ALS.TO - Altius Minerals

[Cigarbutt]

"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."

 

Have very high residual respect for Fairfax and agree partially with the comment but submit two nuances.

 

1-Involvement of a respected investor should constitute only an input to your own decision making process. (Significance of that input is personal)

 

2-The "ordinary" investor should factor in the possibility going forward that Fairfax gets involved more deeply in a distress scenario and then the cost of distress may be borne (and rightly so) by the other stakeholders through a dilutive process.

[linealdin]

Possibility of distress scenario for Altius is nil. Royalties are too large and too diversified. Debt is modest compared to assets and revenue streams. Traditional debt could be wiped out today if they chose to.

 

Brazil could nationalize Chapada and Rocanville could flood, wiping out both crown jewel royalties. Altius would still have enough revenue to pay its debts to the banks and Fairfax.

[linealdin]

Champion makes enormous moves. Trading at C$1.29 in Canada, and A$1.36 in Australia.

 

Champion was trading at C$0.85 when Altius bought the debenture on June 1st.

[linealdin]

By the way, my strong interest in the highly discounted future cash flows of some of these royalties is shared by Altius management. Chad Wells said in an interview years ago that Altius focused on acquiring (cheaply or for free) the long mine life tails that are discounted to almost nothing by traditional cash flow models.

 

It is a kind of contrarian strategy.

[linealdin]

 

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.

 

Excelsior never did a pilot test (drilling a few test wells to test recovery rates), which is common practice for other ISL mines. So the Stage 1 facility becomes a big pilot test in my eyes. Must sell equity before those test results are in. Not much upside left anyway, huge market cap for a non-producer.

[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.

 

Excelsior never did a pilot test (drilling a few test wells to test recovery rates), which is common practice for other ISL mines. So the Stage 1 facility becomes a big pilot test in my eyes. Must sell equity before those test results are in. Not much upside left anyway, huge market cap for a non-producer.

 

I also wonder whether Altius decide to fold it into the new copper vehicle that they are planning.

[wachtwoord]

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.

 

I guess the question here is: why? The value of the cash flows after 45 years is negligible. Why are you happy owning it then? The questions is: is your reasoning logical or emotional in nature?

[Cigarbutt]

Hyperbolic time-inconsistent discounting versus over-confidence?

Waiting for a reward requires effort and has an opportunity cost.

Are the « effort » and the cost worth the wait?

 

Keynes, despite obvious contradictory elements, was a very bright man and eventually a great investor. He invested in commodity futures in the 1920’s.

 

He once observed that remote gains are discounted at a very high rate by the common man.

 

But he also said in the General Theory (1936):

 

« The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong. If we expect large changes but are very uncertain as to what precise form these changes will take, then our confidence will be weak. »

 

Altius has definite potential.

It’s the margin of safety of this potential that I’m struggling with.

Need to do more work.

 

[nostradamus]

My humble contribution to the debate.

 

• Choice A: Invest in a company that has 10 year predicted cash flows.

• Choice B: Invest in two companies that when considered together have the same predicted cash flows a Choice A. That is, one company (ST Co.) has cash flows from years 1 to year 5 and the other company (LT Co.) has cash flows from year 6 to year 10. The proportion invested in ST Co. and LT Co. is such that Choice B has the same NPV as Choice A (assuming the same discount rate is used).

 

Are you indifferent between these two choices? Finance theory would say you should be, but I think you can make rational (non-emotional) cases for either A or B.

 

(i) For example, if a problem arises with the near term cash flows, maybe Choice A is better because investors/banks may be willing to provide temporary financing to keep the company alive in the short term safe in the knowledge of the 5 to 10 year cash flows that will be coming down the line. Under Choice B, maybe ST Co goes bankrupt, with all the associated bankruptcy costs and management time wasted in the build up to bankruptcy trying to keep the company alive.

 

(ii) Equally, if you are worried about legal risk and prospect of the lawsuits arising against the company, maybe choice B is better, as the separation into two companies means the losses at ST Co do not impair the value of LT Co, or vice versa.

 

I guess point (i) implies that the far out cash flows can have an impact on the discount rate that you apply to the near term cash flows. I don’t think far out cash flows should be valued in isolation, but instead should be considered to be part of the company receiving the cash flows. When I look at Altius I find it hard not to think: this company is going to be able to survive a hell of a lot. That is partly due to the fact that its cash flows stretch on for almost forever.

 

N.

 

[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.

 

I guess the question here is: why? The value of the cash flows after 45 years is negligible. Why are you happy owning it then? The questions is: is your reasoning logical or emotional in nature?

 

My reasons as I've stated above are emotional. I'm much happier owning the multi-century royalties. I'd prefer that someone else, maybe someone logical like you, be stuck with the royalty that ends in 45 years. I'm sure you'd be fine with getting the only negligibly shorter end of the stick. Deal?

 

Now the reasoning of a sophisticated investor like Altius may be more logical. Maybe there's evidence that Tier 1 mines tend to expand, thus bringing distant future cash flows forward in time? Maybe they just think the discounting gets a little too hyperbolic, whatever that terms means. Maybe their perspective has changed because they collect actual cash value every month, not net present values? Better ask them.

