ALS.TO - Altius Minerals

[linealdin]

"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.

 

"Royalty is a prior lien on operating profits

and, as such, should not carry a rate as

high as the more risky discount rate applied

to the lessee’s operation."

 

This seems very sensible. I think a 5% discount rate is appropriate for a royalty on a mature mine that has overcome the inevitable difficulties of initial commissioning, and has delivered steady revenue for a long time.

 

Discounting is an art rather than a science. Every mine is different, every royalty is different. 15% discount rate on a package of mature royalties is crazy, though.

 

The difficulties of a new mine are probably underestimated. Morien Resources basically has a single asset, a royalty that could pay out for 30 years on the Donkin coal mine. But this mine is just starting up and has run into a lot of trouble, including: 1) Difficulties with the geological structures; 2) Numerous mine safety violations and fines; 3) Lack of profitability leading to layoffs of 40% of the mine workforce. Now what discount rate should be applied to Morien's royalty cash flows? I think there's a non-negligible chance of the mine operator shutting everything down, and very soon.

 

I expect similar difficulties when Excelsior's Gunnison mine starts up. There are always issues in the beginning. The in-situ injection may just not work. That's the message I get from Altius management regarding Excelsior. Technical risks are underrated.

 

Yamana I won't worry about. After a decade I think they've figured out how to mine Chapada.

[nostradamus]

 

I expect similar difficulties when Excelsior's Gunnison mine starts up. There are always issues in the beginning. The in-situ injection may just not work. That's the message I get from Altius management regarding Excelsior. Technical risks are underrated.

 

 

I wonder if that means that they will sell their Excelsior stake prior to mine construction, eg after the final permit has been issued (expected around the end of the month) or after financing has been arranged.

[Williams406]

Is there some register of who owns what % royalty of a unitized area in Canada? Curious to find out about other players in Rocanville and size of holdings.

[Liberty]

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.

 

Earlier in the thread I've explained why I think even Altius should get a decently high discount rate. Actual events over the years have shown this correct, since many large projects have fallen by the wayside, large write-downs have been made, etc. Commodities aren't predictable, even if all you do is invest in other people's projects.

 

But 15% isn't that high for a resource small cap and capex has nothing to do with it. It's about what return do you want on your money? What's your hurdle rate? If ALS is making a sub-10% return on that big royalty package that they bought during a period of high commodity distress, is that high enough for you?

 

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

 

What matters in the end is the return that it gets on its money (ROIC).  If it takes 11 years to payback its original investment, that's a 6.5% CAGR return. If commodity prices go down during that period, maybe payback takes 15 or 20 years. That's a real risk. If commodity prices go down enough, a project might never be made or might be delayed for over a decade (Alderon?), that reduces the return rate further. Another downside with royalties is even if you hit the jackpot and get a really good royalty, you can't reinvest in it at the original rate you got, if at all. You constantly have to find new ones (more like bonds than a business that you can directly reinvest in). So if your base case isn't that high to begin with and you are taking commodity price exposure risks on top of it, to me that seems risky.

 

And you're riding the cycle. When commodity prices are inflecting up, everything will feel great as the amounts go up and up, and then after a while (probably just when you got used to it) the cycle might turn and for the next 5 years you might see the size of the checks go down and down... All in an unpredictable fashion.

 

As I said many times, I'm not forecasting that the stock will do badly or well. I'm just talking about some of the downsides of the model that I think haven't been discussed enough in this very long thread.

[linealdin]

One more very clear example.

 

Yamana when it was thinking of building the Chapada mine back in the early 2000's did the usual procedures before building a mine. One procedure is a feasibility study that established a project IRR. If that project IRR had been below 10% I doubt that they would have gone ahead with the project. A high hurdle rate is required because of the inherent risks of mining. A bad project can actively lose money for years because sustaining capex is much higher than operating cash flow because of lack of project execution, or whatever. Happens all the time.

