ALS.TO - Altius Minerals

[petec]

 

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

 

 

Agreed and 3% is certainly not a cautious way to value the potash royalties. However, playing devil's advocate: 1) Is it reasonable to assume that potash prices rise with inflation over time? 2) If so, then these royalties are real assets and should be priced off long dated TIPS not treasuries. 3) The longest-dated TIP pays 1% real. 4) TIPS don't have the option value of rising production over time. 5) The lowest-priced producer of a product the world needs in order to eat might be as good a credit as the wildly over-encumbered US government.

 

[StevieV]

"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."

 

3% is way too low.  I mean both too low in the sense that I wouldn't use a 3% rate for my own analysis, and I don't ever expect the market to value the stream at a 3% discount rate.

 

FWIW, it looks to me as though the NPV of a constant $20 million CAD/year stream at a 10% discount rate is $219 million CAD.  $270 million CAD at 8%.  $652 million CAD at 3%.

 

Regardless, I don't think that is a particularly accurate valuation.  Potash prices will be volatile, but my base case would be that they rise over time.  Also, as you discuss, it matters a good deal whether the current price of potash is high or low.

[linealdin]

Buffett is basically rejecting the whole exercise of applying high discount rates as something high IQ people do to create a false sense of precision, and as a substitute for making a real decision. I think that’s a profound insight.

 

Is Rocanville going to be mining ore (and thus paying royalties to Altius and the province) for the next 75 years? Yes or no? Make a decision. Don’t fiddle with the discount rate.

 

 

 

 

 

[linealdin]

Buffett applies the riskfree rate to the future stream of revenue then calculates the NPV. He only considers purchasing the assets if he has certainty about the strength of the assets. Then he creates a margin of safety by purchasing the assets at a substantial discount to the NPV he calculated.

 

The important part is having the certainty about the asset. Yes or no. Everything else is just negotiation, trying to pay as little as possible to create a margin of safety and a higher profit margin.

[wachtwoord]

Buffett is basically rejecting the whole exercise of applying high discount rates as something high IQ people do to create a false sense of precision, and as a substitute for making a real decision. I think that’s a profound insight.

 

Is Rocanville going to be mining ore (and thus paying royalties to Altius and the province) for the next 75 years? Yes or no? Make a decision. Don’t fiddle with the discount rate.

 

If Altius gets in financial distress they might have to sell the royalty.

 

If the utility of the commodities mined goes down for whatever reason the royalty will be less valuable.

 

If political changes undermine the value of royalties it will also be worth less.

 

If political changes or some type of disaster undermine the mines the royalty will be worth less.

 

The above are all possible things. Therefore this is not a yes/no question.

[linealdin]

Altius only gets into financial distress if it is on the wrong side of three yes or no decisions:

 

1) Is Chapada, despite mining miserably low gold and copper grades, a robust and economic mine through the whole commodity cycle? Yes or no.

 

2) Does IOC have a longterm future as a producer of high quality concentrate and pellets mined from low grade ore in the ground? Yes or no.

 

3) Will Rocanville and Esterhazy K3 be mining potash 75 years from now? Yes or no.

 

*

 

If Altius has gotten one or two of these big decisions wrong then bad things start happening to my life. No early retirement. No vacation home. Kids have to work while they attend state college.

 

If Altius is right on all three decisions very good things happen in my life.

 

The application of high discount rates is irrelevant to these yes or no decisions.

[linealdin]

Two yes or no decisions from the last cycle:

 

1) Is the Michelin uranium deposit going to become a mine? Altius decided no and cashed out over C$200 million. The Michelin uranium deposit is probably worth close to zero today.

 

2) Is Kami going to be a mine in this cycle? Altius voted yes, got the decision dead wrong, and missed out on cashing out over C$100 million.

 

*

 

Would applying the proper high discount rate on the future cash flows from these assets have helped Altius get these two decisions right? I don’t think so.

[wachtwoord]

Discount rates are not irrelevant to this decisions. They are determined by and proportional to the probabilities and implied consequences of each of these (and other) choices.

[linealdin]

Discount rates are not irrelevant to this decisions. They are determined by and proportional to the probabilities and implied consequences of each of these (and other) choices.

