ALS.TO - Altius Minerals

[linealdin]

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.

 

A link would be nice.

 

https://www.google.com/amp/s/www.wsj.com/amp/articles/more-potash-coming-to-an-already-crowded-fertilizer-market-1532869201

 

Eurochem is talking the talk but actually delivering the tonnes to the market costs a lot of money and expertise. From what I understand there have been delays and very little new supply is coming from Eurochem in 2018 or 2019.

 

“Some analysts said that target could be overambitious. ‘It’s not a slight towards EuroChem to be very skeptical of their ability to bring this capacity on the market on time,’ said Sanford C. Bernstein & Co.’s Mr. Oxgaard.”

[linealdin]

https://www.juniorminingnetwork.com/junior-miner-news/press-releases/2558-tsx-venture/sic/50227-sokoman-iron-announces-3-million-financing-led-by-eric-sprott.html

 

Billionaire Eric Sprott puts his stamp of approval on Moosehead Gold. Also involvement from Palisade Global, who is involved with Altius in New Found Gold Corp (Sail Pond).

 

C$3 million sets Sokoman up nicely to drill aggressively at the new discovery zone. I want to see 5000 meters in the Phase 2 program.

 

Eric Sprott has caught the scent of Sokoman as the next Garibaldi or Novo (the two junior market darlings of 2017 he sponsored).

 

Don’t underestimate Sprott as a promoter. Garibaldi ran from 15 cents to $5 in 5 months.

[linealdin]

https://www.google.com/amp/s/business.financialpost.com/commodities/mining/what-happens-when-kingmaker-eric-sprott-backs-your-penny-mining-stock/amp

 

Eric Sprott as junior resource kingmaker. He’s going to push Sokoman to $1 or $2 per share.

[linealdin]

Sure, no geniuses at Altius. But they’re smart enough not to pay C$479 million for a royalty that yields only C$10 million a year, and might only last 15 years. Horrific deal. Osisko won’t come close recouping its original investment.

 

Altius gets criticized for doing the coal deals but they are actually going to make a decent profit on them.  A smaller profit than expected because of governmental action, but a profit none the less.

 

 

[linealdin]

Tidbit from Redcloud Klondike securities on Adventus after the latest infill drill results were published:

 

“Infill results to date, have returned a weighted average grade of 14.3% ZnEq (5.95% CuEq), over an average width of 6.5m. This compares favourably to the current resource grade of 10.7% ZnEq (4.45% CuEq) and suggests to us that the next resource update should result in a larger resource and increased grades.”

 

34% higher copper equivalent grades in the new infill drilling.

 

*

 

Also Aethon has begun the 1000 meter drill program at Llanos. Should last 1 or 2 months. Ground exploration has begun at their Arcas projects.

[linealdin]

Altius staff were following the discount rate discussion. They say the key to their successful royalty purchases was buying at trough commodity prices. Whether they modelled their IRR at a 5% or 10% discount rate made little difference.

 

So the key question Altius was asking themselves when they bought the Liberty potash package: Is the current potash price a trough or a peak?

 

If US$240 per tonne for potash turns out to be a peak then Altius is in big trouble. I don’t think that is likely.

 

[petec]

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.

 

Given that a decade ago it (and commodities) were in a wild bubble that has well and truly popped I don't think share performance is necessarily a good measure of value created.

[StevieV]

Given that a decade ago it (and commodities) were in a wild bubble that has well and truly popped I don't think share performance is necessarily a good measure of value created.

 

I am hoping to post some longer thoughts in the next few days, but wanted to make some quick points this morning:

 

(1) I agree with the above.  For the most part, I don't care about the share price performance in the last decade.  Sometimes long stagnation in share price can be a good situation (coiled spring, valuation correct, etc.).

 

(2)  I think the valuation of precious metal royalty companies only has limited value.  It is interesting as a proxy for what Altius might be valued at by the market sometime.  However, there is certainly no guarantee that it will be valued similarly, and I would not use the precious metal valuations as my investment thesis.

 

As Petec alludes to, those valuations may be too high.  There is nothing to say that 20x EBITDA is the right valuation.  I certainly think that is too rich.

 

(3) I read the WSJ article last night.  Interesting, but only on data point.  Certainly didn't lead me to the conclusion that the bottom was going to fall out of potash pricing.

 

 

[linealdin]

Different commodities go in and out of favor, in cycles. Gold royalties are wildly overvalued right now. Potash royalties are wildly undervalued. That won’t be the case forever.

 

I remember Potash Corp as a market darling going from US$30 to US$143 as a hostile takeover target for BHP. Potash was the hottest commodity in the market.

 

Altius has loaded up on potash at what it believes to be a trough price. It is an ignored and despised commodity. Right now it’s hard to imagine the potash price doubling or tripling and Altius’s annual potash hitting C$50 million or more. But that’s how commodity cycles work.

