ALS.TO - Altius Minerals

[linealdin]

If Altius announces on Monday that Blue Sky has acquired a royalty on electricity sales from the Lower Churchill hydropower plant, expected to begin operations in 2019 and operate indefinitely would you be upset? Especially if the terms of the acquisition seemed accretive? Of course not.

 

Right now you’re upset because certain items (cash and/or coal royalties) are being committed for exchange for uncertain items (hypothetical renewable energy royalties).

 

When the actual royalty deals are announced in the next 6 months I highly, highly doubt you will be upset by the terms.

 

 

 

[linealdin]

This Blue Sky skepticism is a repeat of the skepticism about the Fairfax deal a year ago. Fears about too much access to capital, deals made just to impress Prem Watsa, nowhere to invest the money, etc.

 

The reality? The deals made with the Fairfax cash look like home runs.

[linealdin]

What are the potash royalties worth now?

 

In the next 4 quarters, at current potash prices, I expect the Altius potash royalty package to deliver C$16 million in revenue.

 

What’s the value of a perpetual royalty paying C$16 million a year? C$320 million or so?

 

And this is still near the bottom of the potash price cycle. Altius has made a couple of extraordinary deals enabled by the Fairfax preferred shares.

[mikek]

I agree 100 percent about the potash royalties. Those deals are absolutely fantastic and will look amazing over the long term. I know enough about those potash deals to feel very good about that. Regarding the fairfax money- you're correct, they did a good job with those funds. You're correct, I was skeptical about those funds but happy with those moves.  I guess I will wait and see, I laid out my reasoning and I could be wrong. These are just my thoughts and opinions right now. I'm always willing to change my mind but as of right now I'm skeptical on this idea. It doesn't mean I'm correct I'm just putting my thoughts out there. I'm not going anywhere but I will always give my thoughts on things in real time and see where they go. Like I said earlier, I absolutely hope that I'm 100 percent incorrect. That would be the best news for me and shareholders.

[linealdin]

As for the niche business thing: that describes the gold royalties business right now. Too much capital chasing too few deals.

 

The diversified commodities and renewable energy sectors are wide open for accretive royalty investments. They are much bigger sectors than gold/silver.

 

Altius is still gaining weight and scale. It actually has too little capital right now to realistically become part of the financing packages for Tier 1 non-precious metals mines.

 

The goal is to have enough capital to do $300 million to $1 billion royalty/stream deals. Franco Nevada style. That’s when access to the best mines opens.

[linealdin]

Altius’s edge in the renewables sector: zero competition. Their task is simple: identify the best projects in the sector and convince management of the benefits of royalty financing over equity (dilution and loss of management control) and debt (restrictive covenants and possible bankruptcy if the loan defaults).

 

No competition means Altius won’t be outbid by other royalty financing groups.

 

The Franco Nevada founders had one good idea in 1983. They noticed that the royalty model in the oil and gas sector had a high return on capital. They thought, why couldn’t it work in the gold industry?

 

Altius and Great Bay are asking why can’t it work with renewable energy?

[linealdin]

http://www.glencore.com/dam/jcr:fec161da-4d77-4aef-a4df-52fab313fce1/2017-AGM-presentation-final.pdf

 

If we accept Glencore’s classification of early cycle, mid cycle, and late cycle commodities then renewable energy slots into late cycle. See slide 7.  As economies mature and per capita income rises the late cycle commodities become more important.

 

Early cycle economies build out their cities. Late cycle economies consume like crazy.

 

Potash matters more in late cycle because more prosperous people want to eat more meat and more calories in general.

 

Renewable energy matters more because more prosperous people use more electricity yet also demand cleaner air to breathe.

[linealdin]

The Altius management team is based in Newfoundland. In that province an astonishing 95% of electricity is generated by hydropower. And another 1% is wind/biomass/other renewables. From their perspective renewable energy is essential to their quality of life and to their economic well-being. Renewable energy will power Kami and all the other mines we want built in Alantic Canada.

 

For the Altius team green energy is not some namby-pamby, hare-brained scheme pushed by leftists and global warming absolutists. It is a necessity and it is a big business. They want in.

[linealdin]

The low grade stockpile at Chapada at year end 2017 totalled 88 million tonnes at 0.23% copper. It is expected the stockpile will grow by 15 million tonnes in 2018, at similar grades.

 

What is this huge stockpile worth to Altius? If we assume 80% copper recovery, current copper price and USD/CAD exchange rates = Altius royalty revenue of C$62 million.

 

In another couple of years the projected Altius revenue just from the low grade stockpile will exceed the purchase price of the Chapada stream (C$78 million).

 

The growing stockpile is a spur to Yamana to expand the plant’s processing throughput.

