ALS.TO - Altius Minerals

[petec]

Sorry if this is a really dumb question but how do the different volume measures relate (ie million lbs, presumably of finished product, and mtpa, presumably of ore)?

[linealdin]

Sorry if this is a really dumb question but how do the different volume measures relate (ie million lbs, presumably of finished product, and mtpa, presumably of ore)?

 

23 MTA is processed ore. Yamana mines more than that and sets in aside in a huge stockpile which is growing. Another reason they need to expand. The ore is only 0.31% copper, and they recover about 86% of that in a really good quarter. Chapada’s one of the modern mines working magic on ultra low grade ore.

 

Chapada is running at 23 MTA, and the conservative guidance is 120 million pounds of copper per year. They actually produced 127 million pounds last year, and are on pace to produce 134 million pounds this year. (In 2019 more stuff will be commisioned to improve copper recoveries by 2%).

 

After expansion to 32 MTA, the conservative guidance is for 160 million pounds of copper. In reality I expect 175 to 185 million pounds per annum.

 

I plugged in some rough numbers for the expansion scenario. Chapada’s NPV is C$154 million at a 5% discount rate over 25 years.

[linealdin]

So NPV’s for LIF plus Chapada plus potash package at C$305 million = C$537 million

 

I accept your calculation for 777 mine: C$38.4 million

 

I accept your calculation for electrical coal: C$51.2 million

 

Cheviot met coal is an up or down decision for Teck. It’s either worth C$23 million with expansion (5% discount rate) or C$6.56 million (3% discount rate because it’s only the next 2.5 years).

 

Coal bed methane NPV of C$6 million (5% discount rate over 10 years)

 

Zero for Voisey’s Bay (conservative)

 

Grand total (up decision on Cheviot): C$655.6 million

[linealdin]

Upside factors:

 

Voisey’s Bay litigation settled favorably: C$40 million NPV (payback of arrears plus an additional 18 years of production at a 5% discount rate).

 

It becoming obvious to the market (not just to me) that the potash package is worth C$500 million NPV at a 5% discount rate. Potash prices rising to US$500 a tonne will convince everyone of that.

 

Continued mine life expansion at Chapada. Currently 27 years of reserves, plus 10 years of M&I resources. Resource growth far outpaced depletion from mining in 2017. I expect that trend to continue in the next few years. I expect Chapada to be mined for another 50 years. So many ore bodies on that land package.

[linealdin]

Mine life extensions are the juice.

 

Chapada began operations in October 2006 with a 19 year mine life, taking it to 2025. At the beginning of 2018 there is now 27 years of reserves remaining, taking the mine through 2044. Yamana has added a remarkable 19 years to the original mine life. I believe they will add another 20 years by upgrading the existing M&I and inferred resources and delineating new ore bodies.

 

777 didn’t do quite as well. It began in 2004 with a 10 year mine life. Now the projected mine life ends in 2021. Hudbay added 7 years after operations began.

 

On a different topic: the 777 discovery hole encountered mineralization at a depth of 1,000 meters. Not sure Wolfden has the money or expertise to drill that deep. Leave it to the majors.

 

 

[linealdin]

The potash companies have so many years of reserves that they won’t waste the money at this point drilling out the M&I resources to convert them to proven & probable reserves. They can do that infill drilling 50 years from now.

 

Same strategy at Chapada. Yamana isn’t interested in spending the cash infill drilling the M&I resources right now because the reserves are long enough. Now the exploration focus is finding completely new ore bodies to add to inferred resources.

 

Yamana could easily extend the 27 years of reserves to 35 years of reserves with 100k meters of infill drilling. They are choosing to put it off.

 

Same deal at IOC. IOC has beautiful discoveries on Altius royalty land (Goethite Bay with 280 meters at 30% Fe) that they won’t bother drilling out to reserve status for another decade or two. They have more reserves than they need.

