ALS.TO - Altius Minerals

[beerbaron]

It all works fine until Vale stops paying the Voisey’s Bay royalty and Kami flames out. Altius drops to a C$15 million market cap.

 

 

Do you know which argument is Vale using to pretend not having to pay the royalty on Voisey Bay?

 

Thanks

BeerBaron

[bizaro86]

It all works fine until Vale stops paying the Voisey’s Bay royalty and Kami flames out. Altius drops to a C$15 million market cap.

 

 

Do you know which argument is Vale using to pretend not having to pay the royalty on Voisey Bay?

 

Thanks

BeerBaron

 

Not a lawyer, but I think basically they are arguing that because the province forced them to build a big expensive smelter, its costs should be deductible against the royalty payments.

 

The royalty is based on net-smelter-returns. Whatever the mine earns in revenue by selling its ore to a smelter, Altius gets a little piece.

 

But Vale owns the smelter, and it was really expensive. I think they're saying that the costs of the smelter (including depreciation on the big capex bill) are reductions of the effective sales price of the ore. If they drive down the effective sales price of the ore to zero, then they don't own any royalties.

[Cigarbutt]

Not a legal expert either and the following is not based on a complete review of the merits.

 

Classic definition of a net smelter royalty:

“A royalty calculated on the net smelter return is essentially calculated on the amount received by the mine or mill owner from the sale of the mineral product to the treatment plant that converts the output of the mill to marketable metal.  From the gross proceeds received there may be deductions for costs incurred by the owner after the product leaves the mine property and before sale, such as the costs of: transportation, insurance or security, penalties, sampling and assaying, refining and smelting, and marketing.  No deductions are made for the operating costs of the mine-mill complex.” (B.J. Barton, Canadian Law of Mining (Calgary: Institute of Resources Law, 1993) at 461.)

 

Sounds straightforward in defining permissible off-site costs but Vale, before building the local Long Harbour processing facility, used to send (if I understand correctly) their mining production in Ontario and Manitoba. Depending on the incentives and contractual clauses about this facility, I wonder if there exists a grey zone that would allow Vale to at least partially (their position) include operating costs, depreciation and cost of capital as permissible net smelter return deductions pursuant to the royalty agreement.

 

It also seems that Vale was "aggressive" in recognizing certain costs (income taxes to the province) which did not appear to be justified and it is mentioned that Vale "sold" their production below fair market value which is debatable and a matter of appraisal.

 

IMO, the best outcome would be a negotiated "deal" that would settle the issue and clarify things going forward as it is quite unusual that a NSR contract is questioned to such a degree.

[linealdin]

To be clear no one forced Vale to do anything. They bought Voisey’s Bay with full knowledge of the NSR agreement attached to the property. They voluntarily negotiated and signed development agreements with the province.

 

If Vale has regrets about those bad business decisions they can stop mining at Voisey’s Bay. No one is forcing them to do anything.

 

Vale will try to bring the project’s complicated development history into the trial (as CITIC did with the Clive Palmer iron ore royalty trial). It’s all irrelevant. NSR’s have been litigated extensively in Canada. The case law is clear on what are acceptable NSR deductions.

[Cigarbutt]

To a certain degree, the parties are embattled in complex legalese.

I think linealdin should testify to inject a dose of common sense. :)

 

Since beerbaron asked, here's a relatively short summary of present positions:

https://www.canlii.org/en/nl/nlsctd/doc/2017/2017canlii84503/2017canlii84503.html?searchUrlHash=AAAAAQAabmV0IHNtZWx0ZXIgcmV0dXJuIHJveWFsdHkAAAAAAQ&resultIndex=2

 

Vale's position is weak.

They are clearly trying to stretch the meaning of words that is not unlike what Chesapeake did a while back before it was told to stick to "classic" definitions of royalty agreements.

Still, a bad settlement can be better than a good judgement and should be considered.

Isn't a slightly adjusted royalty agreement better than no royalty?

