ALS.TO - Altius Minerals

[linealdin]

Nice detail from the Allegiance Coal press release:

 

“A desire by the Company’s shareholders and its potential joint venture partners that it capitalise on current strong demand and pricing for metallurgical coal to increase planned production beyond that allowed by the sub-EA process.”

 

Discussions with potential JV partners seem have advanced a bit. JV partners offering critical input.

 

[linealdin]

https://www.google.com/amp/s/business.financialpost.com/investing/is-it-time-to-plant-nutrien-ltd-in-your-portfolio/amp

 

Analysts like Nutrien and potash prices going forward, current potash spot price of US$245:

 

“Potash prices continue to surprise to the upside, in our view, benefitting from near-record demand and generally lethargic new supply,” said Steve Hansen, an analyst at Raymond James.

 

Hansen sees better-than-expected Chinese contract prices for potash on the horizon, based on comments out of the recent International Fertilizer Association conference. Chinese prices are an important benchmark, as they traditionally set the global floor price for upcoming quarters.

 

Whereas important spot markets for potash historically soften during contract negotiations with China, this time around they are rising, demonstrating the importance of the current market tightness.

 

 

[linealdin]

http://www.canadianminingjournal.com/features/nutrien-faces-market-challenges-after-mega-merger/

 

A gloomier view of the potash market. New supply could eat up the projected increase in demand, keeping potash at US$230 to US$255 per tonne.

 

The same analyst thinks Nutrien could run Rocanville at full operational capacity for the year while running the other mines at 40%.

 

Obviously a good result for Altius. Most of its potash revenue comes from Rocanville and Mosaic’s Esterhazy, also increasing production in recent quarters, as well as revising the Altius royalty rate upward.

 

To be exact last quarter 86.4% of Altius’s potash revenue came from Rocanville and Esterhazy. Those two mines are the whole game.

[linealdin]

Altius’s current market cap is a measly C$542.4 million. I believe Altius will monetize its project generation portfolio for at least that amount during this bull cycle. Cash out that amount, not “peak equity value.”

 

Altius cashed out about C$225 million from its PG portfolio during the last cycle. The PG portfolio is far more robust and varied this cycle.

 

I see the beginnings of how it all plays out:

 

Adventus selling Curipamba for a couple hundred million. Evrim doing the same for Cuale. Adia Resources establishing a significant diamond resource. If Alderon reaches commercial production its market cap has to be at least C$500 million (Altius gets 39% of that equity value).

[bizaro86]

If Alderon gets to commercial production I think it's pretty likely they will have raised substantial equity along the way, hopefully without ALS participating for 39% of the raise.

[mikek]

I think Alderon is going to take quite awhile to get built unfortunately if ever. No one is putting in that type of capex, the former CEO blew it. I think anyone putting much value in Alderon is unfortunately in the hope category. As for the PG portfolio, it is possible to one day get 500 million but realistically 100-200 million would be very fortunate. The PG portfolio has potential obviously but I don't like to count on it. It is likely to have mostly duds that aren't worth much at all and possibly you get some huge winners with lucky drill results. Such as the Evrim position for possible big winners. You can make a case that having huge equity positions can be a positive or negative. If you get a big drill result having a big position can likely get you a premium for your position but I would also say that a lot of the PG portfolio doesn't have much liquidity and you aren't likely to be able to get out of that type of position unless you get a buyout. Therefore, it's hard to value the PG portfolio because a lot of those positions are 20 percent of the equity for those companies.

[mikek]

Another big issue I'm seeing is the PG model has changed for the worse. The adventus and copper spinout aren't that great for Altius. They are now committing capital to explore a property they don't have royalties on. In the past, you would spinoff your properties and they would be the main focus. Now they spin out their properties and realistically they aren't a big priority in those two companies. Making things even worse is you are now doing add on equity raises to keep your share percentage. I don't think this is a very good business model to be honest. It's one thing if you have a royalty on the property that is the main focus but if you don't you're basically just putting money in to explore a property that you don't have a royalty on. Realistically, not very good for capital allocation and it dillutes the whole point of the PG model. You're now putting capital in which hurts your free ride and your properties really aren't getting much attention. Adventus might spend a little time on your properties but the fact is they aren't really going to focus on them. The old model was you got equity very cheap, had a royalty on that property and it was the main focus of the vehicle. I also don't think they were putting in more capital into those properties. That is a big change to the prior model, I know they aren't doing this for each spinoff but I'm not really a fan of this vehicle.