[petec]

So NPV’s for LIF plus Chapada plus potash package at C$305 million = C$537 million

 

I accept your calculation for 777 mine: C$38.4 million

 

I accept your calculation for electrical coal: C$51.2 million

 

Cheviot met coal is an up or down decision for Teck. It’s either worth C$23 million with expansion (5% discount rate) or C$6.56 million (3% discount rate because it’s only the next 2.5 years).

 

Coal bed methane NPV of C$6 million (5% discount rate over 10 years)

 

Zero for Voisey’s Bay (conservative)

 

Grand total (up decision on Cheviot): C$655.6 million

 

Thanks. I'm going to work through this and your other comments and rework my NPV. Immediate thoughts are that:

- you need to subtract net liabilities (cash+junior equities-debt-Fairfax pref)

- you need to subtract the NPV of holdco costs. I use a 10% discount rate for that but if you're discounting assets at 5% maybe you should discount the outflows at that rate too? Implies -$140m

 

All broadly strengthens my conclusion that to compound rapidly from here (e.g. 15%) you need potash prices to rise or exploration to work. Otherwise you're going to compound at the low rate you've used to discount the cash flows.

 

BTW mine life extensions obviously do add value but what really juices NPV is reserve additions combined with mine expansions. Speed matters when it comes to NPV!

 

 

[linealdin]

I think the NPV game is a little silly. Nutrien knows it could add 100 years to Rocanville reserves if it were willing to spend the money this year. Drill a 1 million meters of infill. Increase the NPV significantly. Altius knows that. I know that.

 

What’s the point of having ginning up as high an NPV as possible for Rocanville? Nutrien isn’t selling Rocanville. Altius certainly (yes, 100% certainty) isn’t selling the Rocanville royalty.

 

Same logic applies to IOC and Yamana. They don’t need to show the market a high NPV for their flagship assets. They aren’t selling.

 

*

 

Expansion of production capacity? Sure, that’s been happening. Rocanville is expanding from 2 MTA to new nameplate capacity of 6.5 MTA. Currently at 5.5 MTA.

 

All the other potash mines have excess nameplate capacity ready to be used as potash demand grows.

 

Chapada has expansion plans which will greatly benefit Altius on its 1.5% stream tail.

 

IOC executed 3 staged expansions in the last cycle. From 14 MTA to 22 MTA current nameplate. I’m certain (80% certainty) they will expand further this cycle. I predict they will announce scoping study plans in 2019.

[linealdin]

BTW, What’s this alternative use for my capital you keep mentioning? Extremely low risk but will compound at 15%?

 

I do not expect Altius to compound at 15%. But I’m also comfortable keeping my family’s life savings in the stock. No downside.

[petec]

I think the NPV game is a little silly. Nutrien knows it could add 100 years to Rocanville reserves if it were willing to spend the money this year. Drill a 1 million meters of infill. Increase the NPV significantly. Altius knows that. I know that.

 

And so do I, but we valued the potash assets as a perpetuity if you remember, so we have already included an infinite mine life in the NPV. The only ways to increase the NPV are to use a lower discount rate or to assume slow production growth over time, which in fairness we should probably do. (Obviously a price rise would also increase the NPV but we don't control that.)

 

We did not value IOC and Yamana as perpetuities, so yes I'll check the NPV of those with longer mine lives.

 

Expansions - yes I'm aware of them and they're good.

 

As for 15% investments - who knows whether I will be right but I have a portfolio that in aggregate, I believe, is priced to compound at 15% with relatively little risk. Some of it is great companies with long growth runways at reasonable prices; some of it is junkier stuff (as in lower ROIC, not higher risk necessarily) which trades on FCF yields of 10-20% with good capital allocators.

 

I do see why you don't think there's downside here on a long term view (obviously anything can happen short term).

[linealdin]

The trickiest issue in the Altius portfolio: how to value the pre-production and exploration royalties?