 

 

 

[linealdin]

The heart of Vale’s defense:

 

“there is no ‘industry standard’ or universally accepted definition of the term ‘net smelter royalty’ – rather, the terms of each royalty agreement must be interpreted tin accordance with its wording, the factual matrix in which it was concluded and the surrounding commercial and legal reality.  The LOA explicitly permits the deduction of smelting and refining charges;”

 

There’s no industry standard of what a net smelter royalty is. Okay.

 

Vale shouldn’t press too hard with that idiotic line of argument. In Canada the judge punishes idiocy by awarding attorney’s fees to the winning side.

[linealdin]

http://www.canstarresources.com/news/2018/canstar-resources-provides-exploration-and-corporate-update/

 

Canstar update. Exploration begins at Buchans Mary March in September (Altius 2% royalty on the larger Buchans part of the property). 3000 to 5000 meter drill program planned for Q4. Canstar has C$1.3 million working capital so they are well-funded for drilling.

 

Surface exploration begins at Daniel’s Harbour Zinc in September (Altius 2% royalty). Drill program planned for 2019. Canstar will likely need to raise more cash for that drill program.

 

Altius owns 8% of Canstar equity, while Adventus owns 39%. Altius will greatly benefit (directly and indirectly) from a discovery by Canstar.

[linealdin]

The Callinan lawsuit against Hudbay regarding the 777 NPI was a real tussle. Net profit interests are hard to calculate. How do you calculate profit when there’s so many accounting tricks to reduce taxable profit?

 

The VB trial is nonsense. Everyone knows how to calculate an NSR. Vale just decided to stop paying, during a period of low profitability for VB, and made up a nonsense argument.

 

Vale basically took a short-term loan against what they owed to Royal Gold and Altius in royalty payments. The loan will be repaid, with interest, once they lose at trial.

[linealdin]

blueskyroyalties.com registered on March 22nd, 2018 by William Rodgers, director of Great Bay Renewables. Blue Sky will go public, too, once it gains enough weight in producing royalties. I’m guessing within 2 years. Investors like pure play royalty companies.

[linealdin]

Minority stakes can be monetized. ArcelorMittal sold 15% of Mont Wright iron ore to POSCO and Taiwan Steel for US$1.1 billion in 2013. Which would be C$1.43 billion today.

 

Coincidentally, LIF owns 15.1% equity in IOC, which is very similar to Mont Wright (both own their railways/ports and both produce valuable pellets).

 

I think that US$1.1 billion, or C$1.43 billion, is a benchmark for how much LIF could make by selling the equity (and keeping the royalty).

 

If the LIF directors had more skin in the game (more shares, less salary) they would have sold the equity long ago. It’s an obvious way to create great value for its shareholders.

 

LIF up today to C$25.86. Altius position worth C$81.5 million.

[linealdin]

777 mine payback calculation:

 

C$34.511 million in royalties received

 

C$67 million net purchase price (excluding cash and investments received)

 

= 51.5% payback through 6/30/18

 

Another 14 quarters of production taking us to the end of 2021 (new mine end date guided by Hudbay) could raise Altius’s total royalty haul to C$79 million.

 

Further mine life extension past 2021 (in the works by Hudbay) would make the deal a clearer win. And positive developments at Cuale or Excelsior would turn it into a home run.

 

[linealdin]

https://www.b92.net/eng/news/business.php?yyyy=2018&mm=08&dd=22&nav_id=104913

 

http://www.mining.com/web/chinese-canadian-finnish-cypriot-firms-bid-serbia-copper-mine/

 

Champion Iron bidding for a large copper mine and smelter complex in Serbia? Canadian-Finnish?Mistranslation? Fake news?

 

RTB Bor has 5000 employees, produces a lot of copper, and loses money. Would be a turnaround project.

[linealdin]

Prairie Coal Payback Calculation:

 

C$69.813 million in coal royalties received through 6/30/18 (electrical and met coal)

 

Purchase price of C$120.45 million (50% of the total C$240.9 million Prairie Royalties purchase price, the other 50% of the price assigned to the potash royalties).

 

= 58% payback in 4.25 years.

 

*

 

Number of Altius-related coal power plants actually converted to natural gas = zero. The first conversion should be one of the minor Highvale plants in 2020 or 2021, depending on regulatory and corporate board approval.