[Cigarbutt]

I would say that Mr. Buffett has not amassed his fortune by obtaining 3% returns on "safe" investments.

 

My perspective on this is that he would conservatively evaluate long term after-tax cashflows and conservatively pay a discount to the appraised value which is conceptually the equivalent to adjusting the discount rate. Maybe his point is that it is quite easy to project optimistic outcomes and then artificially adjust the hurdle rate to rationalize the purchase. Something to do with margin of safety?

 

To invest in Altius (and other commodity-related securities), one has to come up with a conservative assessment of the cashflows over time. The long term nature of some cashflows is an attractive feature but does not constitute, in itself, an automatic conclusion.

 

I would add that, to do well in this space, your insights have to based to some degree on a trading mentality, which is possible but challenging and out of my reach for this specific security unless the discount becomes unusually wide.

 

Others may disagree and may do very well which is fine.

 

Linealdin,

I find that you have been unusually supportive of this investment but hope that you continue to contribute.

[linealdin]

Sokoman traders seem to like that Eric Sprott was allowed to buy shares at 15 cents with full warrants. They’ve pushed the stock up to 25 cents.

 

The full Eric Sprott pump won’t come until some successful holes are hit in the Phase 2 drill program. Then he’s going to start calling Moosehead the next Fosterville gold deposit (a producing high grade gold mine in Australia that the Sokoman crew says is similar in mineralization style). Fosterville is run by Kirkland Lake Gold, whose biggest shareholder is Eric Sprott, so he’s familiar.

 

Altius has a potential 10.61 million share position in SIC after the warrants are exercised. I think there’s going to be good cash out opportunities in the $1 to $2 range later this year.

[linealdin]

My perspective on this is that he would conservatively evaluate long term after-tax cashflows and conservatively pay a discount to the appraised value which is conceptually the equivalent to adjusting the discount rate. Maybe his point is that it is quite easy to project optimistic outcomes and then artificially adjust the hurdle rate to rationalize the purchase. Something to do with margin of safety?

 

 

The Buffett method would be aggressively assigning the riskfree discount rate to future cash flows, thus calculating an NPV, then conservatively paying a discount to that NPV.

 

But he only engages in this process if he is “certain” the business will be successful and that future cash flows will actually be realized.

 

I think it’s a sensible approach.

[petec]

 

The Buffett method would be aggressively assigning the riskfree discount rate to future cash flows.

 

 

Do you have a source for this? You've mentioned it several times but it's not something I've seen him say or write, I don't think. I remember him saying that the only sensible definition of the cost of equity that he'd ever seen was the return you'd get on your next best idea, but not that cash flows should be discounted at the risk free rate.

 

Personally, I tend to use a 10% discount rate, for no better reason than I'd be content to compound at 10%. I then factor certainty of cash flows into whether or not I want to purchase the asset at all (much as you suggest).

[linealdin]

http://www.globalminingobserver.com/letters-200

 

The new issue of the Global Mining Observer is out. A letter writer makes a seemingly informed case against the economics of in-situ copper mining (such as Excelsior):

 

“. . . the copper in-situ leaching development scenario is problematic.

    “The production rate is unpredictable and the economics are diluted with drilling intensity. If the ore isn't sufficiently porous, fragmented, or acid-soluble you can end up with highly variable production rates. From a recovery perspective, the oxide copper resource grade could be 0.4% to 0.65%, but the acid-soluble portion could be only 0.3% to 0.35%, which sterilizes part of the metal.

    “From an economics perspective, the upfront capital is low but the sustaining capital is very high, not dissimilar to shale gas, where you are sinking or connecting new wells constantly to maintain production.”

 

Altius in recent years has turned down cheap royalty options (0.5% royalty for C$3 million) twice and sold a significant portion of their Excelsior equity.

[linealdin]

 

The Buffett method would be aggressively assigning the riskfree discount rate to future cash flows.

 

 

Do you have a source for this? You've mentioned it several times but it's not something I've seen him say or write, I don't think. I remember him saying that the only sensible definition of the cost of equity that he'd ever seen was the return you'd get on your next best idea, but not that cash flows should be discounted at the risk free rate.

 

Personally, I tend to use a 10% discount rate, for no better reason than I'd be content to compound at 10%. I then factor certainty of cash flows into whether or not I want to purchase the asset at all (much as you suggest).

 

I linked to it earlier in the thread:

 

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

 

Buffett: In order to calculate intrinsic value, you take those cash flows that you expect to be generated and you discount them back to their present value – in our case, at the long-term Treasury rate. And that discount rate doesn’t pay you as high a rate as it needs to. But you can use the resulting present value figure that you get by discounting your cash flows back at the long-term Treasury rate as a common yardstick just to have a standard of measurement across all businesses.