 

Gunnison

Kami

Cuale

Stellar

Moosehead

Mt. Pickett

Buchans

Sail Pond

Rathkeale

Silicon

Jupiter

Alvito

Vidalita

And about 50 others currently not being drilled or developed.

 

Zero seems too conservative.

[Cigarbutt]

BTW, What’s this alternative use for my capital you keep mentioning? Extremely low risk but will compound at 15%?

 

I do not expect Altius to compound at 15%. But I’m also comfortable keeping my family’s life savings in the stock. No downside.

 

BTW, I find the conversation you have with petec to be useful.

Let's continue the challenge given your return expectations and long term outlook for Altius.

 

In terms of potential alternative uses and opportunity cost, what about simply indexing the S&P 500 for the next 75 to 100 years.

https://www.cnbc.com/2018/05/07/warren-buffett-10000-invested-in-an-index-fund-when-i-bought-my-first-stock-in-1942-would-be-worth-51-million-today.html

 

I would say that passively holding the S&P 500 over the long term will probably result in more "predictable" returns (based on relative certainty :) of underlying cashflows) even if one considers present levels to be richly valued. No?

 

At present levels, do you think Altius is "safer" and offer better very long term relative returns compared to the S&P 500?

 

I agree that potential excess return for Altius may come from optionality but that is very difficult to value (at least for me).

 

[petec]

The trickiest issue in the Altius portfolio: how to value the pre-production and exploration royalties?

 

Zero seems too conservative.

 

Yes it does. Personally I would not put a number on it, but the presence of those options means I'd demand less of a margin of safety vs my NAV.

 

I am coming round to using a lower discount rate on the potash royalties, given that it seems fair to assume production should grow at say 2% over the very long run (demand is growing at 4% and you could argue these mines, being the low cost, will capture more than their fair share, but I'm being conservative).

 

If we assume potash prices rise with inflation (might be a big aggressive given productivity gains) and I want a 5% real return (well ahead of long dated tips currently giving 1%) then my discount rate is k-g or 5-2= the dreaded 3%.

 

It's extraordinary to think what an engine these royalties could be, generating cash at the heart of Altius for the rest of my life and several lifetimes beyond. If only they traded separately!

[petec]

 

In terms of potential alternative uses and opportunity cost, what about simply indexing the S&P 500 for the next 75 to 100 years.

https://www.cnbc.com/2018/05/07/warren-buffett-10000-invested-in-an-index-fund-when-i-bought-my-first-stock-in-1942-would-be-worth-51-million-today.html

 

I would say that passively holding the S&P 500 over the long term will probably result in more "predictable" returns (based on relative certainty :) of underlying cashflows) even if one considers present levels to be richly valued. No?

 

At present levels, do you think Altius is "safer" and offer better very long term relative returns compared to the S&P 500?

 

 

The primary danger is that it's more concentrated (concentrated on one not many assets, one not many management teams). For that reason if I had to choose one of them for the rest of my life it'd be the S&P.

 

But leaving that aside, I do think the potash royalties at least might bear comparison to the S&P. Low cost, long life producers of something that humanity needs in order to eat. Likely roughly inflation linked (like the S&P) and likely growing production at low-mid single digits (like the S&P). So if you buy it at a similar free cash flow yield it might well be a comparable asset.

 

And then you have two nice options: you're probably nearer the bottom of the cycle than the top (unlike the S&P which is on peak multiples of peak margins) and you've got the exploration portfolio.

[linealdin]

Many seem to prefer Altius to be more passive, just passing through royalties as dividends to investors. I think Altius will eventually be a longterm dividend compounder, like Fairfax, but I want them to allocate capital on my behalf. I trust them to make smart decisions.

 

I love every one of their recent investment decisions.

 

Commodity choice and timing have been perfect. They started buying LIF at $13.50, before the quality premiums widened. They bought the McChip and Liberty potash royalties with potash near trough prices.

