ALS.TO - Altius Minerals

[linealdin]

Sokoman closes at 31 cents. Spectacular run from 3.5 cents. Altius position, with executed warrants, is worth C$3.3 million. I think SIC is going to $2. The market is hungry for an exciting gold discovery.

[linealdin]

https://midasletter.com/2018/08/sokoman-iron-corp-strikes-gold-rises-760-in-8-trading-sessions/

 

Sokoman finishes the week at 42 cents. Incredible. A preview of the bull market mania to come.

 

A Midas Letter interview with Sokoman’s CEO linked above. The Phase 2 program has been increased to at least 10,000 meters with 2 drill rigs, scheduled to begin before October (was originally just 2000 meters).

 

Will have C$5 million in the bank after the Eric Sprott private placement and miscellaneous warrant exercises.

[linealdin]

http://www.avrupaminerals.com/news/index.php?content_id=288

 

Alvito update from Avrupa Minerals. 2437.5 meters drilled in 18 holes. IOCG style mineralization has been found in two to four of the target areas. Assay results due in the second half of August.

 

 

[petec]

I dipped my toe today. For anyone interested:

- I discounted potash royalties at 4% into perpetuity (using q2 payments)

- I discounted Chapada at 6% for 50 years (having modelled volumes and assumed $2.7/lb flat)

- I applied a multiple of 3x to 777 and 4x to thermal coal

- I valued IOC and the other major equity holdings (i.e. the ones where they give the # of shares on the website) at market

- I applied zero value for the smaller equity holdings and the exploration royalties

- I included the debt and Fairfax prefs at face value

- I discounted holdco costs at 10%

 

This gets me to a p/nav of 1x. I'm happy there given optionality around commodity prices moving up, exploration success, and sensible deployment of future capital.

 

The discount rates were based off the idea that I want a 6% real return on a very safe long run cash flow stream. Assuming that prices will rise with inflation long term I can ignore inflation, hence the 6% discount rate for Chapada. Potash got 4% to allow for 2% volume growth, which ought to be reliable given world demand is growing faster than that and these are low cost assets with a weighted average inferred resource of >500 years.

 

I accept that will look aggressive to some but these are very assured cash flows with zero maintenance capital requirement, volatile in the short term but fairly predictable on a retirement-type timeframe (which is what I am thinking about - this goes into a "forget for 30 years" bucket for me).

 

I discounted holdco costs at 10% because I always do. Maybe I should have used a lower rate here to be consistent with the assets (which would being down my NAV as this is a liability) but the cash flows would keep coming even if they decided to retire and stop all operating costs tomorrow, which is a fairly unique attribute.

[Cigarbutt]

I dipped my toe today. For anyone interested:

- I discounted potash royalties at 4% into perpetuity (using q2 payments)

- I discounted Chapada at 6% for 50 years (having modelled volumes and assumed $2.7/lb flat)

- I applied a multiple of 3x to 777 and 4x to thermal coal

- I valued IOC and the other major equity holdings (i.e. the ones where they give the # of shares on the website) at market

- I applied zero value for the smaller equity holdings and the exploration royalties

- I included the debt and Fairfax prefs at face value

- I discounted holdco costs at 10%

 

This gets me to a p/nav of 1x. I'm happy there given optionality around commodity prices moving up, exploration success, and sensible deployment of future capital.

 

Helpful post as it really gets to the heart of the matter.

 

Interestingly, the royalty model mutes the optionality and this puts it in "no man's land" in the investment landscape now, although that may change. Even if relatively muted, volatility may induce large changes in the optionality value, but in two directions.

 

I continue to struggle in building a sufficient margin of safety because, somehow, the economic and commodity cycles have to be integrated into the range of outcomes. With cyclical stuff, timing can make a huge difference. Some suggest that the likelihood of a mistake in cyclical industries is either to ignore the cycle or to think that you can precisely forecast it.

 

In terms of the inflation, a look at long term graphs is sobering as commodity price indices can significantly deviate from inflation rates for significant periods. There have been long periods when commodities lagged. Reconstruction after WWII and the China boom helped restore long term trends and one has to assume that there will be more of those defining trends. Optimist but progress is not linear.