 

Mining investments often seem to have binary outcomes. Either the mine thrives and the investor makes unseemly amounts of money or the mine fails and the investor loses everything.

 

When Altius invested in Chapada in 2016, in the depths of the bear market, there were a couple possible outcomes. Either the bear market would deepen and darken, possibly forcing Yamana to put Chapada on care and maintenance or the market would turn and help Altius make unseemly amounts of money from its investment. The latter seems to have happened.

 

When Altius analyzed the potential investment the important part wasn’t the decision what discount rate to apply future cash flows from Chapada. The important part is making sure there will be actual future cash flows. Will this mine exist in 20 years? Get that decision right and everything else will be fine.

[linealdin]

I know there are private equity groups out there evaluating Kami right now, considering a strategic investment.

 

The only question they really need to answer: Is Kami going to become a mine this cycle? Yes or no.

 

Deal structure doesn’t really matter. The discount rate applied to Kami’s future cash flows doesn’t really matter.

 

If they make an investment and Kami becomes a mine they will reap many, many times their original investment. If Kami isn’t built the investment goes to zero. There’s no way to discount rate your way out of what will be a binary set of outcomes. You have to make the right decision.

 

Buffett would probably just not invest if there’s too much uncertainty. Only invest in things with 100% certainty, at least in your own minds.

 

 

 

[linealdin]

Sokoman up to 21 cents on more heavy volume. Incredible, one great drill hole quadruples the stock price.

 

Wolfden’s also made a strong move from 25 cents to 41 cents in the last couple of weeks. No news.

[linealdin]

Imagine owning the whole Altius potash royalty package. You’ve spent a couple of years, and C$213.45 million, acquiring these royalties. You’ve already received C$31.4 million in royalties. You have a strong Buffett-level, near 100% certainty that these potash will deliver an average of C$20 million a year for a very, very long time. Let’s say the next 75 to 100 years.

 

Does it really matter that some pissant analyst on Bay Street wants to apply an 8%, 10% or 20% discount rate to those future cash flows? Who cares? What does it matter?

 

You’re never selling these royalties. Never. All you’re going to do is sit back and collect the C$1.5 billion to C$2 billion.

[linealdin]

What’s the counter-argument? That you shouldn’t have a Buffett-level, near 100% certainty about anything? That you must follow the crowd and discount everything by 10%?

 

Nonsense. There’s nothing wrong with being certain and then being proven right.

[StevieV]

Does it really matter that some pissant analyst on Bay Street wants to apply an 8%, 10% or 20% discount rate to those future cash flows? Who cares? What does it matter?

 

What’s the counter-argument?

 

I'm not sure what the argument is, so I am not sure if this is a counter-argument or not.  However, the initial proposition (as I understood it) was that the potash will deliver C$20 million/year for 100 years, and that this alone would be worth the current market cap of the company.  It wouldn't.  IMHO, a constant C$20 million/year, even for 100 years, is not worth C$550 million today.

 

Of course, the stream isn't a constant C$20 million/year.  It doesn't really matter if the number of years the royalty pays out goes up (125 years doesn't help).  But, if the payout rises, that would be significant.

[linealdin]

C$20 million a year for the next 100 years is worth around C$500 million today, if there’s certainty that future cash flow will actually be paid out. Certainty = a very low discount rate.

 

Of course, as a savvy businessperson, you don’t want to pay the full C$500 million. You want to pay C$213.45 million and achieve payback from the portfolio in 10.5 years or so.

[linealdin]

If I owned the Altius potash portfolio and someone offered me C$500 million today for them? I’d think hard and then say no thank you. There’s some chance these potash mines go to 200 years. Why not?

 

Base and bulk commodities are different from precious metals. There are multiple hundred year old copper mines still going strong. Very long mine lives are not unusual.

[petec]

C$20 million a year for the next 100 years is worth around C$500 million today, if there’s certainty that future cash flow will actually be paid out. Certainty = a very low discount rate.

 

Of course, as a savvy businessperson, you don’t want to pay the full C$500 million. You want to pay C$213.45 million and achieve payback from the portfolio in 10.5 years or so.