 

Cheviot met coal set for a 9 year mine life extension.

 

 

[linealdin]

If Cheviot is extended I expect Altius’s total royalty haul from the coal portion of the Prairie deal will be around C$215 million (assuming no electrical coal revenue after 2026). I think they would have taken home closer to C$300 million from the coal with no regulatory actions ending the coal plant lives early.

 

Politics went against them but there was a margin of safety built into the Prairie deal. Paying C$120.45 million up front for C$215 million in future royalties is a perfectly good deal.

[Liberty]

Prairie Coal Payback Calculation:

 

C$69.813 million in coal royalties received through 6/30/18 (electrical and met coal)

 

Purchase price of C$120.45 million (50% of the total C$240.9 million Prairie Royalties purchase price, the other 50% of the price assigned to the potash royalties).

 

= 58% payback in 4.25 years.

 

So assuming same rate going forward, that's payback after 7.3 years. That's not exactly correct since not 100% of the royalty goes directly to the bottom line -- they have paid some interest on debt in those years, have corporate costs, there's been costs to do the deal, opportunity cost in time and resources to find the deal and get it done, etc.

 

But even if we optimistically assume 7.3 years payback, that's around a 10% CAGR.

 

In other words, if you had invested $120.45m for 7.3 years at 10%, you'd have gotten a double. It's not bad, but it's less than the SP500 TR over the past 7 years, for example. But these coal royalties are declining assets that will someday (at an unknown date) go away, so their cashflows aren't entirely free cash flow that can be used for any incremental deployment. Large parts should be earmarked to find replacement cash-flowing assets just to maintain earning power over time, so actual payback is longer than appears, which is why the only real way to evaluate them is probably a DCF, but that's hard to do because there are many unknown (like the politics of coal in the coming years, etc).

[linealdin]

Oh no, payback must be some sort of technical accounting term. I’m sorry for using it. Any kind of sophisticated accounting analysis would have to consider interest, transaction costs, taxes, depreciation, opportunity costs, the S&P500, the cost of Brian Dalton’s time spent finding and closing the Prairie Royalties deal, the tangible negative effects of being associated with one of the world’s most hated polluting commodities, etc.

 

I don’t have the training or the interest to do any of the above.

 

I’m simply noting that Altius paid C$120.45 million for the coal portion of Prairie Royalties, and has received C$69.813 million in royalties in 4.25 years. That number is 58% of the purchase price. Not 58% accounting “payback.” I apologize for using the term. I expect a total of C$215 million in coal royalties to come to Altius from the Prairie deal.

 

I’d prefer the C$300 million Altius would have gotten sans government interference but will live with the C$215 million.

[linealdin]

There’s a market perception (fed by endless news stories) that Alberta’s already gone off coal. That coal plants are converting to natural gas as we speak. And that Altius is not going to receive back even what they paid for the coal royalties. Nonsense!

 

The truth is Alberta still burns tremendous amounts of coal. Altius’s electrical coal revenue has been increasing in recent quarters due to rising electricity demand in Alberta. No coal plants have been converted to natural gas. No coal to gas conversions have even been environmentally permitted by the regulators. And Altius is set to receive a return of ~C$215 million from its C$120.45 million investment into Alberta coal (even with an end date for all electrical coal operations by the end of 2026).

[Liberty]

My point was that to know if a deal is good or not, you have to look at the returns on the money invested, and by doing some back-of-the-envelope, the returns on that part of the deal don't seem that great so far (somewhere sub 10% after taking costs into account).

 

My second point is that there's a difference between investing $X into something that will give you Y% back on an ongoing basis, or grow at Z%, and investing $X into something that depletes. In the first case, you can take all the cash that you receive out and reinvest into other things to compound the cash. In the latter case, you can't take all the cash and reinvest in incremental things, you have to take part of the cash and reinvest into a replacement asset (that might or might not be available at attractive valuation) to replace that depleting asset. So all else equal, a depleting asset is worth less than a growing or stable asset because you have a headwind that makes you have to run a bit faster just to avoid falling behind.