 

[petec]

I dipped my toe today. For anyone interested:

- I discounted potash royalties at 4% into perpetuity (using q2 payments)

- I discounted Chapada at 6% for 50 years (having modelled volumes and assumed $2.7/lb flat)

- I applied a multiple of 3x to 777 and 4x to thermal coal

- I valued IOC and the other major equity holdings (i.e. the ones where they give the # of shares on the website) at market

- I applied zero value for the smaller equity holdings and the exploration royalties

- I included the debt and Fairfax prefs at face value

- I discounted holdco costs at 10%

 

This gets me to a p/nav of 1x. I'm happy there given optionality around commodity prices moving up, exploration success, and sensible deployment of future capital.

 

Helpful post as it really gets to the heart of the matter.

 

Interestingly, the royalty model mutes the optionality and this puts it in "no man's land" in the investment landscape now, although that may change. Even if relatively muted, volatility may induce large changes in the optionality value, but in two directions.

 

I continue to struggle in building a sufficient margin of safety because, somehow, the economic and commodity cycles have to be integrated into the range of outcomes. With cyclical stuff, timing can make a huge difference. Some suggest that the likelihood of a mistake in cyclical industries is either to ignore the cycle or to think that you can precisely forecast it.

 

In terms of the inflation, a look at long term graphs is sobering as commodity price indices can significantly deviate from inflation rates for significant periods. There have been long periods when commodities lagged. Reconstruction after WWII and the China boom helped restore long term trends and one has to assume that there will be more of those defining trends. Optimist but progress is not linear.

 

Royalties do mute the optionality but there is still plenty there.

 

I integrate economic and commodity cycles via position sizing: I will add a lot more if everything craps out.

 

I totally agree that commodity cycles can swamp inflation over fairly long periods, but:

a) I'm thinking very long term not fairly long term because of the nature of the two main royalties.

b) I'm also looking for something that protects me in a "loss of faith in the currency" kind of inflation, a la the 1970s. Most of my portfolio will derate if that happens. I could do that by owning gold but I prefer this because management can make smart decisions.

 

But I agree there is not a huge margin of safety. Hence the toehold!

[StevieV]

I dipped my toe today. For anyone interested:

- I discounted potash royalties at 4% into perpetuity (using q2 payments)

- I discounted Chapada at 6% for 50 years (having modelled volumes and assumed $2.7/lb flat)

- I applied a multiple of 3x to 777 and 4x to thermal coal

- I valued IOC and the other major equity holdings (i.e. the ones where they give the # of shares on the website) at market

- I applied zero value for the smaller equity holdings and the exploration royalties

- I included the debt and Fairfax prefs at face value

- I discounted holdco costs at 10%

 

This gets me to a p/nav of 1x. I'm happy there given optionality around commodity prices moving up, exploration success, and sensible deployment of future capital.

 

The discount rates were based off the idea that I want a 6% real return on a very safe long run cash flow stream. Assuming that prices will rise with inflation long term I can ignore inflation, hence the 6% discount rate for Chapada. Potash got 4% to allow for 2% volume growth, which ought to be reliable given world demand is growing faster than that and these are low cost assets with a weighted average inferred resource of >500 years.

 

I accept that will look aggressive to some but these are very assured cash flows with zero maintenance capital requirement, volatile in the short term but fairly predictable on a retirement-type timeframe (which is what I am thinking about - this goes into a "forget for 30 years" bucket for me).

 

I discounted holdco costs at 10% because I always do. Maybe I should have used a lower rate here to be consistent with the assets (which would being down my NAV as this is a liability) but the cash flows would keep coming even if they decided to retire and stop all operating costs tomorrow, which is a fairly unique attribute.

 

Thanks for the helpful rundown.  Plus, it had been several days without an Altius post (before linealdin's earlier today), and I was starting to get withdrawal.  Feeling better now.

 

I have a small position.  Assuming no material changes to the company, something like $8 USD would make me consider a more significant add.  Not sure that is in the cards.

 

Regarding optionality, if I recall correctly, earlier in the thread linealdin said he had a high confidence Kami would be built this cycle.  Then, later, I thought he backed off quite a bit.  I would not assign any current value.

