ALS.TO - Altius Minerals

[linealdin]

https://www.yamana.com/English/investors/news/news-details/2019/Yamana-Gold-Exceeds-2018-Production-Guidance-at-Costs-in-Line-With-Expectations/default.aspx

 

Yamana Gold hits 39 million pounds of Chapada copper production in Q4. New quarterly record? Altius should see C$5 million plus from their royalty if actual sales approach the production numbers.

[TwoCitiesCapital]

Altius bought back 104,000 shares in December. Share count down to 42.85 million.

 

The current NCIB only allows them to repurchase 814,972 shares. They’ve used about half of that allocation. Once they hit the max they can institute a new NCIB. Buybacks continue in January.

 

So they bought back 0.2% of shares... Let's have a look at share count over time:

 

 

I appreciate your feedback Liberty. I'm at a crossroads - I like the business model. I like the developments in the business. I like it's developed from 1 royalty for $3M a year and $200M cash to $60-70M in diversified royalty payments, tons of land, and cash. What I don't like is the market's reaction to that as reflected by the share price - part of which is due to the fact that shares outstanding increasing by 50+% and debt issuance.

 

I can do patience. I've waited 5+ years on Altius (it's one of my largest portfolio positions!). Even longer on Fairfax. But at some point, one has to cut their losses. I keep hoping for a major change in perception and business results - but Adia hasn't yet moved the needle. Champion hasn't yet moved the needle. Kami and Julienne Lake haven't yet moved the needle. Potash, despite it's massive improvements, hasn't impacted the stock price.

 

At some point, I need to make money on this or I've wasted my time. I have trouble because the recent business developments are promising and appear to be improving. I keep thinking that some project generation is going to result in the realization of major gains in the equity portfolio. Instead we got 10% net for the 2018 and a major repricing of Evrim equity... I keep thinking that there will be a catalyst at Kami that will impact the stock price..but I keep waiting.

 

Anyways, your skepticism is refreshing and helps keep a level head about these things even as I remain despondently long.

[petec]

TCC I’m a recent small Altius long so I’m not in the same position as you, emotion/pain/frustration-wise. But I do have a comment on timeframe. While Altius has a great model it’s in a cyclical industry and the cycles can be long. If you’ve held for 5+ years I’m guessing you have only really ridden the cycle down. That’s not going to be fun no matter how good the news flow is. What matters with Altius is how it develops its asset base through a full cycle, and if you’re into timing cycles then the other thing that matters is buying high and selling low. Personally this is the only commodity business model I like enough to make a core long term position and as long as management keeps doing sensible things I intend to hold for the long term. For reference that means 20-60 years. (Whether I have the discipline to follow through on this intent remains to be seen, but if I don’t it won’t be because the share price is going nowhere but because I’ve found something cheaper.)

[linealdin]

http://www.adventuszinc.com/news/122516

 

More excellent drill results from Adventus:

 

12.55 meters of 6.05% copper equivalent

10.86 meters of 5.4% copper equivalent

8.74 meters of 6.18% copper equivalent

 

Along with separate longer intersections of relatively lower grades:

 

24.4 meters of 3.76% copper equivalent

20.14 meters of 3.03% copper equivalent

[Liberty]

I appreciate your feedback Liberty. I'm at a crossroads - I like the business model. I like the developments in the business. I like it's developed from 1 royalty for $3M a year and $200M cash to $60-70M in diversified royalty payments, tons of land, and cash. What I don't like is the market's reaction to that as reflected by the share price - part of which is due to the fact that shares outstanding increasing by 50+% and debt issuance.

 

I can do patience. I've waited 5+ years on Altius (it's one of my largest portfolio positions!). Even longer on Fairfax. But at some point, one has to cut their losses. I keep hoping for a major change in perception and business results - but Adia hasn't yet moved the needle. Champion hasn't yet moved the needle. Kami and Julienne Lake haven't yet moved the needle. Potash, despite it's massive improvements, hasn't impacted the stock price.

