ALS.TO - Altius Minerals

[TwoCitiesCapital]

Linealdin how do you think about valuing this? I'm not asking for the specifics (although that would be great if you're willing to share) but more the structure. For example, I could look at it as:

 

(EV-listed holdings)/(2018 estimated royalty revenue - admin costs - interest - tax)

 

I'd probably adjust for royalties expiring soon and also stress test to the downside by looking at what revenue each royalty produced in 2016.

 

If that multiple seems reasonable, then it's probably a buy based on option value and smart capital allocation.

 

Does that sound sensible to you or do you have another framework?

 

I like think about whether it would be a good deal to buy the whole company for its current market cap of C$546 million. What do I get for that purchase?

 

I think about the potash royalties paying out C$1.6 billion over the next 100 years.

 

I think about Chapada paying out C$1 billion over the next 75 years (yes, I think it will go that long). In the larger land package that Altius holds a stream on there are multiple deposits that could be the next Chapada. Yamana won’t seriously drill out those deposits until the current Chapada complex is depleted, which will be a long time.

 

LIF paying out C$800 million over the next 100 years.

 

Squeezing out another C$150 million from electrical and met coal over the next 10 years.

 

Another C$42 million from 777 in the next 4 years.

 

In the short term I believe C$500 million will be cashed out from the PG portfolio in what will be a thrilling bull market over the next 7 to 10 years. Quick payback of my purchase price.

 

I tend to agree with Petec's approach for valuation; however, I think the trouble is the market doesn't know how to value it.

 

It's a combo of a royalty company and a prospect generator/junior mining investment.

 

Who invests in royalties: risk averse investors

Who invests in junior minors: risk seeking investors

 

Neither group sees Altius as an attractive investment because the prospect generating/junior mining side of the business has the ability to wipe out returns from the royalties in any given year AND the royalty business is not a high enough return business to entice junior mining investors who look to the royalty portfolio as a drag on the underlying portfolio exposures.

 

Once Altius reaches the point where it's royalty portfolio is large enough that the equity portfolio matters very little to declared earnings, then you'll see conservative investors wading in and pushing up it's multiple in-line with its royalty peers.

 

OR we have to wait for the junior mining portfolio to go gangbusters for people to start cashing in on the discount between Altius and its underlying mining portfolio.

 

As long as we're in between, we're "no man's land" for resource investors and the competitive advantage of their business model will also result in them not being a natural fit for any type of natural resource investor. Current investors are playing time arbitrage until one of those two things happens - at least that's how I see it and why I'm content to trade around the core position to try to enhance returns until one of the two happens.

[StevieV]

Linealdin how do you think about valuing this? I'm not asking for the specifics (although that would be great if you're willing to share) but more the structure. For example, I could look at it as:

 

(EV-listed holdings)/(2018 estimated royalty revenue - admin costs - interest - tax)

 

I'd probably adjust for royalties expiring soon and also stress test to the downside by looking at what revenue each royalty produced in 2016.

 

If that multiple seems reasonable, then it's probably a buy based on option value and smart capital allocation.

 

Does that sound sensible to you or do you have another framework?

 

I like think about whether it would be a good deal to buy the whole company for its current market cap of C$546 million. What do I get for that purchase?

 

I think about the potash royalties paying out C$1.6 billion over the next 100 years.

 

I think about Chapada paying out C$1 billion over the next 75 years (yes, I think it will go that long). In the larger land package that Altius holds a stream on there are multiple deposits that could be the next Chapada. Yamana won’t seriously drill out those deposits until the current Chapada complex is depleted, which will be a long time.

 

LIF paying out C$800 million over the next 100 years.

 

Squeezing out another C$150 million from electrical and met coal over the next 10 years.

 

Another C$42 million from 777 in the next 4 years.

 

In the short term I believe C$500 million will be cashed out from the PG portfolio in what will be a thrilling bull market over the next 7 to 10 years. Quick payback of my purchase price.

 

Good discussion in general, and I like long-lived assets.  However, royalties 90 years from now have an almost 0 NPV.  So, I'm not sure "I think about the potash royalties paying out C$1.6 billion over the next 100 years." is that helpful a way to break it down.  IMHO, better to think about current run-rates and the potash can be thought of as perpetual (excepting the risk that potash becomes obsolete or worthless over some time period - probably too long to matter).

[linealdin]

Agree with all except: the PG business has no ability to wipe out gains from the royalty business. The PG business only costs C$5 million or so annually, self-funded by sales from the PG portfolio.

 

This is a malicious stereotype. Prospect generation is also for risk-averse investors. Sokoman will pay for those aggressive drill holes, not Altius.

[linealdin]

The analysts who cover Altius have pro valuation models. I’ve read them. Not particularly interesting for my purposes. But they are readily available. No need to do the modelling yourself.