[mugwump]

labrador iron ore royalty 2nd qtr results

http://www.labradorironore.com/News-Releases/Press-Release-Details/2018/Labrador-Iron-Ore-Royalty-Corporation-Announces-Results-for-the-Second-Quarter-Ended-June-30-2018/default.aspx

[linealdin]

From the MD&A:

 

Lithium Royalty Corp.

 

During the quarter ended June 30, 2018 the Corporation invested $7 million into and alongside Lithium Royalty Corporation (“LRC”). LRC is a private company established to pursue lithium related royalty opportunities of which Altius owns approximately 12% and holds one board seat. As a founding investor and as consideration for providing ongoing technical support, the Corporation received the right to participate directly in royalty acquisitions on a 10% basis.

 

LRC is an affiliate of Waratah Capital, and was formed to pursue investment opportunities in the battery materials sector, with a focus on lithium.

 

[linealdin]

LRC is an affiliate of Waratah, which has about $1.4 billion under management. Lithium project finance is very active right now. Many mines are being built. This deal allows Altius to participate, on a minority basis, in syndicated royalty/stream deals in the very short term.

 

Altius puts in $5 million, LRC puts in $45 million. That’s around the deal size I expect.

 

I expect initial royalty deals will be announced in the next 3 to 6 months. Hot market.

[petec]

Hot market.

 

Yes, hardly a contrarian call. But interesting.

[mugwump]

altius qtr

more revenue

https://ceo.ca/@businesswire/altius-reports-q2-2018-revenue-of-165m-and-adjusted

[Williams406]

LRC is an affiliate of Waratah, which has about $1.4 billion under management. Lithium project finance is very active right now. Many mines are being built. This deal allows Altius to participate, on a minority basis, in syndicated royalty/stream deals in the very short term.

 

Altius puts in $5 million, LRC puts in $45 million. That’s around the deal size I expect.

 

I expect initial royalty deals will be announced in the next 3 to 6 months. Hot market.

 

Waratah was trying to shake things up at LIORC a few years ago:

https://www.newswire.ca/news-releases/waratah-advisors-requests-labrador-iron-ore-royalty-corporation-put-separation-of-the-ioc-royalty-and-the-ioc-equity-before-shareholders-at-may-29-2013-annual-meeting-512203221.html

[linealdin]

Hot market.

 

Yes, hardly a contrarian call. But interesting.

 

Yes, project finance is a weird space for contrarian investment. Any project that actually raises the money necessary for construction is likely to be favored by the general market. Lithium is highly favored right now.

[petec]

Uralkali say that water inflows to their 1.1mt Solikamsk-2 mine have risen 8-fold this year. This creates 2 problems: the inflows are within 10% of the maximum rate Uralkali can pump at, and there's nowhere to pump that amount of water. They've applied for an emergency permit to discharge into the Kama Reservoir but "the possibilities of reducing water inflow have been exhausted". It sounds like the only hope is that the inflows slow. I don't know why they've increased or why they might slow.

 

The water is fresh so it risks dissolving the support pillars and creating sinkholes. Solikamsk-1 (1mt) is right next to S-2 so the worst case is S-2 floods this year and takes S-1 with it. Only Nutrien and Mosaic (owners of the Altius royalty lands) have spare capacity so this could give them an opportunity to increase volume into a tighter market.

[mugwump]

recapping the royalty cos reporting today

qtr data only

 

franco stock price $72

net income/share  29 cents

 

royal gold stock price $83

net income/share  41 cents

 

altius stock price  $10

net income/share  12 cents

 

it's readily obvious that altius is the best value of the

three reporting royalty cos this qtr

[linealdin]

Conference call for Q2 is worth a listen.

 

An initial royalty deal for Lithium Royalty Corp has been signed, with a second deal in advanced discussions.

 

Generally a target rich environment for royalty/equity deals. Juniors just can’t find support from the equity markets. Altius expects several smaller royalty deals to be closed in the second half of 2018. Market turmoil helps Altius.

 

Many deal sheets flying around for Blue Sky Renewable Energy Royalties.

 

News for the Adia Resources diamond spinout will come in the next few weeks.

 

A couple of mentions of the Labrador Trough being a source of low alumina iron ore. Alumina content is becoming a big issue.

