ALS.TO - Altius Minerals

[linealdin]

http://www.allegiancecoal.com.au/irm/PDF/1276_0/Acquires100OwnershipofTelkwaMetCoalProject

 

Altius gives 100% ownership of Telkwa project to Allegiance in exchange for 40.6 million shares. Allegiance had owned only 20% of the project with the opportunity to earn up to 90% by completing various milestones.

 

Allegiance claims the simplied ownership structure will allow them to close joint venture and offtake deals with potential partners. There have been negotiations with steel mills, commodity trading and investment houses in recent months. Allegiance wants to sell off a minority percentage of the project, and offtake, for a big chunk of cash. Capex is not huge so a joint venture deal would significantly derisk the project.

 

Altius probably likes what Allegiance has done so far (intelligently structured PFS reduces startup capex to US$35 million), trusts the management team, and believes they can get a JV/offtake deal done quickly. They’ve now taken off the training wheels.

 

Signing a JV deal could easily quadruple Allegiance's meager market cap. Currently priced like a cash shell.

 

Coking coal, like iron ore, is on an unexpected bull run. Now is the time to lock down investments.

[linealdin]

http://www.alderonironore.com/index.php/news/2017/420-

 

Alderon releases updated economic impact assessment for Kami. Will add C$21.3 billion to Canada's GDP. I very much like the supportive quotes from Graham Letto and Yvonne Jones, the legislators for Labrador West. Government is going to have to get involved to finalize the rail and power deals.

 

The iron ore price is cooperating. If we get to US$90 for the benchmark 62% iron ore price I think Kami will lock down construction financing in late 2018.

 

Goldman Sachs has to be very, very wrong about the direction of the iron ore price. They've been wrong before.

[linealdin]

LIF owns a 7% royalty on IOC's gross revenue, as well as a 15.1% equity stake in IOC. The royalty revenue has increased in the last year but the equity stake has been providing the real torque for LIF.

 

In looking at IOC's financials (from Rio Tinto) their policy seems to be to dividend out net earnings on a pro rata basis to the equity partners (Rio Tinto 58.7%, Mitsubishi 26.2%, LIF 15.1%).

 

*

 

In 2015 and the first half of 2016 IOC wasn't making any money:

 

IOC net earnings in 2015: US$12 million.

 

IOC net earnings in H1 2016: negative US$9 million

 

No earnings, therefore no IOC dividends were paid out to the equity partners in those six quarters. A real trough.

 

*

 

In H2 2016 IOC started to make money because the iron ore price rose, along with pellet and quality premiums:

 

IOC net earnings in H2 2016: US$73 million.

 

No dividend in Q3 but IOC in Q4 2016 paid LIF a US$11.325 million dividend. Roughly 15.5% of net earnings for H2 2016.

 

*

 

In H1 2017 IOC really started to make money:

 

IOC net earnings in H1 2017 of US$122 million.

 

IOC in H1 2017 paid a total of US$18.775 million in dividends to LIF. 15.4% of net earnings.

 

*

 

IOC's net earnings for Q3 2017 have not been revealed yet but it must have been huge.

 

IOC in Q3 paid US$26.4 million in dividends to LIF. If the dividend payout percentages hold that means IOC made US$171.4 million in net earnings in Q3. A massive step change from previous quarters. It means IOC has become a real profit center for Rio Tinto and its equity partners.

 

*

 

The IOC dividend for Q4 should be announced this week. I'm very interested to see if IOC net revenues have remained as high as they were in Q3.

 

*

 

True profitability at IOC will lead to plans for expansion. It is inevitable.

 

 

 

 

 

 

[linealdin]

If the Q4 IOC dividend is in the same range as the Q3 IOC dividend of US$26.4 million that has implications.

 

LIF pays out the IOC dividends it receives right to its shareholders:

 

US$26.4 million x 4 = US$105.6 million or CAD$134 million.

 

LIF could be paying over $2 in annual dividends sourced just from its IOC equity earnings.

 

Add to that another $1.50 in dividends sourced from its 7% royalty revenues. (C$40 million in royalty revenue a quarter minus 20% royalty tax, admin costs and income tax).

 

LIF could be paying out $3.50 per share in dividends in 2018. (At current production levels and current iron ore prices.)

