ALS.TO - Altius Minerals

[Liberty]

11 years to payback is about a 6.5% CAGR. Whether that's good depends on your hurdle rate, I guess.

[linealdin]

11 years to payback is about a 6.5% CAGR. Whether that's good depends on your hurdle rate, I guess.

 

After payback is achieved the profit will be 3 billion dollars or so in potash royalties. Nothing in the resources sphere lasts as long as those potash royalties. Perpetual cash machine.

[Liberty]

3 billion over how long? What commodity prices assumptions are built in that number? What discount rate? What kind of IRR are you expecting?

 

I think absolute number of dollars is pretty meaningless. $240m invested in the SP500 will return $3bn at some point too. The performance will be different whether it's over 20 years or 60 years...

[linealdin]

Champion Iron closes at C$1.15. Good price action, some steam building up. I predict Champion touches C$1.75 by the time production begins in February.

 

Altius debenture is going to be a nice score.

[linealdin]

I'm sure $3 billion in royalties is meaningless to you. It will mean plenty to me and my children and grandchildren.

 

But for the near term:

 

In the next 5 years Altius annual potash revenue will surpass C$12 million. I expect annual potash revenue to reach C$20 million sometime in the next 10 years.

 

A combination of volume increases at Rocanville, the world's largest and lowest cost potash mine, commodity price increases, and the addition of the McChip royalty does the trick.

[linealdin]

The largest and newest wind power station in Alberta is called Blackspring Ridge. 300 MW, 166 turbines, and capex of $600 million. Most of today it produced around 2 MW. Laughably bad technology. Wind power is retarded.

 

It was finished by a French utility in 2014. Good luck attracting that kind of investment again in the NDP's Alberta.

[Liberty]

I'm sure $3 billion in royalties is meaningless to you. It will mean plenty to me and my children and grandchildren.

 

???

 

I think you missed the point.

 

The largest and newest wind power station in Alberta is called Blackspring Ridge. 300 MW, 166 turbines, and capex of $600 million. Most of today it produced around 2 MW. Laughably bad technology. Wind power is retarded.

 

Saying that wind power is "retarded" because a wind farm didn't produce much power on a day when the wind didn't blow is kind of... well...

 

Did you know that the average coal plant's capacity factor is around 60% while wind farms vary around 20-40%, with some offshore wind farms having capacity factors above 60%?

 

Personally, if I can pick a challenge for our society to have to deal with, I'll take renewable's variability over coal's poisoning of the air, water and soil, as well as messing up the climate, but that's just me.

[linealdin]

Nonsense, nonsense and more nonsense. What does the average coal plant matter? Altius's royalties at Genesee, Sheerness, and Keephills 3 are state of the art plants. They are online 96% of the time. That is a fact.

 

What does the average wind plant matter? Offshore wind farms, WTF? Does Alberta have a coast I don't know about?The wind in Alberta doesn't blow very often, especially in the daytime when it is needed. That is an undeniable fact. The usage reports are public and archived. Investigate a little before you spread disinformation.

 

Facts, not fantasies. Exact usage reports not "averages."

 

*

 

The NPV of the prospective $3 billion in potash royalties matters more if you are preparing a sale. Altius is keeping them forever. They will collect those billions. As a fractional owner of the business I will collect my share. My children and grandchildren will collect their shares.

[wachtwoord]

@linealdin I like ALS (and own it) but just so you understand Liberty's point: $3B doesn't say anything if you don't discount it to present day value. In fact for example $100T in 500 years is worth zero today with a 10% discount rate (0.9^500 * 100T=$0.00000).

 

 

[Liberty]

You called wind power "retarded", so I gave you some facts. I said elsewhere what I thought about Alberta specifically, I was just answering your broad generalization.

 

Uptime isn't the same as capacity factor.

 

I think you need to learn about the concept of the time value of money. And unless you own 100% of ALS, you and your lineage won't get anywhere near that money.

[linealdin]

I understand the concept of NPV. Future cash flows are deeply discounted. OK, we have all passed finance 101.

 

Altius still plans to collect billions in potash royalties. As a fractional owner I will collect my share. What part of these two simple English sentences don't you understand?