 

Altius when it was evaluating whether to purchase the Chapada stream in 2016, when the mine had been successfully operating for a decade, probably required a lower hurdle rate than Yamana did with its construction decision. Royalty holders experience less risk than operators and therefore should enjoy lower discount rates.

 

"Royalty is a prior lien on operating profits

and, as such, should not carry a rate as

high as the more risky discount rate applied

to the lessee’s operation."

 

This seems non-controversial.

[linealdin]

P.S. I've already made various calculations of the IRR on the Prairie Royalties acquisition. My calculation was an IRR higher than 10%, if including the probable reserves, and measured and indicated resources at the potash mines. The IRR is lower if only proven reserves are included.

 

Please don't spread disinformation about the Prairie Royalties having a sub-10% IRR if you haven't done the due diligence.

[linealdin]

Choose:

 

1) Investing $240 million capex in a new mine project with a 9% IRR.

 

2) Investing $240 million in a diversified royalty package on a group of mature operating mines. The IRR of the deal is calculated to be 9%.

[Liberty]

The more you don't address my points, and explain to me things I've already addressed, the more I think you don't understand what I'm saying. Anyway, hopefully other readers will have gotten some value out of this.

 

P.S. I've already calculated the IRR on the Prairie Royalties acquisition. My calculation was an IRR significantly higher than 10%, while only including the proven reserves at the potash mines. If we expand the potash mine lives to include probable reserves, and measure and indicated resources the IRR is another step better.

 

Please don't spread disinformation about the Prairie Royalties having a sub-10% IRR if you haven't done the due diligen

 

I'd love it if you could share those numbers, because you're the one who said (and I'm using your numbers because I assume them to be optimistic, as you constantly are) that you expected 1 billion from that royalty during your lifetime and that you and your descendants would see 3bn. Unless you're 80 years old, I'm assuming you meant a few more decades.

[linealdin]

How to get to a C$1 billion in potash royalties in my lifetime. I have to live a long time. I plan to.

 

Altius has received roughly C$20 million in potash royalties, so C$980 million left to go.

 

Outer bounds of my lifespan from August, 2017 forward is another 72 years.

 

C$980 million / 72 years = an average of C$13.6 million in annual potash royalties.

 

I believe we are at a cyclical low in potash. I believe Altius has acquired royalties on the best potash mines on the planet. I believe potash's long term (as in the next 50 or 100 years) demand picture is excellent. I believe there is potential for price inflation, including for commodities. In the near term (the next 5 years) I expect volume expansions, potash price increases, and the addition of the McChip Rocanville royalty to show the potential of the potash royalty package.

[writser]

Another question: how would you handicap the chance that Linealdin is getting paid by / works for Altius? Half a year, 600 posts, all of them in this topic, all of them bullish, 100% invested in Altius with no intention to sell, ever.

[Liberty]

Another question: how would you handicap the chance that Linealdin is getting paid by / works for Altius? Half a year, 600 posts, all of them in this topic, all of them bullish, 100% invested in Altius with no intention to sell, ever.

 

I don't think that's the case. I think he's just genuinely excited about it. And based on his last post, he's also fairly young. I've gotten really excited about other investments in the past too, they were usually good learning experiences, if not always profitable.

[linealdin]

I'm not always positive. I think some of Altius's relationship choices have been questionable. They put Mark Morabito in charge of Alderon, and he is now milking Alderon for salary. They were too aggressive and failed to cash out $100 million from Alderon. Paul van Eeden was given money to invest at the top of the market, mostly because he's a nice guy and a very early Altius investor. But it wasn't very counter-cyclical to be making those investments at that time. The refinery was a horrific act of hubris. What the hell do these guys know about building or running an oil refinery? Nothing, it turns out. I'm deeply suspicious of how in-situ copper solution mining is going to work. Altius should be raising the dividend and cutting debt at a faster rate. Brian could return my emails more often. I could go on.

[cwericb]

Writser, that thought has crossed my mind as well. I do appreciate his information, but one does wonder at times.

Dazel, who started this thread seemed to think Linaldin was doing a good job, but you do have to wonder at times if some posters on this board have other motives.

