ALS.TO - Altius Minerals

[linealdin]

http://media3.marketwire.com/docs/1104066.pdf

 

This is the chart that will matter for Labrador Trough iron ore going forward.

 

The premium/penalty per every 1% above or below 62% iron was under US$1 in 2016. Now it is between US$7 and US$8 per every 1% above or below 62%. That is a spectacular change.

 

So if the benchmark 62% iron ore price is US$60, then Alderon with its 65.2% ore would receive around US$84 per tonne (3.2 x $7.5). Champion with its 66.2% ore would receive US$91.5 (4.2 x $7.5)

 

This doesn't include additional premiums for superior ore quality (low silica, alumina, phosphorus etc.)

 

Alderon is coming out with a new PEA in November (excising all the Wabush Mines stuff, adding in other cost saving ideas). It behooves them to aim for the highest quality ore possible, even if it costs slightly more upfront capex.

[linealdin]

http://www.rengold.com/i/pdf/2017-10-26-nr-ren-g2z4va.pdf

 

A little update on the Ramelius Resources Jupiter earn-in project with Renaissance Gold. Drill program in Q4. Altius holds a 1% royalty. Long Canyon, probable reserves of 18.4 million tonnes at 2.29 g/t gold, is the only significant gold discovery in Nevada in the last decade. It is time. Jupiter is in the same geologic trend.

[linealdin]

https://agmetalminer.com/2017/10/12/glencores-zinc-bet-pays-off/

 

Glencore's dominant position in the zinc market as producer and trader allows them control over the zinc price. Not too low so zinc producers can make a healthy profit but also not too high: high prices destroy demand and attract too much marginal supply growth. Glencore has been very vocal that miners should pursue margin growth not meaningless volume growth. I think their market share in zinc will allow them to keep zinc price under control for a long period.

 

I don't think Glencore wants the zinc price above $2 or below $1. Right where it is, $1.50, is a profitable sweet spot.

[linealdin]

The other idea that Glencore has been pushing: that different parts of the economic development cycle require different commodities.

 

Early cycle emerging economies use lots of iron ore, met coal and manganese to build out infrastructure. Once per capita GDP goes past a certain point use of these early stage commodities drops precipitously.

 

Middle cycle economies use more base metals like copper, nickel, zinc, lead, aluminum.

 

Late cycle mature economies, like the U.S., use more cobalt, oil/gas, PGMs, diamonds, thermal coal, and agricultural commodities (while also using peak levels of middle cycle commodities).

 

Glencore's thesis is that China is finishing its early cycle and will transition to middle cycle commodities. They are therefore skeptical of the long term case for iron ore and coking coal, and are major zinc and copper bulls. Glencore's thesis is dire for majors like BHP, Vale, and Rio Tinto which haven't diversified enough away from iron ore, and for Teck which is too dependent on coking coal.

 

Interesting to think of Altius's asset mix categorized in this way.

[linealdin]

http://altiusminerals.com/projects/sail-pond

 

Updated page for the Sail Pond Ag-Cu-Pb-Zn 18,475 hectare project in Newfoundland. Some nice looking grab samples, up to 7% copper, 557 g/t silver, 7.6% lead, and 3% zinc.

 

A lot of work going into this one: 214 rock samples, 4000 soil samples, 18 trenches and channel sampling. Trenching and channel sampling results due in November.

[linealdin]

According to Glencore's categorization:

 

Early cycle commodities: LIF equity position, Champion debenture, ADV equity/royalty, Cardinal River met coal royalty, Allegiance Coal.

 

Mid-cycle commodities: Chapada, 777 mine, Voisey's Bay (nickel/copper), Excelsior Copper, Adventus Zinc, Copper Spinco

 

Late cycle commodities: Prairie Royalties (thermal electrical coal), Potash, Voisey's Bay (cobalt), Lynx diamond project

 

Recent investments in early cycle commodities (LIF and Champion) and in middle cycle commodities with the Wolfden Resources VMS deposit, and (indirectly) Adventus Zinc's El Domo VMS deposit.

 

What's missing from the portfolio? Aluminum and oil/gas. I suppose the failed refinery project was meant to give Altius some oil exposure.

[linealdin]

http://www.pulso.cl/empresas-mercados/cobre-podria-superar-los-us45-la-libra-deficit-suministro/

 

CODELCO chairman speaking today in London thinks that copper in 2018 could test the 2011 high of US$4.61 because of supply deficits. Much more optimistic than their previous projections.

 

At those prices Chapada, maxing out production, could bring in over C$30 million in annual revenue.

