ALS.TO - Altius Minerals

[mikek]

I do like that transalta is the first to try the coal to gas conversions in Canada . If there is anyone that could mess up it would be transalta. Possibly one of the worst management's in the game. Anyone that has listened to their conference calls for the last five years will know what I am talking about. 

 

Not hearing much from atco anymore about converting the shearness plant in 2020, probably still likely to go to 2026+ as a coal plant.

[linealdin]

Who the heck knows what is going to happen with the coal plants after 2020? They are designing a new energy market from scratch, anything could happen.

 

I do feel confident, with the coal PPA's running to the end of 2020, that Altius is safe through that date.

 

Prairie Royalties has produced C$70.428 million in revenue through the end of July. For the August 2017 through December 2020 period I expect Altius to collect a little under C$80 million in revenue (assuming potash stays in its bear mode).

 

A safe bet that C$150 million will be paid back of the C$240.9 million purchase price by the end of 2020.

 

Significant uncertainty begins with January, 2021.

[linealdin]

And potash may not stay in bear hibernation.

 

Altius's potash royalties will deliver around C$8 million in annual revenue at current prices. Those prices are near cyclical lows. Commodities are still subject to cycles that is just what I believe.

 

Implications of being at a cyclical low? We don't know how exactly how long the lows will last but prices will inevitably trend upwards. Low prices kill investment, and lack of investment squeezes supply. The potash salts can't dig themselves out of the ground.

 

My very conservative guesses:

 

1) Sometime in the next 5 years the benchmark potash price ticks above US$330. Altius potash revenue reaches ~C$12 million a year

 

2) Sometime in the next 10 years the benchmark potash price ticks above US$500. Altius potash revenue reaches ~C$16 million per year.

 

It becomes very, very clear that the Prairie potash royalties are crown jewels in the royalty business. Tier 1 assets that will pay out for an unbelievably long time.

 

Rocanville is now the largest and lowest cost potash producer on the planet. If it stops producing before the end of its very long mine life that would mean the world has found a technological alternative to potash. (Which is certainly in the realm of possibility.)

[tengen]

I've not been following Altius all the closely for the past few years other than an occasional look at this topic. I still have it on a watch list and noticed this negative analysis issued a few days ago by an outfit called Capital Cube: http://www.capitalcube.com/blog/index.php/altius-minerals-corp-value-analysis-torontoals-october-27-2017/

 

[linealdin]

I've not been following Altius all the closely for the past few years other than an occasional look at this topic. I still have it on a watch list and noticed this negative analysis issued a few days ago by an outfit called Capital Cube: http://www.capitalcube.com/blog/index.php/altius-minerals-corp-value-analysis-torontoals-october-27-2017/

 

This the financial analysis equivalent of junk mail. Google search the news tab for any listed company and there will be sites that provide this kind of automatically generated "analysis." Shame on you for passing on this nonsense.

[nostradamus]

https://globenewswire.com/news-release/2017/11/02/1172718/0/en/Definitive-Purchase-and-Sale-Agreement-to-Acquire-Interest-in-Certain-Mineral-Titles.html

 

Altius agrees to pay $3m plus $500k for 10 years (so $8m in total), to purchase some potash properties from a company called McChip. The potash properties are in Rocanville, are being mined and should deliver Altius an royalty and rent stream. No details on what this property has been paying though in the press release. Hopefully Altius will provide more details.

[nostradamus]

The fact that the $8m that Altius will pay McChip is about three times the market cap of the company implies that either Altius overpaid or the market is hopelessly mis-pricing potash royalties.

[nostradamus]

From the latest MD&A of McChip on SEDAR:

 

Saskatchewan Potash Project, Province of Saskatchewan, Canada

The Company is the registered holder of a 100% working interest in 4,147 acres and a 50% working interest in 240 acres in the Rocainville Area, being in Townships 17 and 18, Range 32 and 33, wlm, located in south eastern Saskatchewan. The Company signed a lease agreement effective September 19, 2008, with Potash Corporation of Saskatchewan Inc. (“PCS”) granting PCS the right to mine potash from the Company’s mineral leases in the Rocanville area.