[linealdin]

Market values gold royalties set to pay C$160 million over the next 10 years more than potash royalties set to pay C$1.6 billion over the next 100 years. It’s absurd and it’s silly. But I’m going to profit from the absurdity.

[wachtwoord]

Future cash flows should be discounted so 100 year away cash flows represent very little value unless they're off gigantic size.

 

Current (rising) cash flows already present nice value so no matter :)

[bizaro86]

Future cash flows should be discounted so 100 year away cash flows represent very little value unless they're off gigantic size.

 

Current (rising) cash flows already present nice value so no matter :)

 

Some of the far out cash flows could be of gigantic size. The potash assets have the capacity to double or triple production, and potash pricing could double or triple from here as well. If you put a 5-10X on the current potash cashflow that would offset a lot of PV discounting.

 

That isn't a slam dunk, but I doubt plants will stop needing K any time soon, and these mines are the lowest cost source of it. As population growth means the world needs more food, and more arable land is converted to other uses, I think fertilizer use will be much higher a few decades from now.

 

I don't think you need that to happen to make ALS work, but it's certainly nice upside optionality to have

[wachtwoord]

To put things in perspective, a $1T cash flow 100 years in the future has the net present value of a mere $26.6M at a 10% discount rate. Of course we are not just talking about a cash flow a single time 100 times in the future but it does put things in perspective.

 

I like the current growing low overhead cash flows combined with the optionality of mine expansions and project generation I don't feel I'm paying much for (if anything).

[bizaro86]

To put things in perspective, a $1T cash flow 100 years in the future has the net present value of a mere $26.6M at a 10% discount rate. Of course we are not just talking about a cash flow a single time 100 times in the future but it does put things in perspective.

 

I like the current growing low overhead cash flows combined with the optionality of mine expansions and project generation I don't feel I'm paying much for (if anything).

 

For sure. On the other hand, $10 MM in cashflow per year growing at 3% has a pretty different NPV if it lasts for 30 years vs 100 years. At 8% (appropriate for these assets, imo), the values are ~$164 MM and ~$214 MM. That's 30% extra NPV that I don't think is getting factored in at all here.

 

 

[wachtwoord]

Do you think it's appropriate though to assume 8% growth (or anything close to it) for 100 years? That's a hell of a lot of time for such growth to continue.

 

If it is appropriate you are completely correct of course.

[linealdin]

I would gladly pay $26.6k today for $1 billion to be delivered 100 years from now (to my heirs). I think there’s no government or financial institution that would offer this absurd deal.

 

Don’t believe the hype on hyperbolic discounting.

[linealdin]

Escondida workers reject final contract offer and will almost certainly vote to strike. That one mine accounts for an astonishing 5% of global production. A two month strike would certainly push up the copper price. I see copper averaging over $3 for Q3 because of the labor issues in Chile.

[linealdin]

https://investingnews.com/daily/resource-investing/rick-rule-overlooked-sectors-savvy-investors/

 

Rick Rule this month:

 

“Specifically to now, agricultural minerals, particularly potash and phosphate, are priced on a global basis below the cost of production. Meaning that either the price of those commodities goes up or over time they become unavailable and we starve.”

 

Priced below the cost of production? Is that really true? Altius has really caught the bottom if that is the case. I can see Altius’s potash royalties hitting C$50 million a year with increased price and volume.

[bizaro86]

Do you think it's appropriate though to assume 8% growth (or anything close to it) for 100 years? That's a hell of a lot of time for such growth to continue.

 

If it is appropriate you are completely correct of course.

 

I re-read my post and it is poorly worded, sorry about that. I assumed 3% growth, and used an 8% discount rate. I completely agree 8% growth in pretty much anything for 100 years is ridiculous, but 3% seems reasonable for the Potash assets to me.

 

Their place in the capital structure of the potash industry makes an 8% discount rate seem appropriate.

[petec]

I can see Altius’s potash royalties hitting C$50 million a year with increased price and volume.

 

Do you mind sharing your price/volume assumptions for that?

 

Given how badly Potash Corp et al managed the potash market over the last decade or so I'm wary of the commodity, but that (prices being cartelised high enough to incent new production) does seem to be in the past.

[wachtwoord]

I would gladly pay $26.6k today for $1 billion to be delivered 100 years from now (to my heirs). I think there’s no government or financial institution that would offer this absurd deal.

 

Don’t believe the hype on hyperbolic discounting.

 

You mean $1T ;)

 

And if so: me too as that would be like buying a 10% 100 year risk free bond. We are equity investing here and the risk needs to be discounted. A lot can happen in 100 years ..

 

@bizarro, sounds a lot more reasonable at 3%. I didn't redo your calculation (was on the go) or I would have known that's what you meant :)

[linealdin]

I can see Altius’s potash royalties hitting C$50 million a year with increased price and volume.