[bizaro86]

I wonder if they would never consider distributing shares of some of the bigger positions (Alderon, Adventus, etc) to shareholders. That would let individual shareholders choose which to keep, although it might be a bit messy initially ad probably a bunch would liquidate immediately.

 

I like that for ones where the ALS royalty property isn't a focus, because as was mentioned Id rather not put money in where there is no royalty.

 

[mikek]

If I were Altius I would seriously be thinking about trying to do a cash buyout on Morien. You could do a nice premium to current market cap and still make it well worth it for Altius. Cline isn't going anywhere and it's a super long royalty with expansion potential over time. I doubt they will do it though because the market absolutely hates coal even though this is largely a non thermal coal royalty. Altius is sitting on around 70 million in cash. Would be a very nice replacement for the 777 royalty in the future. Morien is currently at a 28 million market cap with around 4 million in cash.

[linealdin]

Cost of basis of Altius’s 15 million plus Adventus shares: around 30 cents per share.

 

Current Adventus stock price: 95 cents.

 

Wheaton PM just decided it liked the risk-reward of investing in Adventus at 90 cents per share (no warrants).

 

Adventus has spun out the Newfie Altius royalty properties to Canstar (drill program planned on Buchans this summer). The Irish Altius royalty properties will be optioned out presently (2018 drill program planned for Rathkeale).

 

Huge share price appreciation and drilling on royalty property. What’s not to like?

[linealdin]

As for Morien there’s been some startup issues with the Donkin Mine. Production problems, environmental violations, etc. They’ve only produced a modest amount of coal so far. Maybe they will overcome the issues, and maybe they don’t. If the mine is not economic over the long term then MOX is a zero. We can all agree Donkin is certainly not a Tier 1 met coal mine. I want royalties on the best mines.

 

Cline is a positive, of course, but his ownership is not a guarantee of success. He’s failed before.

[linealdin]

Direct spinouts to shareholders? A little gimmicky and there are tax issues.

 

The Adventus and Alderon positions have strategic value. That strategic value disappears if Altius shareholders are given those shares.

 

Adventus is going to be a buyout. Kargl-Simard has implied in interviews that he has no interest in building a mine. The target for selling Curipamba should be around C$500 million. That’s what an open pit version of 777 (with additional satellite VMS deposits) should be worth in a hot bull market. Give it another 3 to 4 years. Altius is going to be an integral part of this development and sales process. They closely advised on the acquisition of Curipamba and the other 2 Ecuador properties. Does Wheaton get involved if respected groups like Altius and Greenstone aren’t already involved? I doubt it.

 

If Kami is going to be built then Altius as a strategic investor is going to be essential. Altius has already solved a big problem for Alderon: Liberty Metals wanting to exit. Altius took the Liberty shares (cheaply) and got Sprott to refinance the Liberty debenture (on favorable terms for all parties). More corporate developments to come.

[linealdin]

Everyone’s forgotten what resource bull market mania is like. Too much recent pain has wiped out the good memories. These 20% equity positions will rise 10x to 20x in value with anything that looks like a discovery if the commodity price is hot.

[linealdin]

Orion Mine Finance supposedly has raised $500 million to invest in iron ore and potash development projects. Alderon HAS to get a piece of that. How many fully permitted, shovel-ready iron ore projects are there? Not already held by majors?

 

US$100 million from Orion for equity and a streaming deal. US$20 million delivered immediately, the balance contingent on raising a certain amount of construction financing from other sources.

 

Private equity groups have all the mining risk capital. Go get some.

[bizaro86]

Strategic is usually a euphemism for management doing things that are non-economic. What ALS interests do you feel are advanced by a big Adventus stake if Adventus isnt drilling an ALS property?