[linealdin]

Chapada purchase price of C$78 million. I calculate that C$111.4 million has to be received in topline royalty revenue (considering the 30% cost of sales) to achieve payback.

 

Altius has received C$26.125 million from 7.39 million pounds of copper received in 1 year and 11 months of royalty ownership.

 

So there’s C$85.3 million to go. I expect topline revenue to Altius of around C$20 million annually from Chapada, so a little over 4 years to go for payback. At that point, in mid-2022, the profit gravy will be another 30 years of royalty revenue.

 

[linealdin]

Amusing that we’d never even heard of Cuale before November 23rd, 2017. 6 months later it looks like the Cuale royalty and the Evrim equity shares could pay for the whole Callinan acquisition.

 

Hidden value suddenly blossoming into real value.

 

 

[linealdin]

Chapada purchase price of C$78 million. I calculate that C$111.4 million has to be received in topline royalty revenue (considering the 30% cost of sales) to achieve payback.

 

Altius has received C$26.125 million from 7.39 million pounds of copper received in 1 year and 11 months of royalty ownership.

 

So there’s C$85.3 million to go. I expect topline revenue to Altius of around C$20 million annually from Chapada, so a little over 4 years to go for payback. At that point, in mid-2022, the profit gravy will be another 30 years of royalty revenue.

 

At the current Chapada reserves/resources of ~5 billion pounds of copper Altius should clear roughly C$500 million over the life of the mine. Around C$300 million from the first 75 million pounds at the 3.7% stream rate, then another C$200 million from the 1.5% tail.

 

Every additional billion pounds of copper discovered at Chapada is worth C$60 million in Altius royalties.

 

 

[linealdin]

https://www.google.com/amp/s/mobile.reuters.com/article/amp/idUSKCN12S230

 

The copper megabull case on the demand side dovetails nicely with the renewable energy story. Renewable energy systems use 4X to 12X the amount of copper per installed MW as traditional fossil fuel plants (as per Rio Tinto CEO). And the heavy use of copper in electric vehicles has been extensively discussed.

 

“Decarbonization generally favors copper.”

 

*

 

Electrification is another megatrend. It’s been estimated that 2 billion more people will have an electric bill by 2035. As poor people become more prosperous the first thing they want is a refrigerator and an air conditioner. And lights so their kids can study at night.

 

Electrification for 2 billion people requires a lot of copper. And the fastest growing source of electricity will be renewable energy.

 

*

 

http://www.visualcapitalist.com/copper-driving-green-energy-revolution/

 

A visual capitalist presentation on the intersection between copper and renewable energy. Very convincing.

[linealdin]

http://m.miningweekly.com/article/vale-boss-prefers-giving-away-windfall-to-avoid-sins-of-the-past-2018-05-21

 

Vale not doing anything with cash but paying dividends. No cash hoarding, no acquisitions, and delaying a decision on the underground mine at Voisey’s Bay.

 

That’s the pattern: at the top of the market Vale, and everyone else, were on huge buying sprees. After a lot of pain in the bear market now Vale is afraid of buying anything. Even though we are not that far off the bottom of the commodity cycle for non-precious metals.

 

This bull market is going to last for a while. The capex spending required to bring on enough new supply to dilute the commodity prices just isn’t happening.

 

Altius is being selective but aggressive in its recent buying. It’s not the absolute bottom of the market 2016 but there are still opportunities because the generally cautious mood of major producers.

[mugwump]

vale okays underground mine at voisey bay

http://www.cbc.ca/news/canada/newfoundland-labrador/vale-sanctions-underground-mine-at-voisey-s-bay-1.3185337

[linealdin]

vale okays underground mine at voisey bay

http://www.cbc.ca/news/canada/newfoundland-labrador/vale-sanctions-underground-mine-at-voisey-s-bay-1.3185337

 

This article is from 2015 when the original sanction for the underground mine was given. Vale recently decided to delay construction of the underground mine and re-evaluate nickel operations globally.

 

Personally I think Vale will delay until they get a decision from the Royal Gold/Altius royalties trial in September. An implicit threat to the province: If we lose this trial we will shut down the mine forever. Vale not likely to win on the merits (governments in Canada receive royalties from the extractive industries, just like Royal Gold and Altius) so they will try thug tactics. This ain’t Brazil.

[linealdin]

Newfoundland & Labrador government funds most of its budget by receiving royalties on offshore oil drilling and from mining. The royalty laws are long established and well protected.

 

A court in St. John’s, Newfoundland is probably the worst place on the planet to make the kind of argument Vale is making to try to get out of paying its Voisey’s Bay royalty.