Sure would be nice to know who some people are and their backgrounds. Liberty is likely right on this - we've all probably been there.

eb

[linealdin]

Another question: how would you handicap the chance that Linealdin is getting paid by / works for Altius? Half a year, 600 posts, all of them in this topic, all of them bullish, 100% invested in Altius with no intention to sell, ever.

 

Careful. What you are suggesting is probably illegal according to securities law. I'm an attorney so I'm alert to those issues. I certainly don't care about the insinuation but sometimes the companies do.

 

Frankly, what I'm doing is getting my money's worth. I didn't like paying for a COB membership but it is a hurdle that keeps out the riffraff of a place like Stockhouse.

[writser]

Immediate reply with vague threat of lawsuit - makes me think I should increase my original estimate of the odds. Anyway, I'm done with this topic, not interested in this company at all either way. Much to difficult for me. Apologies if I have offended you and am wrong. Your post history is just very peculiar.

[Cigarbutt]

Interesting exercise. Would say relevant and useful.

Maybe too difficult for me too but haven't thrown the towel yet.

 

Perspective:

-For fun, looked at Coke yesterday. Very high PE. Not same situation obviously. Still, investors these days (that may change) can highly value (low discount rate) even slowly growing long streams of cash flows. Risk is higher at ALS but interest rates/inflation may go up and the ALS royalty streams will have a relatively high implicit and explicit inflation protection.

-For interest, have been looking at Diversified Royalty Corp (DIV) which, in a way, resembles ALS. For a risk profile that is relatively similar, valuation these days shows a gap. Maybe DIV is too high, but maybe ALS is too low.

-Closer to home, Franco-Nevada certainly implies much lower discount rates for relatively similar mining and oil "projects".

-Would even say that the valuation of FAANG stocks makes sense only with assumptions associated with a certain profile of cash flows and discount rates which, in reality, may not prove to be realistic.

 

Bottom line:

-have to decide if ALS has the recipe for long term success in terms of value creation. If yes, the value (many components here with the royalty model) will eventually be recognized.

-have to try to come up with scenarios about the actual cash flows and the timing of the cash flows.

-unfortunately, for this part, need to look at the macro picture vs commodities.

 

From Mr. Buffett:

"The most the owners in aggregate can earn between now and judgment day is what their businesses in aggregate earn."

 

Need to do more work.

 

[linealdin]

Immediate reply with vague threat of lawsuit - makes me think I should increase my original estimate of the odds. Anyway, I'm done with this topic, not interested in this company at all either way. Much to difficult for me. Apologies if I have offended you and am wrong.

 

"When you are dead, you do not know you are dead. It's only painful and difficult for others." The same applies when you are paranoid.

[linealdin]

https://docs.wixstatic.com/ugd/8d6671_29ce6f7013c042c6bc9f1a5fc6db28b2.pdf

 

Latest EMU NL presentation for their AGM. Drilling will be 6000 to 10,000 meters of air core and 2,000 meters of traditional core drilling. Drill program delayed until after Christmas holidays because the aircore drill rig is slow to arrive from Australia.

 

A$2.3 million in cash at the end of October. I suppose that's enough to run a 12,000 meter drill program, though that part of Chile looks as remote as the moon.

[linealdin]

I don't understand the gloom and skepticism. Every one of the recent deals is going in the right direction:

 

1) LIF, first tranche acquired around C$13, is going to pay around $3 in dividends this year, and is trading over C$21.

 

2) Champion is up to C$1.23, up another 8% today. That's a 23% gain on paper, and the debenture is earning 8% interest while we wait to cash out.

 

3) Adventus stock price has risen from 25 cents to C$1 and has just made a great acquisition.

 

4) Wolfden stock price is 60% higher than what Altius will pay in the private placement. Even the warrants are in the money.

 

5) Yamana Gold about to announce major expansion plans at Chapada.

 

6) Quarterly revenue will certainly hit another record high. MikeK says C$16 million to C$17 million, I say C$20 million. It will probably split the difference but still be a record quarter by a few million.