 

First Quantum seems to have continued with the West Cork copper project (implied by Dalton’s remarks).

 

[linealdin]

https://finance.nine.com.au/2018/08/09/20/39/rio-mulls-float-of-canada-iron-ore-holding

 

Rio Tinto considers a public listing on the TSX of its 59% equity position in IOC.

 

Rio Tinto was previously unable to sell its stake in IOC for US$3.5 billion to UD$4 billion. An IPO would be a kind of a sale to the general market.

 

The market cap of the spinout of the 59% stake would indicate the market value of LIF’s 15% equity position (undervalued).

[linealdin]

The contrarian aspect of making project finance deals with juniors right now: Look at the TSX-Venture Index. We are in a trough, not that far from the bottom of early 2016. Venture juniors are beaten up and discouraged. Altius should be making deals on very good terms.

 

TSX Venture Index at 700 currently, up from the low of 489 in January 2016, but still far from the high of 2370 in 2011.

 

 

[linealdin]

https://finance.nine.com.au/2018/08/09/20/39/rio-mulls-float-of-canada-iron-ore-holding

 

Rio Tinto considers a public listing on the TSX of its 59% equity position in IOC.

 

Rio Tinto was previously unable to sell its stake in IOC for US$3.5 billion to UD$4 billion. An IPO would be a kind of a sale to the general market.

 

The market cap of the spinout of the 59% stake would indicate the market value of LIF’s 15% equity position (undervalued).

 

LIF should probably add its 15% equity stake to the potential public listing. The market currently disregards the value of that equity stake. LIF’s market cap is more than justified by its royalty revenue and its dividend payouts alone.

 

I think that 15% equity could be assigned a value approaching C$1 billion in a successful public listing. LIF’s current market cap is C$1.5 billion. Would create a lot of value.

 

Waratah Capital’s old proposal to divide the equity stake from the 7% royalty was very wise.

[linealdin]

I’m glad First Quantum has taken exercised its option but the West Cork copper deal didn’t bring back much value to Altius. First Quantum acquires 90% of the property with US$6.25 million in exploration expenses and staged cash payments of just US$1.05 million (backloaded over 7 or more years) to Altius and its minority Irish partner. Terrible deal with a major operator.

 

Altius only really benefits if First Quantum builds a mine and starts paying the 2% royalty.

 

The farm-out deals with juniors like Sokoman offer much better terms and near-term upside. The 19.9% equity stakes in the juniors can be monetized when discoveries are made.

[linealdin]

Dalton talks up Chapada during the conference call. It’s not just a mine. Altius now considers it a mining district because of all the deposits Yamana has discovered on the 700 square kilometer property.

 

I believe there are multiple Chapadas on that land package. The implications of that are incredible.

[linealdin]

With the frothy market for royalties and multiple new royalty companies on the scene (I think of BaseCore Metals still hunting a deal) shouldn’t Altius be able to exercise the C$5 million for 0.5% royalty on Excelsior’s Gunnison and immediately flip it for C$10 million? Basically buy it for another party?

 

Altius may have its doubts technically about in-situ copper mining but others may have differing views. The option is very cheap considering the rise in the copper price since Callinan made the original deal with Excelsior.

[bizaro86]

I’m glad First Quantum has taken exercised its option but the West Cork copper deal didn’t bring back much value to Altius. First Quantum acquires 90% of the property with US$6.25 million in exploration expenses and staged cash payments of just US$1.05 million (backloaded over 7 or more years) to Altius and its minority Irish partner. Terrible deal with a major operator.

 

Altius only really benefits if First Quantum builds a mine and starts paying the 2% royalty.

 

The farm-out deals with juniors like Sokoman offer much better terms and near-term upside. The 19.9% equity stakes in the juniors can be monetized when discoveries are made.

 

The upside of doing deals with bigger companies is if an economic deposit is found, they are more likely to be able to build the mine without a bunch of drama.

 

That extra upside pays for the lower upfront proceeds, imo.

[petec]

I think that 15% equity could be assigned a value approaching C$1 billion in a successful public listing.

 

That would value Rio's stake at $3.9bn. If they couldn't sell a control stake for $3.5-4bn, why do you think minorities investing via the stock market would value it that high?