[linealdin]

If LIF's ridiculous 7% royalty didn't exist IOC would be waaaaay more profitable.

 

Rio Tinto's financials indicate IOC is receiving roughly US$100 a tonne in revenue, while its cash costs are somewhere around US$35. That is terrific.

 

[iOC had US$871 million gross revenue and 8.71 million tonnes of pellets/concentrate sold in H1 2017. $871 million / 8.71 million tonnes = US$100 per tonne revenue. Cash costs per tonne sourced from media comments.]

[linealdin]

https://www.teck.com/news/news-releases/2017/teck-updates-steelmaking-coal-guidance---December-5,-2017

 

Teck updates Q4 steelmaking coal guidance. Average realized price of US$165 to US$170. (Q3 realized price was US$159.)

 

Sales of 6.5 million tonnes. (Q3 sales of 7.54 million tonnes.)

 

Price slightly up, sales volume down.

[linealdin]

Transalta Investor Day is tomorrow, December 6th. Expect some news regarding early (pre-2020) coal to gas conversions at the Sundance and Keephills plants. I'll be happy if no mention is made of Sheerness (Transalta only owns 25% of Sheerness; ATCO has 50%, and two of Transalta's Asian partners own the final 25%.)

 

Only Genesee and Sheerness really count (87% of electrical coal royalties). The rest can die.

[linealdin]

https://www.prnewswire.com/news-releases/glencore-and-ontario-teachers-pension-plan-announce-the-creation-of-a-new-partnership-focused-on-base-metals-streams-and-royalties-662053893.html

 

Glencore and Ontario Teachers form the BaseCore Metals LP, a joint venture base metals royalty vehicle. They will be pursuing new stream and royalty financing. Now Altius's main competition in base metals royalties.

 

The secret to winning this competition? Don't compete until the time is right. Let BaseCore expend its reserves by buying increasingly expensive streams/royalties in a bull market. They will feel institutional pressure to spend. Hard to be contrarian when your very high salary is only justified by constant deal flow. 

 

Funny that Glencore felt the need to include the Callinex and Canadian Zinc royalties on the list to add a little weight. All are exploration projects with no production in sight. Altius actually financed a spinout of Paragon Minerals who consolidated the South Tally pond property. Then Paragon was acquired by Canadian Zinc.

[SnarkyPuppy]

Probably lots of risk in asking this question- but I personally find your continued commentary to be helpful.  Given your continued granular review of Altius, in addition to some of the back/forth discussions had on a few pages back, I'm very curious...

 

What is your estimated range of Altius' intrinsic value today?  And at what rate do you expect intrinsic value to grow long term? 

 

IMO, the phrase "you don't need a scale to know a man is fat" is the best perspective for determining whether something is cheap, but at the same time a general IV and growth range must be estimated to know that the current price is demonstrably cheap. 

[linealdin]

Probably lots of risk in asking this question- but I personally find your continued commentary to be helpful.  Given your continued granular review of Altius, in addition to some of the back/forth discussions had on a few pages back, I'm very curious...

 

What is your estimated range of Altius' intrinsic value today?  And at what rate do you expect intrinsic value to grow long term? 

 

IMO, the phrase "you don't need a scale to know a man is fat" is the best perspective for determining whether something is cheap, but at the same time a general IV and growth range must be estimated to know that the current price is demonstrably cheap.

 

Short answer: I don’t know the exact intrinsic value. Maybe not particularly useful for my purposes? I am never selling my shares (therefore not looking for when market cap exceeds IV) and I will buy additional shares at the prices that Altius does its buybacks. So right now I’m positioned to buy when the stock pulls back to $11 or below. Yes, it will go all the way back down at some point. Canadian resource investor is a skittish and damaged creature.

 

Quite difficult to value some of these royalties. Chapada, for example. To do a decent job of valuing the asset I would need to model the monthly cash flows (that’s how Altius gets the money) not on an annual basis as with most free NPV calculators. What discount rate to use? I would need to figure out how mine life will be affected by all the recent deposit discoveries both near mine and regionally. Did they discover a Chapada clone 13 kilometers away from existing mine? Mine life will be 20 years? 30 years? 50 years?  What about these rumblings about expansion? What time frame will that happen and how will stream revenue be affected? What about the recent change in Brazilian mining royalties? Has risk of expropriation increased in Brazil? Should Yamana’s massive debt load affect how Chapada is valued? Copper just had the biggest one day drop in years. Where is the price going in the near and long term?