 

This is why I don't worry about the inevitable bear market that will follow sky high copper prices. By the time the copper price declines back below US$2 the original purchase price of C$76.8 million likely will have already been paid back.

 

After payback, the next 30 years of Chapada revenue is pure profit. There will be multiple boom and bust cycles over the very long life of this mine.

 

Mining royalty financing is a simple business if you actually have the patience to wait until deep into a bear market to buy. Altius has that patience. Don't assume everyone else in the royalties business does. I have no doubt a copper stream/royalty deal will be done by someone with copper trading above US$4. They will lose their shirts.

 

Nolan Watson at Sandstorm Metals gave Donner Metals a US$25 million stream for a copper/gold project right at the top of the copper market in July 2011 (then added on another US$7 million investment in 2012). It was a disaster, part of the reason Sandstorm Metals doesn't exist anymore.

[linealdin]

I'm adding up some of the projected numbers. There is a good chance Altius revenue in Q2 starts with the number 2.

[mikek]

Is the market even going to care?  I think Liberty makes some valid points that sooner or later the actual stock price matters.  This is coming from a long time shareholder and a person that has no plans to sell.  I think the only thing that is going to actually move the stock is if they have a possible world class discovery on the exploration side.  I agree 100% that the company has performed well and I think they are doing the right things but I do feel that Liberty makes some valid points concerning the price of the stock.

 

We would have been much better off just throwing darts at the S&P 500.

 

 

[TwoCitiesCapital]

Is the market even going to care?  I think Liberty makes some valid points that sooner or later the actual stock price matters.  This is coming from a long time shareholder and a person that has no plans to sell.  I think the only thing that is going to actually move the stock is if they have a possible world class discovery on the exploration side.  I agree 100% that the company has performed well and I think they are doing the right things but I do feel that Liberty makes some valid points concerning the price of the stock.

 

We would have been much better off just throwing darts at the S&P 500.

 

While I definitely agree that the stock price is disappointing over the past few years, I would welcome the opportunity to pick up more shares at this price if $18-20M becomes the new norm in quarterly revenues.

 

Progress has been more than slow than anticipated and market participants are rightly disappointed, but to have that disappointment continue blinding them to dramatic changes in business fundamentals that have been hoped for all along would be an error.

 

 

[mikek]

I agree 100%, I just am saying year over year numbers for the last two quarters were about as good as a company could hope for and the market could care less =).  I agree that business fundamentals have changed greatly.  Your earlier post about 3 million royalty revenue and the hopes of Alderon compared to the company now sums up my thoughts on where Altius is currently at. 

[linealdin]

The market will care. It will probably take it as an opportunity to exit the stock. Report of C$20 million quarterly revenue = 20% haircut in the stock price? My limit buy orders will be ready. Hungry! I want to own more shares than Chad Wells.

[SharperDingaan]

http://media3.marketwire.com/docs/1104066.pdf

 

This is the chart that will matter for Labrador Trough iron ore going forward.

 

The premium/penalty per every 1% above or below 62% iron was under US$1 in 2016. Now it is between US$7 and US$8 per every 1% above or below 62%. That is a spectacular change.

 

So if the benchmark 62% iron ore price is US$60, then Alderon with its 65.2% ore would receive around US$84 per tonne (3.2 x $7.5). Champion with its 66.2% ore would receive US$91.5 (4.2 x $7.5)

 

This doesn't include additional premiums for superior ore quality (low silica, alumina, phosphorus etc.)

 

Alderon is coming out with a new PEA in November (excising all the Wabush Mines stuff, adding in other cost saving ideas). It behooves them to aim for the highest quality ore possible, even if it costs slightly more upfront capex.

 

ADV will get very little of the premium for its ore quality, as the bulk of it is optioned to Glencore; but what it does - is bring production nearer, as nobody can extract that premium until the ore is actually mined. The flip side is that leaving the ore it in the ground for now, will very likely produce an even higher premium on the next cycle - when this ore is a lot more scarce.

 

SD

     

[linealdin]

All of ADV's ore is signed up for offtake agreements but the offtake prices are very much tied to benchmark prices and market premiums. AFTER adding in quality premiums for 65.2% ore and for low impurities then HBIS takes its ore at a 5% discount and Glencore takes its share at a 2% discount. Blended discount rate of 3.8%. Standard for offtake agreements.

 

Please see slide 11 of Alderon's current presentation. Their conservative premium numbers are from the feasibility study. The actual market premiums have moved significantly up from those numbers.