 

Shareholder: Following up on that other question – if you don’t adjust for risk by using higher discount rates, how do you adjust for risk – or do you?

 

Buffett: Well, we adjust by simply trying to buy it at a big discount from the present value calculated using the risk-free interest rate. So if interest rates are 7% and we discount it back at 7% (which Charlie says I never do anyway — which is correct), then we’d require a substantial discount from that present value figure in order to warrant buying it.

 

[petec]

 

The Buffett method would be aggressively assigning the riskfree discount rate to future cash flows.

 

 

Do you have a source for this? You've mentioned it several times but it's not something I've seen him say or write, I don't think. I remember him saying that the only sensible definition of the cost of equity that he'd ever seen was the return you'd get on your next best idea, but not that cash flows should be discounted at the risk free rate.

 

Personally, I tend to use a 10% discount rate, for no better reason than I'd be content to compound at 10%. I then factor certainty of cash flows into whether or not I want to purchase the asset at all (much as you suggest).

 

I linked to it earlier in the thread:

 

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

 

Buffett: In order to calculate intrinsic value, you take those cash flows that you expect to be generated and you discount them back to their present value – in our case, at the long-term Treasury rate. And that discount rate doesn’t pay you as high a rate as it needs to. But you can use the resulting present value figure that you get by discounting your cash flows back at the long-term Treasury rate as a common yardstick just to have a standard of measurement across all businesses.

 

Shareholder: Following up on that other question – if you don’t adjust for risk by using higher discount rates, how do you adjust for risk – or do you?

 

Buffett: Well, we adjust by simply trying to buy it at a big discount from the present value calculated using the risk-free interest rate. So if interest rates are 7% and we discount it back at 7% (which Charlie says I never do anyway — which is correct), then we’d require a substantial discount from that present value figure in order to warrant buying it.

 

Thanks.

 

It's all semantics really. Saying you require a substantial discount from the NPV using the risk free rate is mathematically identical to saying you require a substantial spread over the risk free rate (but, IMHO, the latter is far more intuitive since it tells you what rate of compounding you stand to achieve).

[linealdin]

The Buffett dictum to only deal with things you are certain about is not a semantic difference. A hypo:

 

Two projects come to the market for a strategic investment.

 

A) IOC wants to finance an expansion to 30 MTA, which will cost $1 billion.

 

B) Alderon wants to finance Kami for construction, which will also cost $1 billion.

 

The standard financial analyst approach is to find that Kami will likely be riskier than IOC’s expansion. The analyst will then model the future cash flows for each project, assigning Kami a 12% discount rate and IOC a 7% discount rate. Each project will have an NPV, IOC’s will be substantially higher.

 

The analyst’s conclusion: invest in either or both projects as long as you’re paying less than the NPV for each.

 

*

 

Buffett’s approach: model the cash flows for each project, discount each by the long term treasury rate. Both projects will then have an NPV.

 

Now the real work begins! Now he thinks very, very hard about whether he has enough certainty that either project will actually work. He concludes he has no certainty about Kami (because of all the risk factors we know about) so he invests nothing in that project.

 

Now let’s say he decides he does have certainty that IOC’s expansion would be successful (because Rio Tinto is world-class operator, because they own the railway etc.) then he would make an offer to invest at a substantial discount to the NPV (at the long term treasury rate) he calculated earlier. How substantial a discount? As much as he can get during negotiations.

[linealdin]

The standard way discount rates are used tends to assign too much risk to very safe projects (like producing royalties at Tier 1 mines) and far too little risk to projects that are likely to blow up your whole investment (project finance for a marginal mine like Kami). Just my observation.

[linealdin]

Eric Sprott’s last 3 investments in the gold/mining space:

 

Garibaldi Resources: 1751% increase

Metallis Resources: 750% increase

Novo Resources: 360% increase

 

These increases happened in months, not years. Of all the resource juniors on the TSX Sokoman is his next pick. SIC’s market cap is still very small, and the attention brought by Eric Sprott will be intense. The stock is certainly going to run.

[linealdin]

Dead money? No good entry points? 10 years of stagnation?

 

Then I think: Prem Watsa and Fairfax gave Altius the C$100 million stamp of approval. Watsa looks for deep value and he is patient. If everyone is bored of Altius it’s probably time to buy a lot more.

 

The largest mining companies in the world aren’t gold/silver miners. They are copper, iron ore, coal,  nickel, zinc and potash miners. Some of those commodities are in favor, and some are out of favor, thus creating points of entry for royalty deals.

 

But those are the right commodities to be investing in if your ambition is to become a very large royalty company ($5 billion to $10 billion market cap). Growth itself is a key, a lesson Brian Dalton has gleaned from studying the early history of Franco-Nevada. Continually doing larger and larger deals with larger and larger counterparties.