[linealdin]

Choose:

 

A) $100 today

 

B) $1 billion in 100 years (your heirs may collect).

[linealdin]

I think Altius will collect about C$1 billion in potash revenue during my lifetime. Meaningless to you; meaningful to me.

 

I do plan to be alive for a long time. Blue zone diets.

[Liberty]

The NPV of the prospective $3 billion in potash royalties matters more if you are preparing a sale. Altius is keeping them forever. They will collect those billions. As a fractional owner of the business I will collect my share. My children and grandchildren will collect their shares.

 

NPV isn't just for sales. It's just a representation of the time value of money vs your opportunity cost.

 

Choose:

 

A) $100 today

 

B) $1 billion in 100 years (your heirs may collect).

 

Except those aren't the numbers, right?

 

If you have to pay $240m three years ago to get $3bn over:

 

1) 60 years (that's a 4.3% CAGR)

 

2) 50 years (that's a 5.18% CAGR)

 

3) 40 years (6.52% CAGR)

 

4) 30 years (8.78% CAGR)

 

5) 20 years (13.46% CAGR)

 

6) 10 years (28.73% CAGR)

 

So those 3 billions you speculate about (because nobody can be sure how much will come out of that royalty), how fast are you expecting ALS to get them in return for their $240m?

 

Looking at Altius' royalty pages, it doesn't sound like it's going to be within 10 or 20 years... So the CAGR returns you are getting if you spread it out over those kinds of timelines start to be kind of low for my taste, especially considering that this isn't exactly a blue chip company in a stable sector, and surprises can be to the downside as well as the upside...

 

If you're discount rate is even just 15%, getting 3 billion for that 240m package needs to happen kind of fast for it to be worth it.

[bizaro86]

I choose B. That is better than 17% compounding for 100 years in a row. Easy choice. ALS isn't generally getting 17% IRRs on its investments.

[bizaro86]

Incidentally, it is worth mentioning that this is a great discussion, even if slightly hrated by cobff standards. I think that is especially true since both of you are right in some ways.

 

Liberty is right in that the time it takes to earn the money really matters. Linealdin is right too though, because if you do a dcf for this cash flow, under a reasonable set of assumptions the terminal value will be significant, because of the expansion(s), long life, and potential for commodity price inflation.

 

On a somewhat related note, does anyone know how the potash royalties are calculated? I would assume (but don't know) that Potash Corp only pays when they are mining on land from ALS/McChip holdings. Does anyone know differently? It matters quite a bit, because if the royalty is on the entire mine holdings it will be both longer life and less volatile.

[linealdin]

Applying 15% discount rates to a package of royalties that requires no sustaining capex or additional investment from Altius? Does that make any sense to you guys?

 

I understand a mining company wanting high hurdle rates for particular projects. That is because projects can actively lose money in certain years with low commodity prices and high sustaining capex.

 

But Altius just collects checks. Sometimes large checks, sometimes smaller. It never has to write a check after making its royalty purchase.

 

Seems a lot less risky than being a miner.

[Cigarbutt]

"On a somewhat related note, does anyone know how the potash royalties are calculated? I would assume (but don't know) that Potash Corp only pays when they are mining on land from ALS/McChip holdings. Does anyone know differently? It matters quite a bit, because if the royalty is on the entire mine holdings it will be both longer life and less volatile."

 

Looking at ALS.

 

From a press release:

 

"About the PMRL Royalties and CDP  

 

PMRL holds the rights to subsurface minerals in respect of a portfolio of coal and potash properties in the Canadian  provinces of Alberta and Saskatchewan. PMRL has entered into leases, or similar agreements, with mining companies  and electricity utilities that, in return for payment of a royalty, grant these companies the right to exploit the subsurface

mineral resources. On the basis of these leases, significant potash and coal mining operations have been developed on  the leased properties.

 

CDP holds coal projects with more than 7.2 billion tonnes of measured and indicated resources and approximately 4.7  billion  tonnes  of  inferred  resources.  It  also  holds  approximately  2  billion  tonnes  of  inferred  potash  resources  in  Saskatchewan. Some of the over 900 thousand hectares of land owned by CDP are located proximal to existing  operations while other areas represent stand‐alone development opportunities."