[linealdin]

https://wcsecure.weblink.com.au/pdf/PXX/01930683.pdf

 

More assay results from PolarX. Mineralization lengths have been significantly longer than historic drill holes (poor recovery). Opportunity to expand the 1.5 million tonne historic, high grade Zackly deposit. New JORC compliant resource will be completed in early 2018.

 

PolarX is planning 12,000 meters of drilling in 2018 to search for a large copper/gold porphyry deposit below the higher grade skarn. See interview with CEO at London Mines and Money conference (link on PolarX website).

 

I love Other People spending Millions (OPM) on Altius royalty land. 2% royalty on Zackly and nearby exploration targets.

[linealdin]

http://www.transalta.com/newsroom/news-releases/transalta-announces-accelerated-transition-clean-energy/

 

Transalta’s coal to gas conversion plans:

 

1) No mention of Sheerness. Thank heavens. Transalta is an owner of Sheerness and no mention of CTG for that power complex is a big deal.

 

2) Sundance and Keephills CTG conversions in 2021 to 2022 timeframe. Change from 2021 to 2023 original timeframe. Not much of a change. I thought they were about to announce a much more expedited schedule. Terrific!

 

3) Mothballing of Sundance 3, 4 and 5 for one to two year periods starting in April 2018 and April 2019.

 

4) Impact on Altius’s Highvale royalty? Maybe not huge for the next 4 years. They plan to run the 5 non-mothballed units (Keephills 1, 2, and 3, Sundance 6 and one of the other Sundances in a rotation) at full capacity. That takes plenty of coal.

 

5) Pipeline construction is a big brake on CTG conversions. The Sundance and Keephills complexes will require a new 120 kilometer pipeline. Won’t happen overnight. Will require major investment and time.

 

This is just the first of multiple pipelines that the Sundance and Keephills complexes will require. Transalta believes that multiple pipelines are required to reduce operational risks, and they are negotiating with other parties. If one pipeline leaks the other pipelines can make sure the electricity keeps flowing in Alberta.

 

All these pipelines will take years. Even in a doomsday scenario of Capital Power announcing early conversion of Genesee today it will still take until 2021 to get the multiple pipelines for Genesee contracted, permitted, constructed and commissioned.

 

6) Mothballing will raise electricity prices for remaining units in Alberta market. Genesee, Sheerness, and Keephills coal electricity generation will be in demand because no replacements have shown up to cover the mothballed capacity.

[linealdin]

If Transalta manages to convert one of its coal units to gas on schedule in 2021 it will be the first CTG conversion in Canada.

 

Does this seem like an "Accelerated Transition to Clean Energy" to you? Not to me. 2021 seems far away.

 

Don't believe the hype. Ain't nothing happening to Altius's electrical coal revenue for a very long time.

[linealdin]

https://www.prnewswire.com/news-releases/glencore-and-ontario-teachers-pension-plan-announce-the-creation-of-a-new-partnership-focused-on-base-metals-streams-and-royalties-662053893.html

 

Glencore and Ontario Teachers form the BaseCore Metals LP, a joint venture base metals royalty vehicle. They will be pursuing new stream and royalty financing. Now Altius's main competition in base metals royalties.

 

The secret to winning this competition? Don't compete until the time is right. Let BaseCore expend its reserves by buying increasingly expensive streams/royalties in a bull market. They will feel institutional pressure to spend. Hard to be contrarian when your very high salary is only justified by constant deal flow. 

 

Funny that Glencore felt the need to include the Callinex and Canadian Zinc royalties on the list to add a little weight. All are exploration projects with no production in sight. Altius actually financed a spinout of Paragon Minerals who consolidated the South Tally pond property. Then Paragon was acquired by Canadian Zinc.

 

Take another look at the pile of royalties Glencore tried to sell for US$300 million (C$383 million). I'm certain Altius heard the price and had a good laugh.