 

These aren’t fashionable plays, and the strength of the deals doesn’t get recognized immediately (Liberty potash deal was mostly ignored and the LIF purchase was derided as a “leveraged bet”). Altius’s competitors are making cobalt deals at a peak in the cobalt market. Investing in the hottest commodities gets the front page headlines.

 

Out of fashion = cheap.

[linealdin]

S&P 500 index funds are fine (my wife has money in them), but past is not prologue. I don’t know if the next 50 years matches the last 50 years. Can I really understand the future prospects for 500 companies?

 

I know in intimate detail how Altius works. I have a very good idea how the next 5 years plays out (bull market mania, discoveries monetized, debt paid off, copper at $5, potash at $500, utilities drag their feet when it comes to coal plant conversions to gas). I understand the potential downside. I can have a large, concentrated position but still sleep at night.

[linealdin]

Hudbay Q2 conference call tentatively posited 2021 as the closure date for 777 mine, but their team is studying extending mine life by mining some of the “remnants.” A positive tone. I think it’s likely they squeeze out another year or two beyond 2021.

 

Should still be in the middle of a bull market for copper and zinc at that point. Would be significant bonus income for Altius.

 

Only mined 213,134 tonnes at 777 in Q2. 3,876,000 tonnes of reserves on January 1st, 2018.

 

At that sloooow pace there’s 18 quarters of production from January 2018 taking 777 to mid-year 2022, just based on reserves.

 

Another 3.5 quarters based upon indicated resources. Taking 777 to Q2 2023.

 

Another 3 quarters based upon inferred resources. Taking 777 to to Q1 2024.

 

(The slooow pace of production in Q2 still gave Altius C$3.2 million in royalties. Slow is fine.)

 

 

 

[petec]

I have a very good idea how the next 5 years plays out (bull market mania, discoveries monetized, debt paid off, copper at $5, potash at $500.

 

This is the only thing I disagree with. It's certainly possible, but to have confidence that this will happen in a short timeframe is going too far for me.

[petec]

Sorry if this is a really dumb question but how do the different volume measures relate (ie million lbs, presumably of finished product, and mtpa, presumably of ore)?

 

23 MTA is processed ore. Yamana mines more than that and sets in aside in a huge stockpile which is growing. Another reason they need to expand. The ore is only 0.31% copper, and they recover about 86% of that in a really good quarter. Chapada’s one of the modern mines working magic on ultra low grade ore.

 

Chapada is running at 23 MTA, and the conservative guidance is 120 million pounds of copper per year. They actually produced 127 million pounds last year, and are on pace to produce 134 million pounds this year. (In 2019 more stuff will be commisioned to improve copper recoveries by 2%).

 

After expansion to 32 MTA, the conservative guidance is for 160 million pounds of copper. In reality I expect 175 to 185 million pounds per annum.

 

I plugged in some rough numbers for the expansion scenario. Chapada’s NPV is C$154 million at a 5% discount rate over 25 years.

 

So I've got a mistake in my Chapada maths and I don't know what it is.

 

23mtpa of ore.

0.31% grade = 0.0713mtpa of copper

85% recovery = 0.0606mtpa of recovered copper

2200 conversion factor to lbs = 133m lbs of recovered copper - sounds about right

3.7% Altius share = 4.9m lbs/year

market price = 2.7/lb of which Altius keeps 70% because they pay 30% of the market price

= $9.3m to Altius.

 

That's half the 2q annualised run rate. Even if I am a little off on price etc, it's not half. What have I got wrong?

 

[linealdin]

USD to CAD conversion. I started with C$12.9 million annual net royalties to Altius. Then factored in temporary ramp-up effect, expansion rate reduction, production increase for 1.5% tail. Ended at 25 years, 5% discount rate.

 

Altius reports topline revenue, before 30% cost of sales. Standard accounting practice, like all the royalty companies. Most of the streamers have deceptively high revenue, must deduct cost of sales.

[petec]

USD to CAD conversion.