[Cigarbutt]

"Now the reasoning of a sophisticated investor like Altius may be more logical. Maybe there's evidence that Tier 1 mines tend to expand, thus bringing distant future cash flows forward in time? Maybe they just think the discounting gets a little too hyperbolic, whatever that terms means. Maybe their perspective has changed because they collect actual cash value every month, not net present values? Better ask them."

 

I think that's a very valid point.

 

If you try to go back to the early 1980's when Mr. Lassonde and Mr. Schulich were developing the royalty model in precious metals, investing along them was, at least partly, an act of faith. Maybe there was a component of luck but I would venture to say that the very rewarding returns that occurred after were mainly due to an unusual degree of business acumen. And, over the first several years, the exceptional returns were delivered in a relative bear market for gold.

 

BTW, if anybody has annual reports from the early Franco-Nevada years, I would be interested as I am trying to dissect the potential ways (there are many, specific to the royalty model) that Altius have used and could use in the future.

 

[linealdin]

Someone should buy Fancamp's iron ore assets. Way, way undervalued assets.

 

Fancamp's whole market cap is C$9 million.

 

A) Their 10.2 million shares of Champion (restricted from selling until May) are worth C$13 million.

 

B) Their 1.5% royalty on Champion's Fire Lake North consolidated property is worth ???

 

Give them C$20 million for those 2 assets. Unlocks value, win-win for all parties. Similar to the McChip deal.

[linealdin]

http://www.sokomaniron.com/news/2017/11/09/sokoman-iron-corp-to-option-moosehead-gold-property

 

Sokoman Iron options the Moosehead Gold property, after Mountain Lake failed to raise enough money. Altius becomes 20% equity owner of Sokoman Iron and retains a 1.5% royalty. C$500K first year exploration spending requirement.

 

Altius used to own about 14 million shares of Sokoman (acquired in Callinan merger). Those shares were sold for small change in recent years. They retain a 1% royalty on Sokoman's Iron Horse property.

 

NF is a small place. Going back to the well.

[Williams406]

Cigarbutt,

 

Not sure about early FNV annuals, but Global Mining Observer did a piece on the company a few years ago that discusses some of the early deals and decisions. A lot of input on the article from Lassonde.

 

https://static1.squarespace.com/static/52483801e4b0cd3b08465542/t/551d7b01e4b0bd71df802935/1427995393279/Issue+122.pdf

[Cigarbutt]

Got that.

Maybe, to help things going, here's a relevant one too.

https://www.forbes.com/forbes/2002/0218/062.html#12069121cf62

[linealdin]

Cigarbutt,

 

Not sure about early FNV annuals, but Global Mining Observer did a piece on the company a few years ago that discusses some of the early deals and decisions. A lot of input on the article from Lassonde.

 

https://static1.squarespace.com/static/52483801e4b0cd3b08465542/t/551d7b01e4b0bd71df802935/1427995393279/Issue+122.pdf

 

"Franco had paid $1.6m for

down-dip extensions to Canada’s

Hemlo mine, covering areas of the

orebody not expected to be mined for

at least 10 years. It was a “prototype”

for future deals: Lassonde was mining

an arbitrage between the value of

proven, gold-rich acreage and the

market’s tendency to excessively

discount long-dated cash flow."

 

Pierre Lassonde is much happier owning longer life royalties, too.

 

*

 

“What it takes in the royalty business is

patience and cash,” Lassonde said at

the time. “If we do nothing, we’ll do

fabulously well.”

[linealdin]

Also interesting and discouraging: the Franco Nevada guys love base metals too but the fund managers won't give them their multiples if they own too much non precious metals. So they sell good base metal assets to keep under 25% exposure.

 

Crazy. What is so great about gold? Revenue is revenue. I don't care if it is a royalty on salt, as long as it is substantial and pays for 90 years. (Altius has some salt deposits stashed in CDP. Table salt or street salt?)

[bizaro86]

I've toured a windsor salt mine in Alberta. It's basically the exact same thing as Potash mining (solution).

 

The problem with a new salt mine is that there are already long life operators in the market. Windsor Salt has huge operations/market share. Proving my point about Potash, it is actually a subsidiary of K+S.

 

I would prefer to have a long life salt royalty than a gold royalty, because it's a necessity and not very price volatile. That plus long mine lives makes it the perfect asset.

 

In Potash they have a royalty on the tier 1 player. In salt, they would need to get a junior to production, something they have not demonstrated the ability to do. I'm sure it'll happen at some point, but I like producing royalties a lot better than junior mining shares, which are so far the main product of their prospect generation.

[linealdin]

Cigarbutt,

 

Not sure about early FNV annuals, but Global Mining Observer did a piece on the company a few years ago that discusses some of the early deals and decisions. A lot of input on the article from Lassonde.