[SharperDingaan]

The Buffett dictum to only deal with things you are certain about is not a semantic difference. A hypo:

 

Two projects come to the market for a strategic investment.

 

A) IOC wants to finance an expansion to 30 MTA, which will cost $1 billion.

 

B) Alderon wants to finance Kami for construction, which will also cost $1 billion.

 

The standard financial analyst approach is to find that Kami will likely be riskier than IOC’s expansion. The analyst will then model the future cash flows for each project, assigning Kami a 12% discount rate and IOC a 7% discount rate. Each project will have an NPV, IOC’s will be substantially higher.

 

The analyst’s conclusion: invest in either or both projects as long as you’re paying less than the NPV for each.

 

*

 

Buffett’s approach: model the cash flows for each project, discount each by the long term treasury rate. Both projects will then have an NPV.

 

Now the real work begins! Now he thinks very, very hard about whether he has enough certainty that either project will actually work. He concludes he has no certainty about Kami (because of all the risk factors we know about) so he invests nothing in that project.

 

Now let’s say he decides he does have certainty that IOC’s expansion would be successful (because Rio Tinto is world-class operator, because they own the railway etc.) then he would make an offer to invest at a substantial discount to the NPV (at the long term treasury rate) he calculated earlier. How substantial a discount? As much as he can get during negotiations.

 

What WEB is really doing is multiplying the NPV by the P(successful execution), and dividing by share-count.

If it's trading for less than the calculation, buy it - if not, reject it.

 

As at today, Kami may have a 15% chance of success. Price of the share > (NPV x 15%)/share-count, therefore walk-away.

Whereas IOC may have a 70% chance of success. Price of the share < (NPV x 70%)/share-count, therefore buy.

 

So when does Kami become worth buying?

When ALS can get the (P(successful execution) x NPV)/share-count to equal the current share price.

Just deliver on something that materially improves P(successful execution).

 

SD

 

 

 

 

 

 

 

[linealdin]

SD, that’s an elegant formulation. Very pleasing.

 

Buffett claims to only invest in things that he’s certain about. So his estimate of P would have to be 99% for him to consider buying in. Otherwise pass, even it’s a very good (but not great) opportunity.

 

My own subjective view is that IOC would have a 99% chance of delivering a successful expansion project, if that’s what they chose to do.

 

Bloom Lake Phase 2 has an 90% chance of being successfully delivered.

 

Kami with a 5% chance of being built this cycle.

[wachtwoord]

linealdin you are way too cerain about things if you are able to only invest in things you are certain about. That would leave you with zero investable securities. I can assure you that is not how Buffet invests.

[SharperDingaan]

You can apply the same approach to all the royalties/deals that ALS is involved in.

To get to the value of any ONE deal in the ALS portfolio, it's just PV x P(execution) x (% of the total portfolio); it yields surprising results.

 

In terms of delivery, it really means that the ALS results are largely based on three things;

1) Time to the boom in XYZ commodity - the sooner the better

2) Ability of the mine operator to put the expansion, or new mine into production - the more experience they have the better

3) Ability to convert royalty cashflow into sustainable dividend - the higher the better

 

Hence ALS shares are very seldom going to reflect the value of its 'pipeline';

they are going to reflect the size, growth, and sustainability of its dividend. (Div x (1+g))/r  where D is todays dividend, g is the dividend growth rate, and r is the cap rate (the more sustainable the dividend the lower).

 

Sadly, today's global rise in interest rates, is raising r, and will offset the benefit of a rising dividend for quite some time.

Hence not a particularly great investment, despite good management.

 

SD

 

 

 

 

[Cigarbutt]

The Buffett method would be aggressively assigning the riskfree discount rate to future cash flows, thus calculating an NPV, then conservatively paying a discount to that NPV.

 

But he only engages in this process if he is “certain” the business will be successful and that future cash flows will actually be realized.

 

I think it’s a sensible approach.

 

Sorry to insist but "certainty" is associated with a high burden of proof.

 

Agree that a high level of confidence may allow you to take a profitable contrarian stance.

Maybe helpful to assess Altius from an opportunity cost point of view?

Are you considering other potential alternatives?

 

A quote from Mr. Buffett that perhaps underline how hard it may be to achieve certainty:

"You don’t get paid for what’s already happened. You only get paid for what’s going to happen in the future. The past is only useful to you in the extent to which it gives you insights into the future, and sometimes the past doesn’t give you any insights into the future."

 

BTW, you can just ignore the comments as I don't seem to have the right skillset in today's markets and tend to be productive in more stressful and uncertain times.

Here's a short link by Seth Klarman who discusses the value of not being sure. :)

https://1icz9g2sdfe31jz0lglwdu48-wpengine.netdna-ssl.com/wp-content/uploads/2012/01/Value-of-Not-Being-Sure-Seth-Klarman.pdf