 

At some point, I need to make money on this or I've wasted my time. I have trouble because the recent business developments are promising and appear to be improving. I keep thinking that some project generation is going to result in the realization of major gains in the equity portfolio. Instead we got 10% net for the 2018 and a major repricing of Evrim equity... I keep thinking that there will be a catalyst at Kami that will impact the stock price..but I keep waiting.

 

Anyways, your skepticism is refreshing and helps keep a level head about these things even as I remain despondently long.

 

I think it's a case of: "It's great to have a good battle plan, but at some point you should look at the battlefield to see if it's working."

 

When you have a stock that is trading where it was first trading in 2007, you have to wonder if there are easier ways to make money, even if on paper it sounds like a good model. Maybe it's all been a long down-cycle and there will be upswing at some point, but if it's outside the control of management, it's more speculation than anything else. And if what they've done in the past few years is the best that can be done in a downcycle (I remember the quotes from them about waiting for blood in the streets and such), then is it good enough? How high would it need to go, how fast, for you to make a good IRR on it?

 

Don't even interpret all these questions as me necessarily being bearish on the stock. I'm more in the "too uncertain to be bullish" camp. I used to like the model, but it just hasn't performed very well, and since then, I've learned that commodity businesses (and their derivatives, which I consider this company to be) aren't for me.

 

Maybe they'll hit a huge homerun soon, but that's fine. There are companies going up a lot every day that I don't own. I just have to focus on what I'm comfortable with, and waiting for capex-heavy mines to be built and commodity prices to go up isn't something I want to fill my mental cycles with.

[petec]

I think it's a case of: "It's great to have a good battle plan, but at some point you should look at the battlefield to see if it's working."

 

When you have a stock that is trading where it was first trading in 2007, you have to wonder if there are easier ways to make money, even if on paper it sounds like a good model. Maybe it's all been a long down-cycle and there will be upswing at some point, but if it's outside the control of management, it's more speculation than anything else. And if what they've done in the past few years is the best that can be done in a downcycle (I remember the quotes from them about waiting for blood in the streets and such), then is it good enough? How high would it need to go, how fast, for you to make a good IRR on it?

 

Don't even interpret all these questions as me necessarily being bearish on the stock. I'm more in the "too uncertain to be bullish" camp. I used to like the model, but it just hasn't performed very well, and since then, I've learned that commodity businesses (and their derivatives, which I consider this company to be) aren't for me.

 

Maybe they'll hit a huge homerun soon, but that's fine. There are companies going up a lot every day that I don't own. I just have to focus on what I'm comfortable with, and waiting for capex-heavy mines to be built and commodity prices to go up isn't something I want to fill my mental cycles with.

 

Your comments are well thought out and appreciated. However 2007 was the absolute epicentre of one of the biggest commodity bull markets ever. The stock traded on 3-4x book as far as I can tell. Bluntly - and I really don't mean offence to anyone - anyone who bought it then didn't really understand commodities. Since then TBVPS has doubled, and that's a peak-to-trough (or at least peak to midcycle) performance. That's not incredible, but it's also not awful. (It looks much better if you use 2006 as the base - TBVPS doubled in 2007.)

 

So here we are at about 1.4x TBVPS (reported - I have it cheaper on SOTP but let's not get into discount rates again!) sitting probably nearer the bottom of the cycle than the top, with a stock where the model makes intuitive sense (battle plan) and the TBVPS has grown fairly healthily (battlefield), with quite a number of potential catalysts (good drilling results, potential potash price hikes, etc).

 

I worry about China, but I can also get excited about India. Then I look at a graph of commodities vs the S&P and see that commodities are at the bottom of their very long term range, and I think OK, I don't like commodities as an asset class, but maybe I want a tiny little hedge in case inflation picks up a little more and all that money they printed that went into equities starts flowing into commodities (1970s redux). Now there are a lot of things I'd like to own in that scenario, but exploration & royalties have traditionally been a better way of making money in commodities than buying producing mines, so I arrive at Altius.