 

I believe there’s a significant chance the judge will order Vale to pay Royal Gold/Altius’s attorney costs as a kind of penalty after Vale loses the trial.

[mugwump]

hey linealdin

thanks for the update

you're on the ball as usual

[linealdin]

Rio Tinto has incredible timing. They make their biggest purchases at the exact top of the market. Bought Alcan for $38 billion at the top for aluminum in 2007, right before the financial crash. The Alcan deal is widely considered the worst large deal in the history of mining.

 

They gave $3.8 billion for Michael O’Keeffe’s Riversdale right at the top of the met coal market in 2011 (sold that coal project for $50 million a few years later).

 

I will know this commodity bull market is over when Rio Tinto next makes a huge acquisition.

 

 

[linealdin]

Altius’s proposed move into renewables mirrors what Big Oil is doing to manage the energy transition. Royal Dutch Shell is spending $2 billion a year buying renewable assets (just spent $200 million buying 44% of a Nashville based solar developer). BP just bought 43% of Europe’s largest solar developer. Norway’s Statoil is investing heavily in offshore wind farms. Saudi Aramco is investing $5 billion in renewable energy projects. Small investments compared to their market caps, of course, but it is clear renewables are fully accepted as proven technology by the big players.

 

Smaller projects of 10 MW to 50 MW are unable to get the attention of the international finance groups who want to finance very large portfolios or the expensive offshore wind farms.

 

This is probably the sweet spot for Blue Sky to do some accretive deals.

[linealdin]

https://www.google.com/amp/s/www.bloomberg.com/amp/news/articles/2018-05-20/iron-king-pledges-to-protect-market-from-days-of-boom-and-bust

 

Vale believes it can keep the iron ore price in the US$60 to US$80 per tonne range indefinitely. Profitable for the current players but not high enough to attract new supply.

 

Vale believes the floor is $60 per tonne because of the higher cost marginal producers. And Vale claims it can unleash 50 million tonnes of new supply in 3 months if prices get too close to the dangerous level of $100 per tonne.

 

I suppose $60 to $80 per tonne is fine for the Trough as long as the quality premiums are maintained.

[linealdin]

https://www.google.com/amp/s/mobile.reuters.com/article/amp/idUSL3N1ST26U

 

A good summary of the current state of the iron ore market. Price for 62% benchmark still rangebound between $60 and $80 but underneath the surface great changes are happening. The quality premiums and discounts are making certain lower grade iron ore mines in Australia, Iran and China uneconomic. Cliffs Western Australia operations have been shut down. More shutdowns and pain are coming.

 

The winners are high grade producers from Brazil and South Africa. (And Canada of course, which goes unmentioned in the article because it is still a bit player.) No signs yet of a big flood of new high grade supply to take advantage of the premiums. Vale threatens to flood the market with new high grade supply if benchmark 62% iron price rises near $100.

 

 

[linealdin]

https://www.lazard.com/perspective/levelized-cost-of-energy-2017/

 

This is the Lazard report on levelized energy costs from which Altius borrowed a chart for its presentation showing the levelized costs of wind and solar power going below the costs of natural gas, coal and nuclear.

 

The video tersely summarizes the key takeaways: coal & nuclear plants will be replaced by renewables for economic reasons, not environmental reasons. This trend is going to be more powerful outside the United States because the U.S. still has lots of cheap natural gas supporting cheap electricity.

 

I believe Altius is making an implicit call that we are moving past the bottom of the commodity cycle for natural gas and that NG prices and electricity rates are both headed much higher. That will accelerate the transition to renewable power. This is Blue Sky as a countercyclical play.

[linealdin]

Natural gas price chart looks clear. A high of $15 in 2008 declining to $1.70 in early 2016. Then a rise off the bottom to today’s price of $2.84.

 

On levelized cost basis utility scale solar and wind are already beating natural gas power plants. What hapoens when natural gas is $4 or $5?

[linealdin]

Tacora Resources files a feasibility study for the Wabush Mine re-start and a prospectus to raise C$125 million on SEDAR. These cats are running circles around Alderon.

 

Initial capex: C$210 million

After tax NPV8: C$1.075 billion

After tax IRR: 36.3%

After tax payback period: 3.1 million years

 

No more pellet production. Plan is to produce 6 MTA of 65.9% iron concentrate. Installation of four manganese reduction lines using modern rare earth separators to reduce manganese below 2%.

 

*

 

Reminder: this is the same mine Morabito said was uneconomic and should be given to Alderon to use as a garbage dump for tailings. They even sued the province to release some document that supposedly showed Wabush to be uneconomic.

 

Now Tacora is going to restart the mine for low capex, and will yield a high NPV and high IRR. While Kami is nowhere.

 

Embarassing.