 

Maybe they make a bunch of money on the shares, but buying and holding junior mining shares for cash isn't the model I signed up for. That's been tried lots of times and doesn't work. If it becomes too big a piece I'll be out.

 

Even more than a spin of the Adventus shares I'd love a potash spin. Make a special purpose entity (similar to LIF). Spin out 20-30% to shareholders. That would be value accretive because I think the market would put a very high valuation on that asset independently, which would make Altius an obvious look through bargain.

[linealdin]

They got half the Adventus share position in exchange for property. That means free. And the early “seed financing” round which Altius participated in for 25 cents per share is looking like an amazing bargain. No matter how you spin it the Adventus deal has been a HUGE win.

 

Adventus also spent a couple million advancing the Irish and Newfie properties (seismic surveys, etc) before spinning them off. Those Altius royalty properties will be drilled this year partly because of the successful early stage work Adventus did in 2017. That can’t be overlooked.

 

*

 

Altius seems to have violated some unspoken rule of decorum from the early days of prospect generation: Thou shalt not invest cash in the companies dumb enough to farm into the properties you generated.

 

Nonsense! If Altius likes the Adventus business model and if they love Curipamba (they do) why shouldn’t they make an add-on bet?

 

P.S. No reason to worry Altius is going to invest more in Adventus in the near future. With the Wheaton private placement Adventus is cashed up through the end of 2019.

[linealdin]

Virginia Gold and IRC were both strategic positions (no royalties on Altius properties). I think Dalton broached merger discussions with both companies which didn’t work out but the investments worked out really well with eventual buyouts. The Callinan strategic equity position turned into an acquisition. Results still pending for that one but if Cuale and Gunnison turn out well then it’s another huge win.

 

Altius has been down this road before. It usually turns out well.

[linealdin]

https://www.hellenicshippingnews.com/high-medium-grade-iron-ore-spread-widens/

 

“Soaring penalties for alumina and tight supplies of low-alumina fines from Brazilian mining firm Vale have helped blow out the differential between high-grade and medium-grade fines.

 

“Vale’s BRBF fines and IOCJ fines have 1.5pc alumina each compared with an alumina content of as much as 2.6pc in PB fines, the most liquid seaborne product that is supplied by Australian mining firm Rio Tinto. This amounts to around a 1pc alumina difference between the major sources of liquidity for the 62pc and 65pc indexes.

 

“The Argus alumina value-in-market adjustment increased to $6.50/dmt per 1pc alumina last week from $1.65/dmt per 1pc at the end of May, or about a $5/dmt increase over the same period where the 62pc-65pc index differential rose by more than $7/dmt from below $20/dmt in late May.”

 

*

 

Alumina penalties are the next big trend in iron ore. This article is discussing the favorable market for 1.5% alumina Brazilian ore versus the penalized 2.6% alumina Pilbara blend ore.

 

Trough ore is in another dimension in terms of alumina:

 

Bloom Lake: 0.25% alumina

IOC: 0.10% alumina

Kami: 0.10% alumina

 

If the penalty is US$6.50 per 1% of alumina Kami has a built-in US$16.50 per tonne advantage over the leading Pilbara blend product. That’s a game-changer.

 

Under-appreciated factor for why Kami will be built this cycle. The soaring alumina penalty just started from late May. Market needs time to absorb the implications. Where are they going to find the new sources of low alumina iron ore?

[linealdin]

The US$16.25 per tonne alumina penalty offsets or eliminates the shipping cost (to Asia) advantage that Aussie producers have over the Labrador Trough.

 

Again this change in the market just happened. Once sellers and users live with the new alumina penalty for another 6 months or so they will start making different longterm investment decisions.

 

1) IOC expansion to 30MTA will be back on the table eventually. Rio Tinto and its limited partners must be convinced expansion makes sense.

2) Bloom Lake Phase 2 investors are being brought on board right now.

3) Alderon will bring in more strategic investors.

 

This alumina thing will help push those investors forward.

 

[mikek]

"Maybe they make a bunch of money on the shares, but buying and holding junior mining shares for cash isn't the model I signed up for. That's been tried lots of times and doesn't work. If it becomes too big a piece I'll be out."