 

D'oh. Thanks.

 

Altius reports topline revenue, before 30% cost of sales.

 

Yes I figured that out after I wrote the post. Forgot the fx conversion though. Thanks.

[linealdin]

I have a very good idea how the next 5 years plays out (bull market mania, discoveries monetized, debt paid off, copper at $5, potash at $500.

 

This is the only thing I disagree with. It's certainly possible, but to have confidence that this will happen in a short timeframe is going too far for me.

 

That’s the upside scenario. There’s also a downside scenario: replay of 2013 to 2016. I believe Chapada, potash, electrical and LIF are robust enough to not shut down and muddle through. Altius puts in another C$150 million royalty purchase in a downside scenario. Junior equity portfolio devastated.

[petec]

I have a very good idea how the next 5 years plays out (bull market mania, discoveries monetized, debt paid off, copper at $5, potash at $500.

 

This is the only thing I disagree with. It's certainly possible, but to have confidence that this will happen in a short timeframe is going too far for me.

 

That’s the upside scenario. There’s also a downside scenario: replay of 2013 to 2016. I believe Chapada, potash, electrical and LIF are robust enough to not shut down and muddle through. Altius puts in another C$150 million royalty purchase in a downside scenario. Junior equity portfolio devastated.

 

Yes, that's a fair way to think about it.

 

I have 126m for Chapada - 50y mine life per your recommendation but I am discounting at a higher rate than you.

 

Does Altius publish the cumulative amount produced by Chapada towards the 75m threshold? I haven't seen that.

[linealdin]

I have a very good idea how the next 5 years plays out (bull market mania, discoveries monetized, debt paid off, copper at $5, potash at $500.

 

This is the only thing I disagree with. It's certainly possible, but to have confidence that this will happen in a short timeframe is going too far for me.

 

That’s the upside scenario. There’s also a downside scenario: replay of 2013 to 2016. I believe Chapada, potash, electrical and LIF are robust enough to not shut down and muddle through. Altius puts in another C$150 million royalty purchase in a downside scenario. Junior equity portfolio devastated.

 

Yes, that's a fair way to think about it.

 

I have 126m for Chapada - 50y mine life per your recommendation but I am discounting at a higher rate than you.

 

Does Altius publish the cumulative amount produced by Chapada towards the 75m threshold? I haven't seen that.

 

Can add up amounts from the MD&A’s. 7.39 million pounds from Chapada delivered through Q1 2018. Roughly 8.4 million pounds through Q2 2018.

 

At the recent improved production rates (running processing plant at max capacity + better recovery circuits) I expect 5 million pounds delivered annually.

 

Under Yamana’s staged expansion plan the earliest the Altius royalty rate could be reduced to 2.65% is H2 2023 (commisioning plant at beginning of 2023 then a 5 month run-rate proving test).

 

I’m rooting for a delayed expansion (as these construction projects usually are). I want as much of the 75 million pound allotment delivered under the 3.7% rate as possible.

 

Altius only really benefits from expansion after its 1.5% tail rate kicks in. 1.5% of 175 million pounds is better than 1.5% of 134 million pounds.

 

Expansion to 32 MTA opens the possibility of further expansions if they continue finding lots of new near-mine resources. Chapada is Yamana’s best mine by far and they will try to maximize the benefit.

[linealdin]

http://newfoundgold.ca

 

Nice new website for New Found Gold. Altius will own 14% of the company once the IPO completes in Q4 2018. Other strategic investors: Palisade Global, ThreeD Capital and McEwan Mining.

 

ThreeD Capital, which will own 20% of NFG, currently has its New Found Gold holdings listed as worth C$5.4 million. If that value holds through the IPO Altius’s 14% position will be worth C$3.8 million.

 

C$1 million of that Altius pays for as an investment, C$2.8 million in shares is payment for Sail Pond.

 

Website has an excellent project page for Sail Pond. Exciting project. Lots of silver and copper.