 

7) Hundreds of thousands of meters being drilled at Altius royalty properties right now. A year or two ago zero meters were being drilled.

 

Eight) Even coal, the ugly stepchild, is doing better. Electrical coal revenue up 28% in the last 3 quarters compared to the preceding 3 quarters.

 

9) Excelsior's going to be paying new royalty revenue to Altius sometime in 2018.

 

What's there to be bearish about? Alderon? I think we've beaten that horse to death already.

[linealdin]

http://www.cbc.ca/news/canada/newfoundland-labrador/power-newfoundland-quebec-1.4393397

 

"Coady said talks between the two provinces have focused on mining opportunities in the iron ore-rich Labrador Trough, which straddles the border between the two provinces."

 

NL and Quebec discussing Trough iron ore opportunities. Quebec has done its part with its incredible support (and minority ownership) of Bloom Lake. NL needs to step up. The stranded resources on both sides of the border need a new railway, power lines, etc.

[cwericb]

I think some of the negativity may come from this thread itself in that things looked so positive for ALS back a few years ago and since then the share price has really done nothing. I still have some ALS that I purchased at $14+ several years ago and on average I am probably only at a break even point.

 

Certainly the price of commodities has had a big effect on share price and that is one thing that is hard to predict. Also I think people may not have as much respect for Dalton and crew as they did a while ago.

 

Having said that, ALS is one of my larger holdings and I believe that Dalton and company are building for the future. The big question is, how long will it take for the market to recognize this and how long do people want to keep their money tied up?

 

I think the most positive thing to happen with Altius over the past few years is Fairfax's show of confidence in the company. They are no dummies and wouldn't be involved if they didn't see big things in ALS's future.

 

That's just my humble view.

[linealdin]

OK, Alderon Disappointment Syndrome (ADS), basically. Everyone still mad about 2011 being a peak, not a waystation to better things. I hear it from the callers on the quarterly investment calls. A weary, embittered tone. It is the sound of opportunity.

 

On the Altius stock price: I'm excited precisely because stock price is flat, while a very long list of positive things are happening. I would like Altius a lot less if it were trading at C$24 a share. I'd like it a lot better if it were trading at C$6 a share. Preparing and rooting for the latter. 

 

 

[linealdin]

I like Fairfax as a cheap, optional and quick source of debt. The normal types of bank debt facilities are readily available but have higher effective interest rates, higher broker/attorney transaction fees, restrictions of the use of the debt, and can take months to secure. With the Fairfax facility set up Altius can now have C$50 million wired to them whenever they like, to use for whatever purpose they like. No additional documentation, no regulatory filings, no press releases required. That is an advantage. For all we know Altius may have already taken another C$25 million tranche down. They move silently.

 

As to Fairfax's vote of confidence? I don't care and I don't think the market really cares. So what if Brian Dalton met his hero Prem Watsa and impressed him? I don't need Fairfax's approval. My shares were bought a hell of a lot cheaper than theirs.

[cwericb]

A small amount of investors know who Altius is. A lot more investors know who Fairfax and Watsa are. The fact they are willing to back Altius gives the company a certain credibility in the market place. One would think you would recognize the value of that.

[linealdin]

Option A: ownership of LIF with royalties on IOC that should last 90 years (reality).

 

Option B: ownership of a clone of LIF, exactly the same in every way except its royalties on IOC expire after 45 years.

 

The discounting crew is going to tell you that both options have very similar NPV's. Option A has a little higher NPV for its longer cash flows but it's basically a rounding error once you apply a high enough discount rate. Which you should do because mining is really risky.

 

I accept all that. But the reality is I'm going to be much, much happier owning Option A versus owning Option B. Much more happy than the slight difference in NPV I'm receiving should make me.

 

*

 

In a similar way I'm much happier with Altius owning the "multi-century" potash royalties (Dalton's term) versus potash royalties that finish in 40 years, even though the NPV difference is slight once a high enough discount rate is applied.