 

That, at least, is my thinking. Could be a lot of drivel ;)

 

 

[Liberty]

Your comments are well thought out and appreciated. However 2007 was the absolute epicentre of one of the biggest commodity bull markets ever. The stock traded on 3-4x book as far as I can tell. Bluntly - and I really don't mean offence to anyone - anyone who bought it then didn't really understand commodities. Since then TBVPS has doubled, and that's a peak-to-trough (or at least peak to midcycle) performance. That's not incredible, but it's also not awful. (It looks much better if you use 2006 as the base - TBVPS doubled in 2007.)

 

So here we are at about 1.4x TBVPS (reported - I have it cheaper on SOTP but let's not get into discount rates again!) sitting probably nearer the bottom of the cycle than the top, with a stock where the model makes intuitive sense (battle plan) and the TBVPS has grown fairly healthily (battlefield), with quite a number of potential catalysts (good drilling results, potential potash price hikes, etc).

 

I worry about China, but I can also get excited about India. Then I look at a graph of commodities vs the S&P and see that commodities are at the bottom of their very long term range, and I think OK I don't like commodities as an asset class but maybe I want a tiny little hedge in case inflation picks up a little more and all that money they printed that went into equities starts coming out and flowing into commodities (1970s redux). Now there are a lot of things I'd like to own in that scenario, but exploration & royalties have traditionally been a better way of making money in commodities than buying producing mines, so I arrive at Altius.

 

That, at least, is my thinking. Could be a lot of drivel ;)

 

I picked 2007 because it was the earliest date, but I could've picked 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017...

 

I've heard this one before. It's little comfort when the stock has been flat for over a decade while a lot of obvious companies have gone up multiples since then (even a behemoth like BRK has doubled since then) and both inflation and the CAD have further been headwinds.

 

I think that if your thesis is the 1970s redux, it's speculation, not investment. As Buffett has said, when there's inflation, good businesses with pricing power do well, you don't need commodities.

[petec]

I picked 2007 because it was the earliest date, but I could've picked 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017...

 

I've heard this one before. It's little comfort when the stock has been flat for over a decade while a lot of obvious companies have gone up multiples since then (even a behemoth like BRK has doubled since then) and both inflation and the CAD have further been headwinds.

 

I think that if your thesis is the 1970s redux, it's speculation, not investment. As Buffett has said, when there's inflation, good businesses with pricing power do well, you don't need commodities.

 

1970's redux is certainly a speculation but it's not my base thesis. It's just a bit of optionality that I like.

 

2010-2014 were all cycle top years as QE money sloshed around the world. I wouldn't have expected the stock to do very well since then, personally.

 

And of course, you pick your time periods at your peril. If you'd bought this in 2002 you'd be up >20x.

 

To put it in context, this is about a 1% position for me and is dwarfed by my positions in things like BRK.

 

 

[Liberty]

And of course, you pick your time periods at your peril. If you'd bought this in 2002 you'd be up >20x.

 

This is a common way to hook people in. When it was a tiny small cap, the dollar amount that went in was tiny, what you needed to move the needle was tiny... then it got much bigger, and that's when most people noticed it, but since then nobody has made anything.

 

Used to be a common phenomenon with "hot" mutual funds. They get a great track record when they're small, money pours in, and then at the bigger size they can't perform like they used to anymore (or it was all just survivorship bias to begin with) and the dollar-weighted performance since inception is pretty mediocre even if the CAGR still looks good.

 

One way to think about it is that some businesses are good at compounding money, and others have more trouble scaling up and redeploying ever larger amounts of capital.