 

If the current quality premium is a structural feature of the market, and not just a blip/distortion, it clears the path for Alderon being funded for construction during this cycle.

 

Yes, this cycle. I believe iron ore prices hit multi-year lows in January 2016, then the quality premiums began their long march upwards. It's been a very favorable run for Trough iron ore. See how the LIF share price has moved since January 2016, and the huge special dividends they are currently paying. See how Champion raised $300 million for a mine restart in the same period. These are not random developments. The type of ore the Trough produces is highly in favor now. ADV is going to have a window of 3 to 5 years to secure their mine financing. There will certainly be opportunities, I just hope the right management team is in place.

[linealdin]

Even if the benchmark 62% iron ore price is at US$50 (the bear case) Kami is still profitable if the current ore premiums are structural.

 

Kami Opex of US$31.04

 

Benchmark price for 62% ore of US$50

+ quality premium of US$24 for 65.2% ore

+ low impurity premium of US$1.30

- 3.8% blended HBIS/Glencore offtake discount

- US$14 shipping from Sept-Iles to China

 

= US$58.43 FOB price loaded on ship

 

US$58.43 FOB - Opex of US$31.04 = US$27.4 profit margin per tonne

 

Robust profit margin.

[linealdin]

The base metals had huge overnight leaps. Copper back at $3.16, zinc at $1.52, nickel up 23 cents to $5.79 (looks like a multi-year high).

[linealdin]

The flip side of the iron ore premiums Trough ore is enjoying: severe discounts for lower quality ore from Western Australia. Cliffs has stated that it makes nothing right now from its 11 million tonnes of WA iron ore production because of the discounts. It wants to exit the space as soon as possible, the same way it exited Canada. Mineral Resources, another WA producer, has talked about the discounts growing even larger in 2018. They have discussed idling production until they can install a new bulk handling system to bring down costs.

 

Fortescue is taking a hit with the discounts but its volume is so large it is still profitable. Its smaller competitors in WA are not.

 

If 30 to 50 MTA of low quality Aussie ore capacity comes off the market that capacity can be replaced with high quality ore from the Trough.

 

 

[linealdin]

My understanding is that Alderon was fairly close to securing financing in the last cycle. It was close but the iron ore price kept dropping and scaring the banks off. If it had reached production Kami would actually be profitable today because of the premiums. The skeptical financiers were wrong.

 

The Bloom Lake re-start working smoothly in early 2018 will be a big de-risking step for Kami. Kami has US$10 per tonne lower opex than Bloom Lake. If Bloom Lake works then Kami should prosper. The financiers will get a chance to correct their mistake.

[linealdin]

http://m.marketwired.com/press-release/midland-altius-identify-highly-prospective-electromagnetic-anomalies-on-moria-ni-cu-tsx-venture-md-2239065.htm

 

Very intriguing VTEM results from the Shire and Moria base metals projects with Midland Exploration.

 

1) Unexplored territory. Elephants lurk.

 

2) Evidence of high grades. 16% nickel???

 

3) Evidence of large geologic structures or belts. 15 km long? Size matters.

 

http://media3.marketwire.com/docs/MIDLAND_ALTIUS.pdf

 

Updated presentation for Moria and Shire with the electromagnetic anomalies.

 

[SharperDingaan]

Couple of words on Iron.

 

Yes there is a premium for Kami's quality; however it is whether it lasts at the current levels, or even rises, that is the big question.

It would be nice if Kami went into production early - but it makes a lot more sense to keep the ore in the ground at this point. Buyers would like to have a high quality ore Kami type mine open - so that Iron remains globally over supplied, & the price stays as low as possible. Sellers, who know what they have; not so much.

 

The globes lower content iron ore mines are progressively stranding, & forcing consolidation/abandonment. There will be very large quantities available, but the floor price for that iron will also be a lot more sticky than it currently is - as any kind of shutdown, will also take a lot of that supply out of the market. When the commodity tide isn't going out (price falling), premiums are a lot more stable. Rather than get excited, let the market do its thing.

 

Global warming is opening the North West Passage (we already have cruise ships); the preferred early commercial traffic will be bulk ore carriers, and Kami's geography is very well positioned. A big, politically safe & high content iron ore deposit; easily accessible from Asia - is going to command BOTH a quality AND a transport premium. And if its scaling addition lowers the indirect costs of all other miners in the trough, so much the better. Short term versus long term thinking.

 

All the sleeping giant needs, is enough port revenue to service its debt.