 

and:

 

 http://altiusminerals.com/prairie-royalties/potash

 

So, they are revenue-based royalties.

Does that help?

 

[bizaro86]

"On a somewhat related note, does anyone know how the potash royalties are calculated? I would assume (but don't know) that Potash Corp only pays when they are mining on land from ALS/McChip holdings. Does anyone know differently? It matters quite a bit, because if the royalty is on the entire mine holdings it will be both longer life and less volatile."

 

Looking at ALS.

 

From a press release:

 

"About the PMRL Royalties and CDP 

 

PMRL holds the rights to subsurface minerals in respect of a portfolio of coal and potash properties in the Canadian  provinces of Alberta and Saskatchewan. PMRL has entered into leases, or similar agreements, with mining companies  and electricity utilities that, in return for payment of a royalty, grant these companies the right to exploit the subsurface

mineral resources. On the basis of these leases, significant potash and coal mining operations have been developed on  the leased properties.

 

CDP holds coal projects with more than 7.2 billion tonnes of measured and indicated resources and approximately 4.7  billion  tonnes  of  inferred  resources.  It  also  holds  approximately  2  billion  tonnes  of  inferred  potash  resources  in  Saskatchewan. Some of the over 900 thousand hectares of land owned by CDP are located proximal to existing  operations while other areas represent stand‐alone development opportunities."

 

and:

 

http://altiusminerals.com/prairie-royalties/potash

 

So, they are revenue-based royalties.

Does that help?

 

They are definitely revenue based royalties, but my question is what set of revenues are they calculated on.

 

Take Rocanville for example. The mine is huge, produces a lot of potash, and covers a lot of acres. Does ALS get paid a royalty on every $ of potash produced by Rocanville, or only on potash produced by land it owns? That press release seems to imply the royalties are land based, but maybe they own all the land or have traded their land for an overarching royalty at some point.

 

Both types of royalty are common, but the land based one has a bit of downside risk. For those who have also followed Pardee (PDER), a few years ago their Colorado royalty stopped producing cash, because the long wall coal mine left their land. It was a good investment for them, but if you had capitalized the earnings a year before the mine left their land because the mine was going to keep going that would have been a significant mistake.

 

It was actually the McChip acquisition that made me think of this question. If ALS owns all the land under Rocanville, why is Potash Corp paying McChip royalties? If ALS doesn't own all the land under Rocanville, then what percentage they own becomes a material question, imo. Maybe they've traded their land to POT for a fixed royalty, in which case this is all moot, but it seems worth knowing to me.

[linealdin]

http://altiusminerals.com/uploads/Prospectus_Eng.pdf

 

See page 42:

 

"The Rocanville Mine leases have been unitized pursuant to a unitization agreement with other mineral

rights holders. Royalties are calculated as the greater of the royalty rate paid to the Crown over Crown owned

lands within the Rocanville Mine lease area, or a percentage of the net selling price of run of mine ore

determined by the average grade of potash ore mined in each month, in accordance with the schedule of royalty

rates determined by Saskatchewan’s Subsurface Mineral Regulations."

 

So the royalties are over the whole unitized area that Rocanville mines from. Altius just bought McChip's smaller unitized share. Each mineral rights holder receives a pro rata share of the whole unitized area based upon the size of their land holdings.

 

In addition, the CDP portfolio has a significant inferred potash resource located close to Rocanville. No lease deal has been made with Potash Corp yet on those lands.

[bizaro86]

http://altiusminerals.com/uploads/Prospectus_Eng.pdf

 

See page 42:

 

"The Rocanville Mine leases have been unitized pursuant to a unitization agreement with other mineral

rights holders. Royalties are calculated as the greater of the royalty rate paid to the Crown over Crown owned

lands within the Rocanville Mine lease area, or a percentage of the net selling price of run of mine ore

determined by the average grade of potash ore mined in each month, in accordance with the schedule of royalty

rates determined by Saskatchewan’s Subsurface Mineral Regulations."

 

So the royalties are over the whole unitized area that Rocanville mines from. Altius just bought McChip's smaller unitized share. Each mineral rights holder receives a pro rata share of the whole unitized area based upon the size of their land holdings.

