglo drilled 1800 meters at Natashquan) to early this Spring (Emu drilling a few thousand meters at Vidalita) it was a complete drought. That showed Altius it was a market bottom and time to bid for royalties and build up the exploration land bank. They did.

 

Now the pace of exploration activity is hard to keep up with. Drills turning or about to turn at Wilding Lake, Vidalita, Alvito, Stellar, Jupiter, Rathkeale, Kingscourt, Pine Bay and Silicon. One good drill hole changes everything for these companies, and Altius would certainly benefit.

 

Does this activity last for one more year? Three more years? Five? When companies stop calling them for properties that will be the bellweather for Altius that the bull run is over.

 

Does the market credit Altius with any option value for their NSR's at currently drilled properties? I don't think so.

[linealdin]

Alderon basically just has option value for Altius right now. But option value is real value.

 

If Altius were to auction off the 3% royalty at Kami there would certainly be interest from market scavengers. This is a royalty on a fully permitted mine in an existing iron ore district that would bring in over C$15 million per annum at today's iron ore price. Mine life of 24 years. That is a juicy prize worth taking a bet on, if the price is right.

 

Good deposit, good location, it just may take a decade for infrastructure, consolidated ownership and the iron ore price to align.

 

What would an auction bring in today? I would guess something between C$5 million to C$10 million.

 

 

[linealdin]

https://www.reuters.com/article/potashcorp-production/potash-corp-to-temporarily-reduce-canada-potash-production-idUSL2N1M128Z

 

Potash Corp halting production at Allan for 10 weeks starting in November, and Lanigan for 10 weeks starting in December. This will be a blip in Altius Q3 income. Altius holds an Allan royalty directly and I believe the CDP potash royalty draws revenue from Lanigan.

 

Potash Corp maintaining supply discipline in a low price environment. Healthier in the long run.

[linealdin]

http://www.mining-journal.com/people/on-the-move/carrabba-replaces-lamb-at-ram/

 

I was surprised to learn the billionaire mining magnate Lukas Lundin has a private company, Ram River Coal, developing a met coal project in Alberta. They just hired the former CEO of Cliffs Natural Resources.

 

Michael O'Keeffe and Riversdale Mining have a met coal project at Crowsnest Pass in Alberta. They plan a large IPO spinout for the project.

 

The smart money is getting in early. A good sign for Allegiance Coal and CDP's Tower project receiving more investment in the near future.

[linealdin]

I think the Voyageur lands should be injected into the copper spinout. The targets are Nickel-Copper-PGM so it is reasonable.

 

There's been some progress at the property. Altius did an expensive VTEM airborne magnetic and electromagnetic survey. Followup ground prospecting has yielded 10 priority drill targets. Let the market, through the copper spinout, finance the drilling. The Adventus model would be raise $10 million: $2 million for Voyageur drilling, $3 million for Chile drilling, use the rest to stalk copper acquisitions.

 

Lundin Mining's Eagle Mine is a neighbor. Lukas Lundin again.

 

 

[linealdin]

A diversified mining royalty company of significant scale (as large as Royal Gold or Franco Nevada in the precious metals royalty category) has never existed.

 

Altius is trying to get there, obviously. I think their thesis is that a diversified basket of commodities will ride out a prolonged bear market better than a precious metals royalty company can ride out a gold bear market.

 

The fundamentals of the potash market are very different from the copper market, for instance. The hope is that each commodity, while being inherently volatile, will run up and down at different times.

 

The diversification effects are happening now. Most bulk commodities are still depressed while most base metals (copper/zinc/lead but not nickel) are booming.

 

I also credit Altius for trying to create some organic gold royalty revenue from farm-outs to Antler, Emu, Canex, and Mountain Lake. If one of these companies eventually produces gold that royalty will give Altius some precious metals exposure. More diversification.

[linealdin]

http://s1.q4cdn.com/305438552/files/doc_presentations/2017/Hudbay_InvestorPresentation_Oct2_FINAL.pdf

 

Latest Hudbay presentation. Slide 23 has Wood McKenzie's latest global copper and zinc outlook.

 

Zinc stronger in short term with price in the $1.70 range through 2018 and 2019, then a sharp decline to $1 in 2023.

 

Copper flat at $2.60 through 2019 then a steady climb to $3.75 by 2023, as market experiences prolonged deficits.

 

If the above holds as reality:

 

1) 777 is right to prioritize zinc production in short term. Get it while zinc price is hot for the next two years. Then switch to emphasizing copper as it moves consistently above $3.

 

2) Chapada royalty will produce tremendous revenue over the next 6 years. Excelsior also in the sweet spot to move on from 25 million pound pilot project to 125 million pound full production. $3 plus copper will allow Excelsior to raise the money.