 

https://static1.squarespace.com/static/52483801e4b0cd3b08465542/t/551d7b01e4b0bd71df802935/1427995393279/Issue+122.pdf

 

Lassonde believes that Franco Nevada's 9 million acres of land may be more valuable than its cash flows. I believe Altius could have nearly as much land if all categories are included (royalties on producing districts, royalties on partnered exploration land, and exploration land). The scale on some of these base metal districts can be astonishing. Examples:

 

Chapada's total district is 173,000 acres.

 

Lynx Diamond project is 300,000 acres. (Despite the intriguing diamond discovery in Manitoba there's been no staking rush; Altius already staked the whole district.)

 

West Cork Copper, partnered with First Quantum, is a 272,000 acre land package.

 

Alvito, currently being drilled by Oz Minerals, is 211,000 acres.

 

The Adventus Zinc royalty properties total 640,000 acres.

 

So that is 1.6 million acres with just 5 large land packages. It adds up quickly.

 

Franco Nevada's market cap is 38X Altius's market cap. A whale vs a wild Atlantic salmon. But their royalty land banks are of comparable size. That shows Altius's ambitions.

 

 

[linealdin]

The revenues from Altius's royalties, all purchased in bear market troughs, haven't been plunged into new, more expensive royalties. They have gone into aggressive bull market activity: merchant banking, development finance, property generation, equity purchases.

 

Altius's investment in the Adventus spinout has grown 5.3X in 9 months. What is the CAGR on that?

 

What about the CAGR on the LIF purchase? 100% total return in 2 years?

 

This bull market activity basically keeps the Altius staff occupied and productive. Less temptation to buy a big royalty at expensive valuations just to relieve the boredom. There will be producing royalty buying opportunities again but it may take another 7 to 10 years to reach the cyclical lows.

 

Purer royalty companies, who don't have the experience or corporate mandate to spin out companies or stake vast exploration districts, either do nothing in a bull market (smart) or buy continually more expensive royalties (dangerous).

[linealdin]

Not sure there is that much to learn from FNV. Franco Nevada exploited a market inefficiency that doesn't exist anymore: the impact of royalties wasn't well understood by their counterparties in the early company-making deals. They were receiving 5% to 9% NSR's on huge mines.

 

Companies now understand how royalties can destroy profitibility for a producer, and be a windfall for the royalty holder once commodity prices rise.

 

Now most royalty deals top out at a 2% or 3% NSR. Golden era is over.

[linealdin]

I calculate a roughly 13% IRR for the McChip royalty purchase. Assumptions: current potash price, no further expansions past 6.5 MTA at Rocanville, cut off Rocanville mine life at another 49 years from today. Totally arbitary cutoff, I expect two centuries more mine life at Rocanville.

 

C$3 million purchase price. C$250K in net revenue for the first 10 years. C$750K in revenue for the next 39 years after that.

 

Timing of McChip purchase, on November 1st, is interesting. By that time both Altius and McChip knew what the Rocanville royalty revenue for July through October was. The royalties are unitized so everyone is aware of what every other royalty holder receives. I suspect the Q3 McChip revenue came in around C$150K, a strong improvement on the previous quarter, which opened the way for a deal to happen.

 

Deal makes sense for both parties. McChip locks in C$8 million in revenue, they don't have to worry about potash's bear market or whether Potash Corp actually uses the expanded capacity at Rocanville. Altius has obviously done its due diligence about its Rocanville royalty and knows what the potential revenue is at the expanded production capacity.

 

 

[linealdin]

Dividend growth potential is enormous for Altius. In the last 5 quarters Altius has paid a total of C$6.5 million in dividends. In the last 5 quarters Altius has paid a total of C$39.5 million in debt repayments (principal and interest). When the traditional debt is paid off that huge debt-related cash drain is freed up. The dividends could easily be tripled, while still maintaining enough free cash flow to take advantage of buying opportunities.

 

Champion and Excelsior reaching production in early 2018 should be big liquidity events for both stocks. I expect Altius to cash out at least C$30 million from those two positions. That cash will pay off debt.

 

LIF may take a little longer to reach its potential. I want to see what LIF revenue looks like when IOC is mining 23 million tonnes per annum (Wabush 3 pit coming online in late 2018).

 

 

[linealdin]

The McChip royalty acquisition increases Altius's existing Rocanville royalty by approximately 10%. Adding a jewel to the crown.

 

Would have been cheaper to buy the whole McChip Resouces company but the McChip executives likely don't want to lose their nice salaries. Microcap stock but the executive salaries are not micro. Inertia is good for the executives.

 

Morabito at Alderon is also benefiting from inertia. Remember he loses $400K in salary if Alderon is taken over. He wouldn't admit it but Kami being idle for another 10 years wouldn't hurt his bank account, as long as he remains CEO.

 

[linealdin]

http://resourcestockdigest.com/archives/index.php?content_id=4954

 

Interview with Avrupa director from earlier this year about Alvito, my favorite of the Altius royalty properties currently being drilled. I like it because IOCG targets are known to be very large, up to 4 billion tonnes. The copper soil anomaly is 24 kilometers long and 4 meters wide. The copper and gold grades can be fairly low if the deposit is very large.

 

Oz Minerals, who is funding the exploration, plans to drill aggressively and make a quick up-or-down decision.