 

Another thing that I've been thinking about with Altius is the whole royalty model to begin with. It looks great when you think about it from the point of view of the merchant bank, but let's think about it from the seller's point of view. Why do you even sell a royalty to someone like Altius to begin with? It's just a form of financing to pay for your mine, right? You could also borrow from the bank or raise equity or sell preferreds. Why would you give away the store if you can do these others things? And if you can't at all raise anything, what are the chances that your project is that promising and company that solid to bring it to fruition? There's gotta be plenty of risk with partners that can't raise the debt or equity for a project, right? Or if they can but would just rather sell a royalty anyway, do you think they'll sign conditions that are radically better than debt or equity? Why would a royalty have an expected return of 20% IRR for the buyer or whatever? You have to be lucky and the seller miscalculates, but that's a gamble too, especially since the people who are developing the project have a good chance of knowing it better than outsiders. That's why when I did some math, it seemed to me like Altius has often gotten single digit returns on the capital it put in for royalties, which isn't that far from debt or equity. It's possible to get lucky and get better than that, but it's also possible to get unlucky and get worse. If there's a huge commodity boom, the royalties will do better, and vice versa. Pretty equity-like, just with cashflows swaped for the possibility of capital gains (probably a good trade safety-wise, but still, not exactly a magical instrument that guarantees good returns)...

[linealdin]

“And if you can't at all raise anything, what are the chances that your project is that promising and company that solid to bring it to fruition? There's gotta be plenty of risk with partners that can't raise the debt or equity for a project, right?”

 

The last post criticized development royalty financing as if that is Altius’s business model. Liberty is, of course, completely off base and talking in circles.

 

When has Altius bought a major royalty from a project developer? NEVER.

 

The royalties they bought during the last cycle were from mines that had been in production for decades. Facts not fantasies: Look up the dates Rocanville, Esterhazy, Chapada, Genesee, 777, IOC went into production.

 

[Liberty]

“And if you can't at all raise anything, what are the chances that your project is that promising and company that solid to bring it to fruition? There's gotta be plenty of risk with partners that can't raise the debt or equity for a project, right?”

 

The last post criticized development royalty financing as if that is Altius’s business model. Liberty is, of course, completely off base and talking in circles.

 

When has Altius bought a major royalty from a project developer? NEVER.

 

The royalties they bought during the last cycle were from mines that had been in production for decades. Facts not fantasies: Look up the dates Rocanville, Esterhazy, Chapada, Genesee, 777, IOC went into production.

 

Why did these mines sell these royalties? It's still just a way to raise capital, right? Why would the terms be so much better for the buyer than on other forms of capital? Please explain that to me.

 

And I didn't mean non-producing junior miners, I meant people who are raising money to pay for their projects, wether capex for mine expansion or selling a piece of one mine to finance the building of another one. You took what I wrote too narrowly.

[TwoCitiesCapital]

 

Why do you even sell a royalty to someone like Altius to begin with? It's just a form of financing to pay for your mine, right? You could also borrow from the bank or raise equity or sell preferreds. Why would you give away the store if you can do these others things? And if you can't at all raise anything, what are the chances that your project is that promising and company that solid to bring it to fruition? There's gotta be plenty of risk with partners that can't raise the debt or equity for a project, right? Or if they can but would just rather sell a royalty anyway, do you think they'll sign conditions that are radically better than debt or equity? Why would a royalty have an expected return of 20% IRR for the buyer or whatever? You have to be lucky and the seller miscalculates...

 

I'll bite. It's very possible for Altius to be a lender of last resorts - especially given their counter cyclical business model - without taking undue risk.

 

I remember back in 2010/2011 I was trying to buy a piece of commercial real estate. There were 7 years left on the lease with two options to extend 5 years each, the corporate tenant was a Dollar General, and the property grossed 40-45k a year and was selling for $220k - an unlevered  cap rate of 18%! Also, it was a trippe-net lease arrangement so all you're responsible for was roof and parking lot maintenance....