 

3) Adventus may not be able to move quickly enough to take advantage of the zinc price. (Good that the El Domo project they optioned also has a lot of copper and other minerals).

 

4) The copper spinout should have a long runway to do some things.

[linealdin]

Wood Mackenzie with another startling finding: the current copper mine project pipeline (total production volume of highly probable and probable copper projects) is less than half what it was in the depressed pre-super cycle period.

 

Why not another super cycle, at least for copper?

[linealdin]

The other thing about boom bust cycles in mining: I believe the industry has learned (through extreme pain) that the swings do not have to be as big as they are.

 

Everyone, from Glencore to BHP to Potash Corp, is exercising supply discipline and chasing margin growth, not meaningless volume growth.

 

I expect a period of lower volatility in commodity prices as a result. Iron ore is going to stick in the $50 to $60 range. Copper will be attractive at $3 but there won't be a huge rush to put marginal copper projects into production, which then have to be written down during the inevitable bust.

 

Nobody wants to blow up their money like they did in the super cycle.

[linealdin]

http://www.afr.com/business/mining/iron-ore/discounts-on-fortescues-iron-ore-widen-further-20170915-gyihvu

 

Discounts for Fortescue's low quality ore have widened to 35%. Traders believe there's actually a shortage of high quality ore and an oversupply of low quality. Situation could persist for 5 years.

 

Benchmark iron ore price is somewhat meaningless. IOC is prospering in this environment while Fortescue is floundering. The LIF dividends tell the story.

 

Also a sweet spot for Bloom Lake to be coming into production. Benchmark price could be $60 but the price Bloom Lake is commanding with all the premiums for quality could be $85. If their cost per tonne is anywhere near $43 they make a good enough margin of profit. All they need to do is execute the feasibility study plan and reduce Bloom Lake's traditionally high costs per tonne. Iron ore price shouldnt be an issue.

 

Bloom Lake will fulfill part of that market shortage for high quality ore. Will any other Trough ore projects? Or is it up to the majors? Vale is shutting down high silica iron ore capacity while its new higher quality mine is coming into production. Shortage will not last forever.

[linealdin]

 

Recent interview with Michael O'Keeffe of Champion. Now that the financing is put together he can go out and promote. I'm impressed:

 

1) 200 workers on site at Bloom Lake. First blast in October, first trainload of ore goes out in February. Evidently the financing hiccups made no difference to the schedule.

 

2) Very smart plan of matching Bloom Lake's costs to those of the majors. The majors determine the iron ore price but won't cut the price so that it goes lower than their cost of production.

 

3) Champion will have little project debt compared to most iron ore mines. Payback easier.

 

4) BHP and others putting all capex towards higher quality ore projects. That is what the market demands for environmental and regulatory reasons.

[linealdin]

https://m.youtube.com/watch?t=33s&v=7Q1pWiUa9AQ

 

Interview with Christian Kargl-Simard of Adventus right before the Ecuador option deal was announced. Interesting points:

 

1) All strategic shareholders expected to exercise pro rata participation rights in future equity raises. $20 million raise, mentioned as example, would cost Altius $5 million to maintain its current equity percentage.

 

2) A big deal with a major would offer the major cash and Adventus shares in exchange for a zinc property. Helps the major monetize inventory assets dusty on the shelf. This is the big prize for Kargl-Simard.

 

3) Zinc price expected to rise as private zinc stashes draw down. 3 to 4 years of high zinc prices predicted.

 

4) Not much interest in the geology, very strong interest in transacting accretive deals for the investor. Otherwise humble sounding dude. Quick to give others credit.

 

3) Altius interested in providing royalty/streaming financing for the properties Adventus acquires. Obviously they get first dibs.

[linealdin]

Altius iron ore projects are definitely on the wrong side of the provincial border running through the Trough. Quebec government entities have injected ~C$150 million of debt and equity into Bloom Lake and C$175 million into Tata Steel's producing DSO mine. This doesnt count the millions paid for the new multi-user port facilities and for a rail feasibility study. Without those investments where would those projects be? Nowhere. And thousands of jobs would have been lost.

 

Could you imagine the Newfoundland government investing C$100 million in Alderon? So impossible it is laughable. They should ashamed of themselves.

[linealdin]

Liberty suggested doing some IRR calculations on the three most recent Altius royalty purchases. Let's start with Callinan:

 

C$67 million purchase price ($112 million gross price minus the $40 million cash and accounts payable and $5 million in equity investments in Callinan's coffers.) No adjustment for Altius's pre-existing 6% equity position in Callinan.