 

Do you mind sharing your price/volume assumptions for that?

 

Given how badly Potash Corp et al managed the potash market over the last decade or so I'm wary of the commodity, but that (prices being cartelised high enough to incent new production) does seem to be in the past.

 

The potash portfolio is set to bring in C$16 million at current prices, which Rule claims is below the global cost of production. So prices must go up. Potash demand is going up at a steady 3% every year. Poor people as they get richer want more calories, but arable land per capita is declining. So potash demand grows. Brian Dalton says potash prices need to double or triple to reach the incentive price for bullding new potash supply to meet demand: US$500 to US$750 per tonne.

 

Altius’s best royalty mines are currently producing significantly below nameplate capacity. I expect more volume from Rocanville and Esterhazy in any demand scenario because they are very low cost mines. The other mines are higher cost but production could be ratcheted up in a frothy potash price environment.

 

Potash prices going to US $588, with a 33% bump in production from Altius’s royalty mines = C$50 million in Altius potash royalty revenue.

 

I’m not saying this is sustainable over the long term but there will be years of C$50 million or higher potash royalties during this bull cycle.

 

(In Q1 2018 Altius’s realized potash prices averaged C$314, or US$240, per tonne. The bottom in 2016 for potash prices was around US$210 per tonne. We are still very near the bottom. Altius is bought the McChip and Liberty potash package at the right part of the cycle.)

 

 

[linealdin]

https://www.google.com/amp/s/seekingalpha.com/amp/article/4149368-discounting-future-cash-flows-buffett-munger-approach

 

Appropriate for this website, the Munger/Buffett approach to future cash flows:

 

1) Discount future cash flows at the risk free, long term US treasury rate.

 

2) But only buy cash flows that you are 100% certain will actually pay out.

 

3) Build in a margin of safety by acquiring those cash flows as cheaply as possible.

 

4) No fancy financial calculators. Do it by feel. Be right.

 

*

 

I’m 100% certain those Rocanville and Esterhazy royalties will pay out over the extreme long term. I’ve detailed the reasons why. I am betting my family’s life savings I am right.

 

I believe I have a margin of safety because Altius bought those royalties near the bottom of the price cycle and with some special situations (Liberty Mutual needing cash after a hurricane year; McChip as a cash-constrained junior). I also got the bulk of my Altius position very cheap.

 

Following Buffett: I will apply a 3% discount rate to the C$1.6 billion in future cash flow from potash. I will be right.

[linealdin]

I calculate Altius’s total potash purchase price as C$213.45 million:

 

I assign 50% of Prairie Royalties purchase price to potash: C$120.45 million

 

I assign 50% of CDP purchase price to potash (the rest to coal bed methane, miscellaneous electrical coal revenue, and farmland assets): C$20 million

 

C$8 million for McChip

 

C$65 million for Liberty Potash

 

*

 

Exactly C$31.391 million in potash revenues received through June 2018, so C$182.059 left until payback. At C$16 million a year in projected annual revenue payback will be achieved in another 11.38 years if potash prices stay stagnant.

 

If we get the bumper crop C$50 million royalty years payback will be much, much quicker.

 

After that: nearly endless profit.

[linealdin]

Humor me: What’s the NPV of C$16 million a year for the next 100 years at 3% discount rate?

 

Would it be more than Altius’s current market cap? Close to it, I think.

[Cigarbutt]

Linealdin how do you think about valuing this? I'm not asking for the specifics (although that would be great if you're willing to share) but more the structure. For example, I could look at it as:

 

(EV-listed holdings)/(2018 estimated royalty revenue - admin costs - interest - tax)

 

I'd probably adjust for royalties expiring soon and also stress test to the downside by looking at what revenue each royalty produced in 2016.

 

If that multiple seems reasonable, then it's probably a buy based on option value and smart capital allocation.

 

Does that sound sensible to you or do you have another framework?

 

I like think about whether it would be a good deal to buy the whole company for its current market cap of C$546 million. What do I get for that purchase?

 

...

 

In the short term I believe C$500 million will be cashed out from the PG portfolio in what will be a thrilling bull market over the next 7 to 10 years. Quick payback of my purchase price.

 

I tend to agree with Petec's approach for valuation; however, I think the trouble is the market doesn't know how to value it.

 

It's a combo of a royalty company and a prospect generator/junior mining investment.

 

Who invests in royalties: risk averse investors

Who invests in junior minors: risk seeking investors

 

Neither group sees Altius as an attractive investment because the prospect generating/junior mining side of the business has the ability to wipe out returns from the royalties in any given year AND the royalty business is not a high enough return business to entice junior mining investors who look to the royalty portfolio as a drag on the underlying portfolio exposures.