 

Well that’s the point, isn’t it? It’s all very well arguing that discount rates don’t matter for yes/no decisions, and that’s true. But the discount rate embedded in the share price is the rate of return you’ll get if your (and their) decisions are right. And I’m not investing for 3% when I can compound at 10-15% elsewhere. Especially given that *I* don’t receive the royalties, they do, and I have to trust them to allocate that capital well *for 100 years*. So for me the idea of discounting a 100 year royalty at 3% doesn’t work.

[linealdin]

As a practical matter what’s going to happen is this: the potash price will rise to reach an incentive price. Potash related stocks will be in favor again (remember Potash Corp’s multiples when potash was US$800 per tonne). And the Altius stock price will rocket because they’re getting C$50 million a year in potash royalties. Boom then bust then boom again. There will be a nice juicy exit point.

 

C$50 million in annual potash revenue will greatly reward Altius shareholders but it won’t change my longterm outlook. I will still expect an average of C$20 million over the next 100 years.

[linealdin]

If you don’t trust Altius management to allocate cash for you that’s another issue entirely. I believe their royalty investment decisions in the last cycle were the best of any of the royalty businesses. I like their approach and the results.

 

Altius is currently being punished for unpopular commodity exposure: coal is reviled and potash bores people to death.

 

But the royalties arrive in checks denominated in US dollars which mostly perfumes the stench away.

 

Look up how much Osisko paid for the Eleonore gold royalty. Look at how many US dollars the Eleonore royalty brings in, and how long the mine life is supposed to be.

 

Compare that to how much Altius’s potash royalties bring in, and how long those mine lives will last. Crazytown.

[linealdin]

What’s the chance the gold price will double to $2443 an ounce in the next 10 years?

 

What are the odds the potash market price doubles in the next 10 years?

 

I like the odds for potash much, much better.

 

So why is gold exposure so favored? It doesn’t make sense.

[petec]

Agreed. Mind you, gold stock pricing has never made sense to me. I also agree there will be a good exit point.

 

I also agree that Altius seem to be great capital allocators. I’m not saying I don’t trust them. I’m saying they’ll be dead within the 100 years. But then, so will I.

[linealdin]

Osisko paid C$479 million for Virginia Gold, mostly for the flagship Eleonore royalty.

 

That royalty is set to bring in 6500 gold equivalent ounces each year, which is C$10.3 million at current gold prices and US/CAD exchange rates. 10 or 15 years of mine life left.

 

Think about that.

 

If the Altius potash portfolio were magically transformed into gold it would easily sell for C$600 million to C$1 billion at auction. The chance to acquire 100 or 200 years of gold royalty revenue? Sean Roosen would have a heart attack.

 

 

[bizaro86]

I think the best capital allocation for 100 years of potash cash flow would be the non-ammended LIF plan. Cash the cheques and distribute the money.

[nsa122]

I have to say with all respect that this is a fairly unique thread on the board--it has not failed to fall off the first page of the threads for years now it seems.  WSJ article today-- "More Potash Coming to Crowded Market" has escaped comment but the smallest developments are posted and construed positively.  I know my comments will not be well received, but as I've said before, I don't see the Altius management brilliance.

[mikek]

Potash royalties will be fine, I don't think you will be seeing 50 million a year but I don't think many Altius investors have any issues with the potash deals. The fact remains that this looks like dead money unfortunately and has been for quite awhile. I'm not sure what they are going to do to really move the needle. Nsa might have been the smart one to get out of this position. I think investors that have been in this stock for quite awhile have pretty much given up much hope of this turning into some great investment. Personally, I don't see much downside but the fact remains that this stock has done nothing in the last decade and I don't really see much value being created. Sooner or later, management should be buying back shares if they truly believe they are very undervalued by the market. Actions speak louder than words and the actions haven't lined up.

 

The PG part of the business is nice but I'm not sure it's really going to be able to move the stock. Even if they get some big hits the equity goes up on their holdings is nice but it's going to have to take quite a find to really move the stock. Say they do find something, the actual royalty will have little value for quite awhile because mines take quite awhile to get built and the market isn't going to assign much value to the royalty component of the find.