 

I went to 10+ banks and credit unions to get a loan to buy this thing. I was making ~60k at the time and so was my partner. Even with two personal incomes backing the loan, an 18% cap rate, a tenant who had doubled sales in the last 5 years despite the recession, and being 2 years into the economic recovery, we couldn't get a loan. Why? Because it was 2010/2011 and lenders didn't lend to anyone. It had nothing to deal with the deal mechanics and everything to do with lenders being skittish.

 

If I could have sold a royalty on some of the cash flows to finance the purchase, it would have been lucrative for the person buying it because there was virtually no risk in the transaction of the financing not getting paid with 160k cash/yr against a 210k mortgage.

 

Secondly, Altius isn't just a lender of last resort. They're the one who is often times providing the land package and necessary equity financing to allow for the exploration to occur to begin with. Without Altius, there is no mine even if you can go to the bank for financing.

 

Just some thoughts as to why that's not necessarily an accurate or fair comparison

 

 

[Liberty]

That's what I thought the model was, be counter-cyclical, sit on cash to have it when others need it, etc.

 

But that doesn't change that when you do that the royalty model isn't that different from debt or equity. If you're injecting capital when someone really needs it, you can usually get pretty good price and terms. Yet in recent years, despite us apparently being in a terrible time for commodities, I haven't seen such great deals, and I haven't seen such great IRRs from past deployments of capital. Hence my point that being so enamored by the royalty format can distract us from the fact that however you structure things, you won't get economics that are that different from other providers of capital for distressed situations, unless you're lucky (which can also happen with equity/warrants/etc). And just the fact that your lendees can get in distressed capital-starved situations in the first place shows that there's probably a decent amount of risk there.

[Cigarbutt]

Why do you even sell a royalty to someone like Altius to begin with? It's just a form of financing to pay for your mine, right? You could also borrow from the bank or raise equity or sell preferreds. Why would you give away the store if you can do these others things? And if you can't at all raise anything, what are the chances that your project is that promising and company that solid to bring it to fruition? There's gotta be plenty of risk with partners that can't raise the debt or equity for a project, right? Or if they can but would just rather sell a royalty anyway, do you think they'll sign conditions that are radically better than debt or equity? Why would a royalty have an expected return of 20% IRR for the buyer or whatever? You have to be lucky and the seller miscalculates...

I'll bite. It's very possible for Altius to be a lender of last resorts - especially given their counter cyclical business model - without taking undue risk.

 

I remember back in 2010/2011 I was trying to buy a piece of commercial real estate. There were 7 years left on the lease with two options to extend 5 years each, the corporate tenant was a Dollar General, and the property grossed 40-45k a year and was selling for $220k - an unlevered  cap rate of 18%! Also, it was a trippe-net lease arrangement so all you're responsible for was roof and parking lot maintenance....

 

I went to 10+ banks and credit unions to get a loan to buy this thing. I was making ~60k at the time and so was my partner. Even with two personal incomes backing the loan, an 18% cap rate, a tenant who had doubled sales in the last 5 years despite the recession, and being 2 years into the economic recovery, we couldn't get a loan. Why? Because it was 2010/2011 and lenders didn't lend to anyone. It had nothing to deal with the deal mechanics and everything to do with lenders being skittish.

 

If I could have sold a royalty on some of the cash flows to finance the purchase, it would have been lucrative for the person buying it because there was virtually no risk in the transaction of the financing not getting paid with 160k cash/yr against a 210k mortgage.

Secondly, Altius isn't just a lender of last resort. They're the one who is often times providing the land package and necessary equity financing to allow for the exploration to occur to begin with. Without Altius, there is no mine even if you can go to the bank for financing.

 

Just some thoughts as to why that's not necessarily an accurate or fair comparison

I guess you no longer need financing for your projects but if you ever did, call me and we'll talk. ;) I would make sure that the royalty is based on revenue so I don't have to worry about rising costs and would include liens on whatever positive may happen to the property (building getting larger with more rented space, new metro station nearby with its effect on rent etc).