 

As I said above the Callinex and Canadian Zinc royalties are pure exploration projects at this point, similar to many exploration royalties Altius owns. The Horne 5 and El Pilar projects are at the feasibility stage but also no certainty they will reach production. And the royalties are not huge (2% and 1% respectively).

 

The two crown jewels assets are on Antamina and Highland Copper, both large mines, but they are not NSR royalties. They are NPI's, or net profit interests. So when the mines are not profitable during low parts of the commodity cycle the NPI holder gets nothing.

 

This is not academic. Highland Valley Copper over the last 9 months has negative C$42 million in profits. Glencore, even in a booming copper market, was receiving nothing or little from its 0.5% NPI on Highland Valley over the last 9 months. No wonder they wanted to sell it.

 

Antamina is currently a big profitable mine and a 1.67% NPI is currently throwing off lots of cash. But there is significantly less safety versus a 1.67% NSR.

 

I think Ontario Teacher's got a pretty bad deal. They paid a great deal of cash for a 50% stake in this portfolio of royalties. I suppose they are also paying for Glencore's savvy. Maybe Glencore will figure out how to steer this vehicle to a successful IPO.

[linealdin]

Franco Nevada Q3 revenue: US$171.5 or C$219.49 million

 

Altius Q2 revenue: C$17.90 million

 

Franco-Nevada market cap: C$17.9 billion

 

Altius market cap: C$568 million

 

Franco-Nevada's market cap is 31.5X larger than Altius's market cap, but its revenues are only 12.3X Altius's revenue.

 

*

 

Is Franco-Nevada expensive? Is Altius cheap? Yes and yes.

 

*

 

Game plan should be to monetize assets during a long and glorious bull market for $500 million or so. They made $250 million monetizing assets in the last bull market from 2003 to 2011. Doubling that benchmark should be the minimum goal. Enter the ensuing bear market with that cash, and with the Fairfax and other lender relationships, and start making FNV-size deals in the base metals space. Gain some real weight. Buy $1 billion in royalties and streams. (Last bear market: around C$470 million in royalties and streams purchased.)

 

[linealdin]

https://docs.wixstatic.com/ugd/8d6671_6e72a00aec504c92917db3f8ddbb0b1d.pdf

 

Emu NL raises A$600K. I think Altius likely participated to maintain its equity position. Drilling equipment arriving in Chile from Australia.

[linealdin]

http://www.wolfdenresources.com/files/PickettMtn-Stakeholders.pdf

 

New Wolfden presentation for local Maine public info session. 10,000 meters of drilling planned starting mid-December. Two holes completed by Christmas. 2 or 3 locals will be hired to help with the drill program.

 

Airborne geophysical over whole property in January. Environmental survey work to begin this Spring.

 

A small underground mine would have a very small disturbance area (800 meters x 500 meters), less disturbance than the logging that has been taking place on the property. No processing facilities would be on site. Environmentalists will still protest any kind of development.

 

Should be fairly low cost exploration. No need for an exploration camp, drillers can stay at accommodations in the nearby town. Near highway and existing logging roads for bringing in the drilling equipment. (Much less expensive than EMU's project in a remote part of Chile.)

 

From Donald Hoy's comments at the public forum, and from Wolfden's corporate history, it sounds like the plan is to prove up the resource, then sell it to a major to actually permit and build the mine. It will be very tricky to navigate the permitting (open pits forbidden and other rules) and environmental protesters. Wolfden doesn't have the skill set, they are pure explorers.

 

Ewan Downie, founder of Wolfden, sold 400,000 shares at 36 cents last week. Bad form to sell so early in the project's development?

[linealdin]

Couple of more thoughts on Transalta's news from yesterday.

 

1) Cost. Transalta's press release didn't include the cost of the pipeline. Tidewater Midstream's press release did:

 

https://globenewswire.com/news-release/2017/12/06/1233869/0/en/Tidewater-Midstream-and-Infrastructure-Ltd-Enters-Into-Agreement-With-TransAlta-to-Construct-an-Inter-Alberta-Pipeline-Network-supported-by-a-15-year-Take-or-Pay-Proposed-Issuance-.html

 

C$150 million in capex for the 120 km pipeline. That's a cost of C$1.25 million per kilometer. It's an expensive project, way more expensive than the cost of the CTG conversion itself.