[StevieV]

My point was that to know if a deal is good or not, you have to look at the returns on the money invested, and by doing some back-of-the-envelope, the returns on that part of the deal don't seem that great so far (somewhere sub 10% after taking costs into account).

 

My second point is that there's a difference between investing $X into something that will give you Y% back on an ongoing basis, or grow at Z%, and investing $X into something that depletes. In the first case, you can take all the cash that you receive out and reinvest into other things to compound the cash. In the latter case, you can't take all the cash and reinvest in incremental things, you have to take part of the cash and reinvest into a replacement asset (that might or might not be available at attractive valuation) to replace that depleting asset. So all else equal, a depleting asset is worth less than a growing or stable asset because you have a headwind that makes you have to run a bit faster just to avoid falling behind.

 

I think both of Liberty's points are good ones.

 

FWIW, the coal deal does not strike me as a particularly lucrative deal at all.  $210/120.45 = 78% return.  That's a simple total return number.  The company can re-invest the money as it comes in, which would boost the calculation.  Nevertheless, the payments would have to come in quicker, or be greater, for me to consider it a good deal.

 

[linealdin]

I sort of understand your second point:

 

“It’s better to buy 7% of an insurance company which can go on making money forever than it is to buy a 7% royalty on an iron ore mine which will eventually deplete.”

 

That’s fair. I guess it depends on what the stake in the insurance company costs, what the iron ore royalty costs,  and how long the iron ore mine will take to deplete.

 

In the case of the LIF royalty an argument (based on hard evidence) can be made that IOC, the underlying mine, won’t deplete until well into the next century. And that the price Altius paid for that royalty was quite modest.

[linealdin]

My point was that to know if a deal is good or not, you have to look at the returns on the money invested, and by doing some back-of-the-envelope, the returns on that part of the deal don't seem that great so far (somewhere sub 10% after taking costs into account).

 

My second point is that there's a difference between investing $X into something that will give you Y% back on an ongoing basis, or grow at Z%, and investing $X into something that depletes. In the first case, you can take all the cash that you receive out and reinvest into other things to compound the cash. In the latter case, you can't take all the cash and reinvest in incremental things, you have to take part of the cash and reinvest into a replacement asset (that might or might not be available at attractive valuation) to replace that depleting asset. So all else equal, a depleting asset is worth less than a growing or stable asset because you have a headwind that makes you have to run a bit faster just to avoid falling behind.

 

I think both of Liberty's points are good ones.

 

FWIW, the coal deal does not strike me as a particularly lucrative deal at all.  $210/120.45 = 78% return.  That's a simple total return number.  The company can re-invest the money as it comes in, which would boost the calculation.  Nevertheless, the payments would have to come in quicker, or be greater, for me to consider it a good deal.

 

Agreed. The coal portion of the Prairie Royalties deal was not particularly lucrative. It was the weakest deal Altius made in the bear market (Chapada was the best deal), but it had a positive IRR. A little under 10% IRR.

 

But the market perception is that Altius took a bath and a beating on their investment in Alberta coal. Far from the truth.

 

 

[TwoCitiesCapital]

Prairie Coal Payback Calculation:

 

C$69.813 million in coal royalties received through 6/30/18 (electrical and met coal)

 

Purchase price of C$120.45 million (50% of the total C$240.9 million Prairie Royalties purchase price, the other 50% of the price assigned to the potash royalties).

 

= 58% payback in 4.25 years.

 

So assuming same rate going forward, that's payback after 7.3 years. That's not exactly correct since not 100% of the royalty goes directly to the bottom line -- they have paid some interest on debt in those years, have corporate costs, there's been costs to do the deal, opportunity cost in time and resources to find the deal and get it done, etc.

 

But even if we optimistically assume 7.3 years payback, that's around a 10% CAGR.