 

There is nothing magical with the royalty model and the "inventors" (Mr. Lassonde and Mr. Schulich) of the model in the commodity space did extremely well because of an unusual combination of shrewd skill and luck (especially with their first homerun purchase) as well as a patient and contrarian capacity to ride several cycles. And perhaps not all that glitters is gold.

 

IMO the royalty model sits somewhere between debt and equity (in terms of risk and return) and modulates the effects of the cycle. In certain instances, notwithstanding the credit cycle (especially in early stages of development), mining companies may want to avoid debt (cash flow issue) and may want to avoid equity financing (expensive dilution) and may then offer an attractive proposition to royalty capital providers which, by definition, occupy this financing space.

 

Investing in ALS means that:

-one likes the royalty model

-one considers that management is competent, patient, opportunistic, and contrarian

-a key part is where management reinvests their money

-there is concordance with management as to where we stand in the cycle

[bizaro86]

“And if you can't at all raise anything, what are the chances that your project is that promising and company that solid to bring it to fruition? There's gotta be plenty of risk with partners that can't raise the debt or equity for a project, right?”

 

The last post criticized development royalty financing as if that is Altius’s business model. Liberty is, of course, completely off base and talking in circles.

 

When has Altius bought a major royalty from a project developer? NEVER.

 

The royalties they bought during the last cycle were from mines that had been in production for decades. Facts not fantasies: Look up the dates Rocanville, Esterhazy, Chapada, Genesee, 777, IOC went into production.

 

Why did these mines sell these royalties? It's still just a way to raise capital, right? Why would the terms be so much better for the buyer than on other forms of capital? Please explain that to me.

 

And I didn't mean non-producing junior miners, I meant people who are raising money to pay for their projects, wether capex for mine expansion or selling a piece of one mine to finance the building of another one. You took what I wrote too narrowly.

 

A lot of those assets were existing royalties they bought from others, not mine owner-operators. Potash they bought from Sherritt, which was distressed from overspending on a nickel mine in Madagascar. 777 was owned by Callinan another public royalty co. that they took over, the market had no confidence in their strategy. IOC is a public company and they bought shares on the stock exchange.

 

 

[petec]

That's what I thought the model was, be counter-cyclical, sit on cash to have it when others need it, etc.

 

But that doesn't change that when you do that the royalty model isn't that different from debt or equity. If you're injecting capital when someone really needs it, you can usually get pretty good price and terms. Yet in recent years, despite us apparently being in a terrible time for commodities, I haven't seen such great deals, and I haven't seen such great IRRs from past deployments of capital. Hence my point that being so enamored by the royalty format can distract us from the fact that however you structure things, you won't get economics that are that different from other providers of capital for distressed situations, unless you're lucky (which can also happen with equity/warrants/etc). And just the fact that your lendees can get in distressed capital-starved situations in the first place shows that there's probably a decent amount of risk there.

 

There's nothing magic about royalties but they offer a very different return profile to either debt or equity.

 

Debt gives you no (upside) exposure to the cycle or to mine life extensions. Equities give you both, but with (usually levered) downside exposure to the cycle.

 

Royalties sit somewhere in the middle. You get exposure to the cycle and mine life extensions, but no operating or financial leverage and no exposure to rising costs. If you're skilled enough to be a countercyclical LOLR, then royalties offer a relatively high reward low risk profile compared to debt and equity.

[Liberty]

That's what I thought the model was, be counter-cyclical, sit on cash to have it when others need it, etc.

 

But that doesn't change that when you do that the royalty model isn't that different from debt or equity. If you're injecting capital when someone really needs it, you can usually get pretty good price and terms. Yet in recent years, despite us apparently being in a terrible time for commodities, I haven't seen such great deals, and I haven't seen such great IRRs from past deployments of capital. Hence my point that being so enamored by the royalty format can distract us from the fact that however you structure things, you won't get economics that are that different from other providers of capital for distressed situations, unless you're lucky (which can also happen with equity/warrants/etc). And just the fact that your lendees can get in distressed capital-starved situations in the first place shows that there's probably a decent amount of risk there.