For the six months ended June 30, 2017 the Company recorded royalty income of $161,631. Based on production and price expectations the Company anticipates that this royalty will have a long term positive impact on income.

 

If you annualise the last 6 months this is an income stream of $323,262. Implies Altius cash flow of:

-> negative $3,000,000 now

-> negative $176,738 for the next ten years (= 323,262 -500,000)

-> positive $323,268 for years 11 to the end of the mine

 

Assuming an 80 year mine life (I've no idea), you need to use a discount rate of around 4.5% to get a positive NPV for this. However, the structure is obviously very leveraged to an increase in potash prices and production volumes.

 

 

 

 

 

[nostradamus]

McChip received the following potash royalty payments over the last few years:

 

FY 2014: $275,606

FY 2015: $388,351

FY 2016: $173,931

H1 2017: $161631 (=$323,262 annualised)

[linealdin]

I will repeat some relevant themes from yesterday, in light of this recent transaction:

 

1) Rocanville is now the largest capacity and lowest cost potash mine in the world. It is a crown jewel royalty.

 

2) Potash is likely trading near its cyclical lows. You buy royalties when the underlying commodities trade near cyclical lows. (If you still believe that commodities trade in cycles.)

 

3) Current production hasn't reached capacity. Rocanville was just certified in H1 2017 to a nameplate allocation of 6.5 MTA by Canpotex. This 15 day run rate testing just happened. The fact is Rocanville was producing nowhere near its nameplate 6.5 MTA in H1 2017. It wasn't allowed to by Canpotex rules. Potash Corp expects to significantly ramp up volume at Rocanville in H2 2017, and in future years.

 

4) The royalty revenues Mcchip received over the last several years was based upon Rocanville's pre-expansion production capacity of 2.0 MTA.

 

5) Because Rocanville is the lowest cost potash mine in the world Potash Corp plans to continue to ramp up its capacity to its new nameplate, whatever the potash price environment is. I don't know how long it will take to reach 6.5 MTA but it is definitely going to get there in the next couple of years.

 

6) Multiply those Mcchip revenues by 3.25 and you will see the potential of volume expansion.

 

7) Then multiply those results by 1.5 or 2 to see the potential revenues at recent cyclical highs for the potash price. (If you still believe cyclical highs are possible, I admit the possibility we are in a permanent bear market.)

[linealdin]

Setting aside the C$3 million initial payment, I expect McChip related revenue to be cash flow positive immediately. Altius will receive around C$750K and pay McChip C$500K in 2018. Just a guess based on Potash Corp's ramp-up rhetoric.

 

The juice, of course, in these kinds of deals is the mine life extensions. Rocanville, if you consider all reserves and resources, could run for much, much longer than 80 years. Multi-centuries.

[linealdin]

From the original deal McChip signed with Potash Corp in 2008.

 

The royalty rate Altius will receive is same rate Potash Corp pays to the Crown. Once in a while there are rumblings about raising the Crown royalty, usually when the Potash companies are doing too well in a bull market.

 

McChip in 2008 started receiving $100K per year advance royalty payments until their lands reached commercial production in 2012 (C$400K total). Then those advance royalty payments were deducted when McChip started receiving actual production royalties. Not sure the 2014 royalty revenue number is trustworthy since they were still deducting the advance royalties. The 2015 and forward royalty numbers are full payment.

 

Devil is in the details.

 

 

[nostradamus]

If the royalty payment is 750k in 2018 (and at least that thereafter), then it is a fantastic deal even without any further expansion or price rises.

[petec]

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

 

 

Superb presentation. Slides 6/7/8 are particularly amusing!

[linealdin]

Potash Corp doesn't break down exact production numbers for its mines but Rocanville production volume is definitely increasing at the expense of other higher cost mines in its portfolio.

 

1) New Brunswick (2 MTA capacity) was shut down a couple of years ago.

 

2) Cory (0.8 MTA capacity) switched to white potash only, which should lower overall production volume.