 

"P.S. No reason to worry Altius is going to invest more in Adventus in the near future. With the Wheaton private placement Adventus is cashed up through the end of 2019."

 

I don't think bizaro86 is worried about the initial seed capital but it does seem like Altius will continue to put capital in for future equity raises which is a crappy business model.  I think this is what Bizaro86 is talking about and I agree 100 percent.  Basically, Altius is investing in a junior to explore a property that they don't have a royalty on.  As of right now, the risk capital is very low but as time goes on and the equity raises get larger that isn't a attractive business model.  This is what Biazaro86 is concerned about.

 

IOC is going to be a huge winner, it's really too bad that management thinks they need to dilute that asset and buy other royalties.  That thing is a huge cash flow, expanding prices, production, quality is good and possibly huge expansion potential in the future if these trends are here to stay.

 

If Alderon is so good why couldn't Tacora raise a much smaller capex to get built?  I do believe the ore is good but no one is spending a billion dollars to get this built.  The only way Alderon ever gets built is if it gets bought by a producer that is near by or they try to start it out at a much smaller capex/ initial production.  That is there only hope, if the former CEO didn't drop the ball they would be sitting in a pretty good position.  Unfortunately, he did and the choices aren't very viable to get this thing built at current plans.

 

 

The thing that is attractive to me about Altius is the extremely long royalties, I call them basically forever assets-

Potash- 16 million

Chapada- 13 million (this is the real amount actually that they keep)

IOC- 7 million

VB- 4 million ( I consider this a forever asset once this gets settled, 15+ years in reserves and I would guess this is a bit more)

 

That is 40 million in forever assets with 43 million shares outstanding and 50 million if Fairfax converts, it isn't rocket science how you can see that you can possibly win with that.

 

 

 

[linealdin]

Regarding Tacora: It is having trouble raising the IPO money. There's no issue with the debt financing (private equity + equipment financing). Champion had the same issue in the equity markets, being forced to downsize from a $50 million equity raise to a $20 million equity raise. A debenture from Glencore made up the $30 million difference. Michael O'Keeffe is a great salesman, and Bloom Lake is a wonderful mine, but he just couldn't reach those retail investors.

 

Takeaway: Easier right now to raise money from sophisticated private equity investors and from big industry players than it is to issue shares to unsophisticated retail investors, who are focused on marijuana stocks or bitcoin or other fashionable nonsense.

 

I'm sure Tacora will downsize the IPO and bring on another private equity investor. The money is available, just not from the retail brokerages.

 

Wabush is, indeed, a much worse property than Kami. Wabush has some kind of crazy 7% plus royalty on it, and the ore has more impurities.

 

I very much hope Alderon is taking note. They should be bringing in multiple (like 5 or more) strategic investors (private equity, industry players, or government) who will make add-on bets when construction financing is required. The public equity market is frozen and pointless at the moment. Traditional bank construction financing for mining projects is also nonexistent.

 

Adapt or die!

[linealdin]

The IOC proposed rule change is much ado about little. I very much doubt they will diversify more than 10% of their revenue beyond IOC royalties. I think LIF management just wants to opportunistically diversify. Not a big deal. The major move will come when IOC announces its expansion plans.

 

*

 

I believe Curipamba is a special situation. Adventus scooped up the Ecuador properties near the bottom. Ecuador is being de-risked as major mines like Fruta del Norte and Cascabel are advanced by international groups, benefiting from changes to the tax rules and an improved investment environment.

 

In 3 or 4 years, if all goes well, Curipamba will be drilled out and expanded, satellite deposits will have inferred resources, and a feasibility study will be published showing high NPV and modest capex. Curipamba will valued as if it is located in Chile or Brazil. Then the deposit will be sold for a 40% discount to the project's post-tax $1 billion NPV. The potential is incredible.

 

Altius didn't make any additional cash investment into Aethon Minerals. I don't expect significant add-on bets with that spin-out or with the diamond spinout. Adventus is special in terms of management quality and asset quality.

 

 

[StevieV]

linealdin,

 

Do you hold the .to or US OTC listing?  Any particular reason?  The Canadian listing appears to trade a bit more, but relatively similar.