 

SD

 

 

   

[linealdin]

There's a Glencore chart that influences my view of iron ore. See slide 10 below

 

http://www.glencore.com/assets/media/doc/speeches_and_presentations/2017/20170516-GLEN-presentation-BAML-Confrence-Barcelona-2017-FINAL.pdf

 

The iron ore demand growth from China won't last forever. China's GDP per capita was US$8,123 in 2016. Glencore's data indicates that once a society reaches roughly US$15,000 GDP per capita the use of iron ore peaks and then starts a steep decline. Not flat demand, but falling off a cliff. How long will it take for China to reach US$15,000? 10 years? 15 years? I think no more than 20 years.

 

China's GDP per capital was US$3,838 in 2009. So GDP per capita has more than doubled in only 7 years. (Growth has hit a plateau in recent years.)

 

Once peak iron ore is reached for China, bulls will point to India (only US$1,709 GDP per capita in 2016). But China is very large, I don't know if the incremental gains from India can make up for the loss of the Chinese demand. And who knows if India will grow at the same rate as China?

 

Conclusion: Alderon doesn't have forever. Iron ore market could look like a very different, inhospitable place in 10 or 15 years. Kami should be profitable now.

[linealdin]

Kami's proposed 7.8 MTA of supply is completely inconsequential to the global production picture, which is 3.2 billion tonnes per annum production, something like that.

 

Kami's extra supply is a rounding error, and will not move the iron ore price.

 

I believe Kami, and other high quality Trough ore, can slide in to replace other types of less desirable lower quality ore from Western Australia, North Korea or wherever. The customers want a certain quality of ore and the market will shift (slightly) to serve them.

 

P.S. My personal rule: If a mining project promoter ever mentions shipping through the NW passage to Asia, short that stock. It's going to zero.

[linealdin]

Listened to part of the Transalta Q3 presentation (and a few of my thoughts on the Balancing Pool):

 

1) Transalta and other stakeholders working out the rules for the new energy market post 2020. Federal draft rules for coal to gas conversions have been issued.

 

2) Balancing pool terminates the PPA's for Sundance 3 to 6 at the end of April. This action, along with the voluntary mothballing of Sundance 1 and 2, should drive power prices in Alberta up.

 

If electricity prices are driven high Transalta would have the option of offering power from Sundance 3 to 6 at the market rate, and make some money. If electricity prices are what they are today those units can't make money and will be idled until new energy market rules take effect in 2021.

 

Higher electricity prices benefit the economic viability of the Genesee and Sheerness power plants, Altius's main concerns since they generate 87% of Altius's total electrical coal revenue.

 

3) Balancing Pool wants to terminate Transalta's Keephills PPA, too, but there is ongoing litigation. Transalta expects the Balancing Pool to be forced to hold on to that PPA through 2020 because litigation takes forever.

 

4) My thoughts: Balancing Pool definitely holds on to the Genesee PPA through 2020 (termination costs much higher than potential savings) and likely keeps the Sheerness PPA (termination costs slightly higher than potential savings). Higher electricity costs would also encourage the Balancing Pool to hold on to the Genesee and Sheerness PPA's.

[linealdin]

Takeaway for the electrical coal royalties, in the near term:

 

1) Highvale revenue will be cut roughly in half after March 2018 (Keephills complex keeps operating; Sundance complex greatly diminished). Highvale did C$929K revenue last fiscal year. Expect C$465K going forward, post March.

 

2) Genesee and Sheerness revenue unaffected through the end of 2020. With expected higher electricity rates with the Sundance retirements, both complexes will run at full capacity. They remain the backbone of Alberta's baseload power capacity.

 

3) Paintearth is already diminished but it stays at current C$754K through the end of 2020 (Balancing Pool will be forced to hold on to Battle River 5 PPA because of ongoing litigation).

 

A lot happening in the Alberta power market but Altius keeps collecting steady checks for the next 3.25 years.

[linealdin]

Transalta will announce more details about coal to gas conversions for Sundance and Keephills at its investor day on December 6th. Will announce securing gas supply for the conversions? Will announce that CTG will proceed earlier than the announced 2021 to 2023 timeline? That is what it sounds like. Probably Sundance 3 to 6 conversion moves ahead earlier, since the PPA is dead at the end of March 2018.

 

Keephills CTG probably stays on same schedule because the PPA is still solid through 2020.

 

When one of the Sundance 3 to 6 plants is converted it will be the first CTG conversion in Canada. A milestone! I, and Transalta's competitors, look forward to seeing exactly how much the conversion costs and how the process in general plays out. Let's see how long those natural gas pipelines take to build.