 

2) Timing. Transalta and Tidewater are signing a deal in December 2017 for a pipeline that has to be ready for a CTG conversion plant operational sometime in 2021. That's more than three years away. That's how early these pipeline deals have to be made. No pipeline = no gas plant.

 

3) Location. Why is this pipeline 120 km long? Isn't natural gas everywhere right under the feet in Alberta? Gas is everywhere but an economic, reliable source of gas will likely come from an existing gas processing plant like Tidewater's Brazeau Complex. These complexes may be pretty far away from your planned CTG plant.

 

4) Double Trouble. This pipeline, once it is expanded to maximum capacity, will be able to provide 50% of Transalta's gas requirements at Keephills and Sundance. At its initial capacity this pipeline will only provide 19% of Transalta's needs. So Transalta still needs to sign another pipeline deal with another provider for just as much capacity. They may even need to do a third pipeline deal to ensure reliability.

 

5) ATCO's been threatening gas conversions for years. Capital Power, at its investor day today, mentioned the possibility of a staged conversion to gas (whatever that means). All of it is just talk to sound eco-friendly until these companies actually sign take-or-pay pipeline construction deals for hundreds of millions of dollars. Once pipeline deals are signed then a 3 year clock begins until the pipeline gas is commissioned and available. Nothing happens overnight.

 

6) I dislike Transalta's gas conversion news because it casts a pall over Altius but doesn't actually affect its royalty revenue. The Highvale mine operation was already set to leave Altius royalty land by 2023 (see Altius website). The Highvale royalty is going to die a natural death, totally unrelated to the gas conversions.

[linealdin]

When Altius bought the Prairie royalties for C$240.9 million in their internal valuations the coal asset and potash assets were valued equally. The coal assets paid out more quickly but the potash assets paid out forever.

 

So in their minds they paid C$120.45 million for the coal royalties and C$120.45 million for the potash royalties. I believe that bifurcation helps us understand just how well the assets are performing.

 

*

 

First potash (excluding CDP potash) purchased for a notional C$120.45 million. The potash royalties in 3.5 years (to the end of October) have paid back C$18.25 million. Which doesn't sound too impressive except that 3.5 years after the purchase the NPV of the potash royalties is still around C$120.45 million. It's basically a perpetual royalty that will keep paying steady income but won't decline in NPV value. NPV for the potash royalties in 25 years will still be the same.

 

I actually think the NPV of the potash portfolio will rise once the potash price cycle changes (potential C$10 million to C$15 million in annual potash revenue) but we will discuss that when it happens.

 

Regardless Altius LOVES this deal. The market may not understand it because the revenue is so long dated. 

 

*

 

The Prairie Coal Royalties purchased for a notional C$120.45 million have paid back an astonishing C$58.764 million (to the end of October). 49% of the purchase price paid back in just 3.5 years. As much drama as the coal royalties have made in the news, the payback rate has been extraordinary.

 

100% payback will be achieved in another 3.5 years or so. Let's say May 2021. Interesting to see whether the coal royalties will be paid back before the first CTG conversion plant in Canada is commissioned. Should be a close race. The profit on the deal will be however much coal royalty revenue comes in after that date. I think there will be significant profit from tail revenue from Genesee and Sheerness. But who knows? It may be a smaller amount of profit if coal gets wiped out in 2025, not 2030.

 

*

 

It's amusing that Altius gets criticized for the Prairie purchase because of the constant flow of bad Alberta coal news. At worse Prairie will be a profitable but lower IRR deal; at best, if potash prices ever move, it will be a home run. Altius's peers in the same time period were destroying money. Sandstorm Gold gave US$75 million to Colossus Minerals, and got back ZERO when Colossus went bankrupt. 

[linealdin]

Lots of mixed signals from Capital Power in today’s investor day presentation re: coal to gas conversion.

 

1) Adamant they have extensively studied all conversion options. Silence does not equal inactivity.

 

2) Have decided not to announce conversion schedule until 2020, when they will have all relevant info.

 

3) Plan is to stage the conversions. This means spacing the conversions several years apart? Also burners that can handle both gas and coal.

 

4) Management also very proud of their investment in Genesee efficiency. Millions spent replacing rotors and experimenting with biofuel mixed in with coal. Subcritical plants are now as efficient as the supercritical plants. More efficiency = less coal per unit of electricity, and therefore less emissions.