 

I used a simple IRR calculator for annual expected cash payments. With only received and expected cash flow from 777 mine through 2020 I calculated an IRR of 4%. Mediocre. (This assumes the strong copper/zinc prices predicted by Wood Mackenzie. All bets off if copper falls to $1.)

 

If the Excelsior mine performs like its feasibility study and reaches 125 million pound full production and operates for its predicted mine life the IRR for the Callinan deal jumps to 13%. Much better. (This assumes Altius sticks to its existing 1% royalty at Gunnison.)

 

I've done no calculations for the growth of the $5 million equity portfolio Altius received. The Excelsior shares and other shares have appreciated considerably. Around a triple in value for the whole portfolio. There is also hidden value with the slew of NSRs on properties currently being explored and drilled, including the Adventus Irish zinc properties. Not sure how those option values can be included in IRR.

 

Conclusion: Deal looked shaky first, with no mine life extension at 777, but the copper/zinc markets kicked into gear, Excelsior made strides to building a mine, the Excelsior shares rocketed, and Adventus made some exciting progress. Looks like this will be a win.

 

(Yes, even early stage NSR's have some modest value. Sandstorm Gold recently bought a package of 22 very early stage royalties for US$2 million, or C$2.5 million. Their kind of deal.)

[linealdin]

Nice comeback in copper price to $3.04. Was below $2.90 a few days ago. So much for copper "petering out."

 

Should make locking down investors for the proposed Copper Spinco that much easier.

 

Altius Q2 revenue is going to be a doozy: I predict something around C$18 million.

[linealdin]

At the time of the Callinan deal I think Altius assumed 1) 777 mine life would extend with discovery of reserves at War Baby; and 2) that the Excelsior project was a big nothing-burger mistake investment by Roland Butler.

 

Both assumptions turned out to be wrong. Offsetting fouls.

 

 

 

[linealdin]

IRR Calculation for the Prairie deal (excluding CDP):

 

Purchase price: C$240.9 million

 

IRR of 6.5% for received and expected cash flows through April 2062. The potash royalties will pay for another 50 or 100 or 200 years beyond that, but the free IRR calculator I used only had 50 input periods.

 

That extra 50 or 100 years of potash income will matter to my children and grandchildren (could be C$400 million to C$800 million of income over those 50 to 100 years) but the financial calculators don't give much present value for cash flows that far out.

 

Those future cash flows are somewhat protected from inflation. If inflation spirals out of control the price of potash will also rise.

 

To me the Prairie deal is a grand slam. I love love love the interminable, inflation protected, cash flow. Virtually perpetual is very appealing as I plan to be invested forever. But I understand that most investors will be focused on the shorter term returns that IRR calculators credit. For them the deal is only a modest win.

[linealdin]

IRR calculation for CDP royalty purchase

 

Purchase price of C$42 million

 

IRR of 4% for received and expected cash flows through 2062. Again, the CDP potash royalties are expected to flow for a significant number of years beyond that date.

 

Allegiance Coal project came from CDP. If Allegiance or the any of the extensive potash lands in the CDP portfolio (extensions to existing mines) are put into production the IRR from the deal would skyrocket.

 

I will wait and see if Allegiance goes into production before condemning the CDP purchase as a low return mistake.

[linealdin]

IRR for Chapada stream purchase

 

Purchase price: C$76.8 million

 

IRR of 12.74% for received and expected cash flows for 30 year mine life.

 

Mine life could easily go beyond 30 years. Recent near mine discoveries Baru, Sucupira, and Suruca SW, mostly have not been converted into reserves or resources yet. Yamana spends $7 million to $10 million a year drilling to expand Chapada production rate and mine life. It is paying off.

 

Mine life extensions, very typical in base metals, is the juice for Altius's returns.

 

Conclusion: Deal is a terrific win already and getting better.

[linealdin]

All the royalty deals Altius made during the downturn are going to pay back and provide profit. Even the lowest return deal, CDP with 4% IRR, still has optionality with the Allegiance project to significantly improve that internal rate of return in the near term.

 

Their closest competitor Anglo Pacific, during the same downturn, gave US$30 million to London Mining for an iron project that totally blew up. Not even future option value remains because the deal wasn't structured as a royalty on the land. What's the IRR on that deal?

[linealdin]

http://www.excelsiormining.com/index.php/news/news-2017/526-excelsior-mining-receives-no-appeal-on-recently-granted-state-operating-permit

 

Solid news for Excelsior. State permit is officially issued (no appeals). Final remaining permit from EPA is progressing. Draft EPA permit will be available for public comment soon. Trump EPA won't be any trouble, I am certain of that.