 

Also, you mentioned $100C/share the other day?  Obviously, that is a quite aggressive number.  How do you get there, other than there simply being that type of room to run size wise?

[linealdin]

linealdin,

 

Do you hold the .to or US OTC listing?  Any particular reason?  The Canadian listing appears to trade a bit more, but relatively similar.

 

Also, you mentioned $100C/share the other day?  Obviously, that is a quite aggressive number.  How do you get there, other than there simply being that type of room to run size wise?

 

Own both listings. Older account with IB for the foreign shares and a US Vanguard retirement account. Not too worried about liquidity since I plan to hold forever. Good bargains on the US listing sometimes.

 

Multiple pathways to the nice round number of C$100.

 

Revenue growth and re-rating would be nice.

 

Growing to C$200 million in annual revenue and re-rating to a market cap of 20x revenue (in line with larger royalty players) gets Altius to C$4 billion market cap, or C$93 per share.

 

I expect C$500 million to C$1 billion in hard cashouts from the project generation portfolio during this bull cycle. That money will in turn be re-invested in new royalties during a cooler part of the cycle.

 

Other equities might do better but I don’t know of a resource stock with less downside. Very, very unlikely I lose money. Safety first.

[bizaro86]

"Maybe they make a bunch of money on the shares, but buying and holding junior mining shares for cash isn't the model I signed up for. That's been tried lots of times and doesn't work. If it becomes too big a piece I'll be out."

 

"P.S. No reason to worry Altius is going to invest more in Adventus in the near future. With the Wheaton private placement Adventus is cashed up through the end of 2019."

 

I don't think bizaro86 is worried about the initial seed capital but it does seem like Altius will continue to put capital in for future equity raises which is a crappy business model.  I think this is what Bizaro86 is talking about and I agree 100 percent.  Basically, Altius is investing in a junior to explore a property that they don't have a royalty on.  As of right now, the risk capital is very low but as time goes on and the equity raises get larger that isn't a attractive business model.  This is what Biazaro86 is concerned about.

 

IOC is going to be a huge winner, it's really too bad that management thinks they need to dilute that asset and buy other royalties.  That thing is a huge cash flow, expanding prices, production, quality is good and possibly huge expansion potential in the future if these trends are here to stay.

 

If Alderon is so good why couldn't Tacora raise a much smaller capex to get built?  I do believe the ore is good but no one is spending a billion dollars to get this built.  The only way Alderon ever gets built is if it gets bought by a producer that is near by or they try to start it out at a much smaller capex/ initial production.  That is there only hope, if the former CEO didn't drop the ball they would be sitting in a pretty good position.  Unfortunately, he did and the choices aren't very viable to get this thing built at current plans.

 

 

The thing that is attractive to me about Altius is the extremely long royalties, I call them basically forever assets-

Potash- 16 million

Chapada- 13 million (this is the real amount actually that they keep)

IOC- 7 million

VB- 4 million ( I consider this a forever asset once this gets settled, 15+ years in reserves and I would guess this is a bit more)

 

That is 40 million in forever assets with 43 million shares outstanding and 50 million if Fairfax converts, it isn't rocket science how you can see that you can possibly win with that.

 

I agree with you 100% on all of this. Buying shares in a royalty Co. (Callinan, IOC, etc) is an investment I really like. Getting free shares in a junior plus a royalty on a prospect I like. Putting in a bit of cash so the junior can use your reputation to raise more capital to explore your property I like a bit. You get the shares plus extra upside on the royalty.

 

Buying shares in a junior is a statistically terrible business. Unless there is some other source of upside, even if Dalton and Co are better than average I'd like to see that avoided. Just because you're smart doesn't mean you should pick something hard to do. Munger says to shoot fish in a barrel by first emptying the barrel of water. Royalties are shooting fish in an empty barrel, investing in juniors is like shooting fish in the ocean. It's very hard, so why do it. The bigger % of the value of ALS in that activity the less happy I am.

 

I agree about the long life assets as well. They are the cream assets here, and it isn't hard to justify a very high multiple on them, imo.