 

In addition, the CDP portfolio has a significant inferred potash resource located close to Rocanville. No lease deal has been made with Potash Corp yet on those lands.

 

Thanks! That's super helpful! I'm familiar with unitization from oil and gas, where it's relatively common.

 

I wonder if ALS would consider buying oil and gas royalties. Something like providing royalty financing to whoever buys Cenovus' interest in the Weyburn unit. Long life, low decline (because of the CO2 flood), and could allow someone smaller to get into the game by providing a part of the upfront cost. Just a thought, but I'd love to see them up their commodity diversification.

[linealdin]

From the same prospectus above. 90% of Sherritt's electrical coal was sold to mine mouth power generation plants but the remaining 10% was sold to "other domestic customers as well as used in value-added coal products." Interesting, there does some to be other markets for the Prairie coal besides the power plants.

 

Coal gasification or liquefaction is, of course, the preferred route for squeezing some more value out of the deposits once the power plants are closed.

 

Transalta at some point seems to have done a feasibility study on coal gasification at its Highvale mine.

[linealdin]

http://altiusminerals.com/uploads/Prospectus_Eng.pdf

 

See page 42:

 

"The Rocanville Mine leases have been unitized pursuant to a unitization agreement with other mineral

rights holders. Royalties are calculated as the greater of the royalty rate paid to the Crown over Crown owned

lands within the Rocanville Mine lease area, or a percentage of the net selling price of run of mine ore

determined by the average grade of potash ore mined in each month, in accordance with the schedule of royalty

rates determined by Saskatchewan’s Subsurface Mineral Regulations."

 

So the royalties are over the whole unitized area that Rocanville mines from. Altius just bought McChip's smaller unitized share. Each mineral rights holder receives a pro rata share of the whole unitized area based upon the size of their land holdings.

 

In addition, the CDP portfolio has a significant inferred potash resource located close to Rocanville. No lease deal has been made with Potash Corp yet on those lands.

 

Thanks! That's super helpful! I'm familiar with unitization from oil and gas, where it's relatively common.

 

I wonder if ALS would consider buying oil and gas royalties. Something like providing royalty financing to whoever buys Cenovus' interest in the Weyburn unit. Long life, low decline (because of the CO2 flood), and could allow someone smaller to get into the game by providing a part of the upfront cost. Just a thought, but I'd love to see them up their commodity diversification.

 

Agreed. I like the fundamentals for oil. BHP is looking right now to add more copper and oil; those are the two commodities they like best.

 

Barriers for Altius: 1) No particular expertise in oil/gas; 2) tremendous competition for oil/gas properties.

 

They've flirted with energy, usually from unusual angles. The shale oil thing, and the refinery project come to mind.

[linealdin]

Champion up to A$1.23 in the Australian market.

 

Resale restrictions for the Altius debenture expired at the end of October. They can convert to shares and sell those shares immediately. Though I think the plan is to keep collecting interest through the loan's maturity in June.

 

Interested to see how many Champion shares Altius acquired in the recent 90 cent private placement. The PP investors are sitting pretty.

[Cigarbutt]

"So the royalties are over the whole unitized area that Rocanville mines from. Altius just bought McChip's smaller unitized share. Each mineral rights holder receives a pro rata share of the whole unitized area based upon the size of their land holdings.

 

In addition, the CDP portfolio has a significant inferred potash resource located close to Rocanville. No lease deal has been made with Potash Corp yet on those lands."

 

Thank you for the clarification. This is phrased elsewhere in the Altius documentation saying:  "...the resource land ... located proximal to  existing mining operations ... could be  incorporated into future mine plans for new royalties."

 

In terms of the discount rate of the cash flows which is an essential determinant, here is some info I have found recently concerning discount rates that could be used to value royalty streams:

http://www.rpmglobal.com/wp-content/uploads/2015/08/Issue116-Royalties.pdf

 

I would say that the long term AAA yield which stands now at about 3,6% is way too low. Too low because of the overall business risk and because those projects are very long term and one has to consider that inflation may eventually go up (though I understand contracts include inflation adjustments to the streams).

 

Also, the discount rate in this field has to include the potential effects of forward looking commodity selling prices as this may impact the absolute amounts and even eventually the timing of those cash flows.

Need to do more work.