 

3) Recently enacted 18 week shutdowns at Lanigan (2 MTA capacity) and Allan (2 MTA capacity).

 

4) All these shutdowns yet Potash Corp reported a quarterly record 2.9 million tonnes of potash sold in Q3. Rocanville is doing the heavy lifting (only other Potash Corp mine unaffected by shutdowns or slowdowns is Patience Lake, which is a small producer).

 

5) Potash Corp will try to book around 9.3 million tonnes of potash sales volume in 2018. I believe they will try to make sure 6.5 MTA of that volume comes from Rocanville, its lowest cost producer.

 

6) We are going to see highly improved revenue from Altius's existing Rocanville royalty and its newly acquired McChip royalty in calendar 2018, even in a flat potash price environment.

 

 

[linealdin]

The recent quarterly royalty increases at McChip tell the story (flat potash price, so it's mostly just Rocanville ramping up):

 

Q3 2016: C$39,841

Q4 2016: C$69,597

Q1 2017: C$69,437

Q2 2017: C$92,194

 

McChip Q3 royalty revenue will be released later this month. I expect around C$150,000 for the quarter.

 

A big step change happened at the end of June: Canpotex certified Rocanville's expansion capacity and approved an allocation increase for Potash Corp. That will definitely impact McChip's Q3 royalty revenue.

 

Further marginal Rocanville volume improvements in 2018 easily pushes the McChip annual royalty revenue to C$750,000.

[linealdin]

As to why McChip sells this royalty just as the underlying mine is making a step change in production?

 

The company is a microcap is that getting little credit for its potash assets. The royalty revenue could triple and the market may not notice. This is a way to realize some value immediately.

 

McChip is very much a one man operation. The CEO and board chairman, Richard McCloskey, has been on the company's board since 1975. He owns 45% of the shares. He is older; he will not live to see most of the Rocanville revenue stream.

 

Right now he pays himself C$115K a year. With the C$3 million cash influx that annual salary could easily be doubled or tripled. No one can stop that from happening because he owns so many shares. A cash grab, that is my cynical view.

[linealdin]

https://docs.wixstatic.com/ugd/8d6671_6bae42fec7394d9aab73332af30f6ab4.pdf

 

Field season begins for EMU in Chile. 7 person team doing mapping and follow-up soil sampling at Vidalita and Jotahue. Drilling to follow in December. Very rugged, remote and beautiful terrain. Looks like an expensive place to explore. Better EMU than Altius.

[linealdin]

http://sustainability.sherritt.com/2012/_doc/AIF-FINAL-(2013-03-26).pdf

 

The potash acquisition got me thinking about monetization of CDP portfolio. The 2012 Sherritt annual information form linked above, page 53, listed CDP's mineral holdings: 213,000 hectares of crown leases and licenses but also 694,000 hectares held in fee simple.  Fee simple means freehold land ownership, the same way you own your home. No lease payments, no annual required exploration expenses, no use it or lose it. Just the standard real estate taxes all landowners pay.

 

694,000 hectares = 1.715 million acres. That is an astonishing amount of land to own.

 

Obviously Altius wants to monetize these acres by encouraging underground mineral development of coal, potash, coal-bed methane, salt, or whatever. That is their game. But as freehold landowners they will always have the option of selling or leasing the land for surface operations like farming or logging or real estate development.

 

Even the most useless, uninhabitable, unfarmable land has a price per acre. Applying a nominal price of US$100 per acre to 1.715 million acres implies an enormous amount of hidden value in CDP. Farmland cost an average of C$2500 per acre last year in Alberta.

 

(You can't buy land in the middle of the desert for $100 an acre. I've tried.)

 

Once in a while in Altius's financial statements you will see mystery sales of CDP coal assets. See page 7 below:

 

http://altiusminerals.com/uploads/FS-July-31--Q1-F2018-FINAL.pdf

 

What is that C$191K in coal assets sold? There were no CDP-related deals announced in the quarter. I think this may be a straight up land sale. They have plenty of it.

[bizaro86]

Altius only owns the mineral rights, not the surface rights. They are divisible under the Torrens title system used here.