 

Once Altius reaches the point where it's royalty portfolio is large enough that the equity portfolio matters very little to declared earnings, then you'll see conservative investors wading in and pushing up it's multiple in-line with its royalty peers.

 

OR we have to wait for the junior mining portfolio to go gangbusters for people to start cashing in on the discount between Altius and its underlying mining portfolio.

 

As long as we're in between, we're "no man's land" for resource investors and the competitive advantage of their business model will also result in them not being a natural fit for any type of natural resource investor. Current investors are playing time arbitrage until one of those two things happens - at least that's how I see it and why I'm content to trade around the core position to try to enhance returns until one of the two happens.

Interesting perspective and challenge for valuation.

In terms of enterprise value, the two components need to be valued differently.

 

For the junior mining component, potential growth but high uncertainty and high discount rate required IMO.

For the established royalty component, relatively lower uncertainty versus long term cashflows and lower discount rate required.

 

Even if quite "predictable", 3% discount rate seems awfully low for the present royalty portfolio. This is unexplored territory as Altius is defining the new model to some extent but IMO the floor on the discount rate should be around the long term AAA bond rates. This is running around 4,5% these days and risk spreads are at record lows.

 

To complicate matters even more, Altius aims to grow the royalty portfolio and that separate component probably deserves an intermediate discount rate (difficulty in timing buying decisions within commodity cycles).

 

One does not make money out of a rosy consensus but FWIW I still don't "see" an attractive entry point in this cycle.

 

 

[linealdin]

Rocanville and Esterhazy K3 are two of the largest and lowest cost producers in the potash industry. If they are out of business then it likely means every other potash miner is out of business. Some lab produces a magic cheap synthetic potash that wipes out mined potash. (I’m sure the companies that make diamonds in the lab dream about wiping out the natural diamond industry in a sudden, unexpected sea-change.) It’s a fantasy for now.

 

Chapada is much riskier. Low quality gold and copper ore but they manage to be economic.

 

LIF is also profitable but marginal in the global picture. 35% Fe in the ground never really competes with 65% Fe in the ground. Risks abound.

 

I would only apply the Buffett future cash flow approach to the potash royalties. They are world class. Under the Buffett test one wouldn’t invest in either the Chapada or LIF royalties because they are marginal. One doesn’t have 100% certainty.

[linealdin]

Of course this is all subjective. You may love Chapada but think ag minerals are risky for whatever reason.

 

In my very subjective view the potash assets, given their world class low costs and nearly endless resources, are low risk and are worth Altius’s current market cap. They will deliver C$16 million annual royalty revenue near the bottom of the cycle. Through a whole cycle I expect potash to average C$20 million or more annually.

 

C$20 million a year for the next 100 or more years at a 3% discount rate = an NPV higher than Altius’s current market cap.

 

All of Altius’s other assets may be classified as marginal, especially the junior equity portfolio, but I’m getting them for free.

 

In a couple of years when potash royalties are delivering C$50 million to C$60 million annually the above argument will seem obvious instead of audacious.

[Sportgamma]

Of course this is all subjective. You may love Chapada but think ag minerals are risky for whatever reason.

 

In my very subjective view the potash assets, given their world class low costs and nearly endless resources, are low risk and are worth Altius’s current market cap. They will deliver C$16 million annual royalty revenue near the bottom of the cycle. Through a whole cycle I expect potash to average C$20 million or more annually.

 

C$20 million a year for the next 100 or more years at a 3% discount rate = an NPV higher than Altius’s current market cap.

 

All of Altius’s other assets may be classified as marginal, especially the junior equity portfolio, but I’m getting them for free.

 

In a couple of years when potash royalties are delivering C$50 million to C$60 million annually the above argument will seem obvious instead of audacious.

 

At a 3% discount rate, most things would seem dirt cheap...

[linealdin]

“In Buffett’s view, it is foolish to account for risk by fiddling with the discount rate. For one, it only makes sense to ‘deal with things about which we are quite certain.’ Buffett is only interested in opportunities where the probability of actually getting those future cash flows is as close to 100 percent as possible. In that case, it is appropriate to discount the cash flow using a risk-free rate.”

 

*

 

I believe the probability of Altius actually getting the long-term future cash flows from their potash royalties is close to 100%. Therefore I apply the risk-free rate.

 

Little possibility of legalized welching: Altius gets its royalties on the exact same terms the province collects its royalties. The province, out of self-preservation, won’t allow a potash royalty agreement not to be honored.

 

Little possibility of being squeezed by competition: Rocanville and K3 have prime position on the global cost curve. If Rocanville and K3 go out of business then the world doesn’t need potash anymore.

 

Little possibility of catastrophic mine failure. Modern safety practices and mine technology have advanced a great deal in recent decades. They won’t do anything foolish and allow the mines to flood.