 

They love these coal plants and claim their coal plants will still rank well in the merit order even with the federal carbon tax kicking in in 2022.

 

*

 

I suppose 2020 isn’t bad. That gives Altius at least 2 or 3 years of worry-free revenue from Genesee. And once Capital announces the conversion schedule in 2020 it will be another 3 years before the first gas plant comes online.

 

Maybe 2023 for Genesee 1, 2026 for Genesee 2, then finally Genesee 3 converted in 2030?

[linealdin]

Excelsior is putting together its construction financing package now. Should be around US$70 million, 50/50 debt and equity.

 

Altius could contribute C$5 million for its 0.5% royalty option, and another C$10 million structured as a convertible debenture (debt). Gunnison is mostly derisked in terms of permitting. I like the risk/reward of offering them some short term debt.

 

8% interest with the option to convert to Excelsior shares at C$0.90 cents. Debt ultimately secured by an additional royalty. Something like the Champion debenture.

[linealdin]

https://www.capitalpower.com/InvestorRelations/Events/Documents/2017%20Capital%20Power%20Investor%20Day.pdf

 

Capital Power's Investor Day presentation pdf.

 

I have the sense that Capital Power likes their relatively new, state-of-the-art coal plants and wants to figure out how to operate them, as primarily coal-burning plants, in the new anti-carbon regime. Their tactics:

 

1) Significant investment in the Genesee Performance Standard (GPS). 2017 was the first year of GPS implementation, and investment will be accelerated to create earlier savings. Efficiency of operation cuts carbon emissions. New low pressure rotors will be installed at Genesee 1 in 2019 and Genesee 2 in 2020 at a total cost of C$28.8 million. Targeting a 10% reduction in GHG emissions and C$35 million per year in savings in 2022 and beyond (savings on carbon tax and fuel costs).

 

2) Definitely some interest in co-firing coal and gas, or coal and biomass, at one or more of the Genesee plants. See page 57: "Co-firing provides greatest fuel flexibility through 2030."

 

Genesee complex has total capacity of 1266 MW, but has ability currently to co-fire 250 MW of natural gas. If they can obtain the enough gas supply this is probably the cheapest way to lower carbon emissions. No conversion or outages necessary. Just add a little gas into the fuel mix.

 

Biomass and coal co-firing experiments performed in 2016-17. Biomass could make up 10% to 15% of the fuel mix.

 

3) All of this is a totally different approach from Transalta's. Transalta wants to convert their coal plants asap, and they've made concrete plans to obtain enough gas supply to make that happen in the 2021 to 2022 period.

 

Capital Power is hedging their bets at Genesee. If they can get away with carbon mitigations, like GPS or co-firing, I think that is their preferred solution.

 

But this all depends on what the environment looks like in 2020 when Capital Power will announce their staged coal conversion schedule. A new conservative government should win office in 2019 for Alberta. A large part of their platform is anti-carbon tax and pro-coal. From Kenney's website:

 

"Jason Kenney will stand up for Alberta coal on the national stage. He will defeat the NDP and take the fight for our province’s coal industry right to Trudeau’s doorstep. Jason’s plan to bring back the Alberta Advantage, which includes defending Alberta coal and cancelling the NDP’s job-killing carbon tax, will make our province a leader again."

[linealdin]

Increased pace of activity in the Voisey's Bay litigation in the St. John's Trial division. There was an application proceeding yesterday, and another application proceeding next Wednesday, Dec. 13th. Pre-trial motions?

[linealdin]

Champion debenture interest payments.

 

On June 1st Altius received C$400K in advance interest payments for the June through November period (as well as C$40K covering its transaction fees for the debenture).

 

On December 31st Altius is due C$266K for interest in the December 2017 through March 2018  period.

 

The payment structure—interest paid far in advance—increases the effective received interest rate. Great negotiated terms.

[Cigarbutt]

http://www.riotinto.com/documents/171204_Presentation_Rio_Tinto_Investor_Seminar_2017.pdf

http://www.riotinto.com/documents/171204_Rio_Tinto_Investor_Seminar_Script.pdf

 

Interesting comments on outlook, China and iron ore dynamics.