 

I can prove it to. 1.7mm acres would be worth close to a billion dollars anywhere in Western Canada. ALS management is promotional enough they would have mentioned it in their presentations. Also, you would see millions per year in income and expenses from rent and property taxes.

 

Also, Sherritt got most of these minerals from buying Fording coals thermal assets. Fording of course was a spin from CP rail, which got the land for building a railway.

 

They sold the land and kept the minerals, trying to get western Canada settled to provide markets for their railway.

 

My ancestors bought quite a bit of land from CP 100 or so years ago. If they got the minerals my life would likely be quite different (Pan Canadian discovered oil under their land...)

[linealdin]

Altius only owns the mineral rights, not the surface rights. They are divisible under the Torrens title system used here.

 

I can prove it to. 1.7mm acres would be worth close to a billion dollars anywhere in Western Canada. ALS management is promotional enough they would have mentioned it in their presentations. Also, you would see millions per year in income and expenses from rent and property taxes.

 

Also, Sherritt got most of these minerals from buying Fording coals thermal assets. Fording of course was a spin from CP rail, which got the land for building a railway.

 

They sold the land and kept the minerals, trying to get western Canada settled to provide markets for their railway.

 

My ancestors bought quite a bit of land from CP 100 or so years ago. If they got the minerals my life would likely be quite different (Pan Canadian discovered oil under their land...)

 

Thank you so much for the clarification. My apologies, I thought "fee simple" meant the same thing in Canada as it does in the U.S.

 

Does the fee simple right to the subsurface minerals include the oil and gas?

[Cigarbutt]

linealdin,

 

-presently working on an opinion versus ALS.

-late stage now with a review of posts on this thread for which you have been a significant contributor.

 

-recently covered the mineral rights issue in oil and gas, USA vs Canada.

-thought the following link was helpful.

 

https://www.fraserinstitute.org/sites/default/files/divergent-mineral-rights-regimes-rev_0.pdf

[linealdin]

Yes, of course the fee simple subsurface rights include oil and gas. That is why Altius receives a significant amount of coal-bed methane revenue from CDP.

 

The coal-bed methane (CBM) litigation involved Crown lease holders. Did Crown coal lease holders have a right to the coal bed methane? The courts said no, the CBM goes to the Crown gas lease holders.

 

But that litigation is irrelevant to the fee simple landowners who own all the mineral rights below the ground (and who haven't already leased out the natural gas rights). The majority of CDP's land bank is held fee simple and therefore will benefit if CBM production ever really gets rolling in Alberta.

 

The 648 square kilometer Voyageur property in Michigan is also freehold mineral land. Can be held forever very cheaply.

[linealdin]

McChip purchase structure is definitely weird. I'm going to think of it like this:

 

1) C$3 million purchase price.

 

2) Altius hopes to receive approximately C$300K net revenue (C$800K revenue minus the C$500K annual payment to McChip) for the next 10 years. After 10 years the original C$3 million purchase price will be paid back.

 

3) The profit on the deal is hopefully a very long 100 year tail of production revenue. C$50 million to C$100 million total profit? Depends on how big Rocanville grows and potash's long-term demand picture.

 

This deal I would definitely use my own family's money on. Love potash, love Rocanville even more. The timing near the bottom of the potash price cycle is perfect. I think it is a steal. My biggest fear would be Rocanville flooding. It happens to these deep mines and it wipes all value out instantly.

[linealdin]

http://www.hudbayminerals.com/English/Media-Centre/News-Releases/News-Release-Details/2017/Hudbay-Announces-Second-Quarter-2017-Results/default.aspx

 

Hudbay Q3 results. Zinc production at 777 is up on higher grades. Zinc is stockpiling faster than plant can process. Copper production at 777 is down.

 

Overall mining of ore at 777 has slowed down. That will certainly stretch out the remaining mine life. I still see 777 operating at least to the end of 2021. Also, increase in commodity prices increases mineable resources.

 

Hudbay will present new plans for the whole Manitoba complex in January. Goals of both maximizing value and maintaining optionality once 777 and Reed are mined out.