 

In other words, if you had invested $120.45m for 7.3 years at 10%, you'd have gotten a double. It's not bad, but it's less than the SP500 TR over the past 7 years, for example. But these coal royalties are declining assets that will someday (at an unknown date) go away, so their cashflows aren't entirely free cash flow that can be used for any incremental deployment. Large parts should be earmarked to find replacement cash-flowing assets just to maintain earning power over time, so actual payback is longer than appears, which is why the only real way to evaluate them is probably a DCF, but that's hard to do because there are many unknown (like the politics of coal in the coming years, etc).

 

I'd add to this that it's hard to know the positive implications outside of the income as well. How did this income factor into credit lines, interest rates, debt issuances, etc. that may have positively impacted Altius?

 

I once tried to sign a lease on an apartment. The rental company refused to lease me the place simply because my income wasn't 45x the annual rent. I showed them bank/brokerage statements where I had 2+ years of the rent in unencumbered cash/securities that could be posted as collateral in addition to my 41x the annual rent in income (non-inclusive of bonus), but all that mattered to them was "income" when determining if I was a reasonable candidate to rent to. Similar considerations were provided for why I couldn't get a loan in 2010 when I wanted to buy commercial real-estate...

 

My only point is the benefit to Altius may have been more favorable negotiations to get financing, or to lower financing rates, since it boosted their annual income. If we're going into the subtleties of the cost, might as well speculate to the subtleties beyond the income as well.

[Liberty]

I'd add to this that it's hard to know the positive implications outside of the income as well. How did this income factor into credit lines, interest rates, debt issuances, etc. that may have positively impacted Altius?

 

I once tried to sign a lease on an apartment. The rental company refused to lease me the place simply because my income wasn't 45x the annual rent. I showed them bank/brokerage statements where I had 2+ years of the rent in unencumbered cash/securities that could be posted as collateral in addition to my 41x the annual rent in income (non-inclusive of bonus), but all that mattered to them was "income" when determining if I was a reasonable candidate to rent to. Similar considerations were provided for why I couldn't get a loan in 2010 when I wanted to buy commercial real-estate...

 

My only point is the benefit to Altius may have been more favorable negotiations to get financing, or to lower financing rates, since it boosted their annual income. If we're going into the subtleties of the cost, might as well speculate to the subtleties beyond the income as well.

 

Maybe, but seems to me like these kinds of benefits would be pretty marginal for a company that isn't the kind that will lever up a lot and that was sitting on a lot of cash before these deals. Seems to me like what will determine the returns of the equity over the long term is ROIC on the deals that they do and whether their organic project generation can bring enough things of big enough size over the finish line at a decent cadence.

[bizaro86]

One of the big benefits of buying the coal royalties is they came with the option to buy the potash royalties, which was a great purchase. Maybe it would be more accurate to change the calculation to 60% potash 40% coal or something similar. The potash royalties are probably close to a perpetuity.

 

I think its much more likely we'll stop needing certain insurance lines (car insurance, for example) within the next 150 years than we'll stop eating plants (or eating animals that eat plants) that need potassium. Potassium is an element, tough to imagine substitution there.

 

As to the coal, while I think they will get a reasonable return through the shut-down, I doubt it gets extended. Even if the UCP wins the next election (likely) I don't think they'll cancel. Alberta wants social licence for the (much bigger) oilsands industry. Plus, air quality has become a bigger issue here after the entire province set worst air quality records this year.

 

Of course, that air quality issue isn't because we're burning coal, it's because BC is burning trees (that it should have cut down). But facts often don't get in the way of a good political argument.

[linealdin]

Agreed. Extension of the coal past 2030 is impossible. I’m applying an weighted average shutdown date of year end 2026 to Altius’s coal power plants. Some of the plants will go all the way through 2030 (Genesee 3 and Keephills 3 as the latest and most efficient plants), some of the smaller plants will shut or convert to gas earlier (Highvale/Keephills in the 2020 to 2022 timeframe). The rest shut down around year end 2026.

 

Still a lot of royalties to be gathered. H1 2018 saw Altius receive C$8.821 million in electrical and coal royalties. That’s C$17.642 million on an annual basis. Multiply that by 8.5 years (taking us through 2026) = C$150 million.

 

Add to that a few years of Cheviot met coal royalty going beyond 2026.