 

There's nothing magic about royalties but they offer a very different return profile to either debt or equity.

 

Debt gives you no (upside) exposure to the cycle or to mine life extensions. Equities give you both, but with (usually levered) downside exposure to the cycle.

 

Royalties sit somewhere in the middle. You get exposure to the cycle and mine life extensions, but no operating or financial leverage and no exposure to rising costs. If you're skilled enough to be a countercyclical LOLR, then royalties offer a relatively high reward low risk profile compared to debt and equity.

 

We're saying the same thing.

 

But if you go back through this thread, there's always been a lot of excitement about royalties, claiming they deserve a 40-60x P/E like FNV or whatever, while they're in fact just a way to tweak the risk/return profile on capital deployed. If you're going to be a distressed investor, you can also pick up high-yield debt at significant discounts to par and get equity-like profile...

 

In the end what matters is the returns on the capital and the ability to redeploy at attractive returns (since royalties don't offer a built-in reinvestment mechanism), and that's where I'm not yet convinced. If you can get high ROIC with royalties over long periods and with most of your capital, that's amazing, but it's easier said than done, apparently.

[petec]

That's what I thought the model was, be counter-cyclical, sit on cash to have it when others need it, etc.

 

But that doesn't change that when you do that the royalty model isn't that different from debt or equity. If you're injecting capital when someone really needs it, you can usually get pretty good price and terms. Yet in recent years, despite us apparently being in a terrible time for commodities, I haven't seen such great deals, and I haven't seen such great IRRs from past deployments of capital. Hence my point that being so enamored by the royalty format can distract us from the fact that however you structure things, you won't get economics that are that different from other providers of capital for distressed situations, unless you're lucky (which can also happen with equity/warrants/etc). And just the fact that your lendees can get in distressed capital-starved situations in the first place shows that there's probably a decent amount of risk there.

 

There's nothing magic about royalties but they offer a very different return profile to either debt or equity.

 

Debt gives you no (upside) exposure to the cycle or to mine life extensions. Equities give you both, but with (usually levered) downside exposure to the cycle.

 

Royalties sit somewhere in the middle. You get exposure to the cycle and mine life extensions, but no operating or financial leverage and no exposure to rising costs. If you're skilled enough to be a countercyclical LOLR, then royalties offer a relatively high reward low risk profile compared to debt and equity.

 

We're saying the same thing.

 

But if you go back through this thread, there's always been a lot of excitement about royalties, claiming they deserve a 40-60x P/E like FNV or whatever, while they're in fact just a way to tweak the risk/return profile on capital deployed. If you're going to be a distressed investor, you can also pick up high-yield debt at significant discounts to par and get equity-like profile...

 

In the end what matters is the returns on the capital and the ability to redeploy at attractive returns (since royalties don't offer a built-in reinvestment mechanism), and that's where I'm not yet convinced. If you can get high ROIC with royalties over long periods and with most of your capital, that's amazing, but it's easier said than done, apparently.

 

Agreed.

[mikek]

I agree with what TwoCities said recently, unfortunately I am in the same boat and this has been dead money for such a long time.

 

I just don't see a catalyst unfortunately to move the stock.  The only big catalyst would be Alderon and I don't see that happening.  The PG portfolio isn't going to move the needle, say they hit big on one of the properties, it still isn't really going to move the stock.  The increase in value on the PG portfolio isn't going to be enough to really move the stock.  The royalty on that said property isn't going to be worth much because these mines take such a long time to be built that the market isn't going to assign any value to that.  The big problem is that Altius has 777 stopping at the end of 2021 and the market doesn't have much confidence in the thermal coal royalties.  This is why it doesn't matter if Altius hits 67-72 million in royalty revenue because the market is very uncertain on near term cash flows and the market hates declining royalty revenues.

 

I do feel a lot of the moves they have made in the last couple of years were very good deals, chapada, LIF (as long as management doesn't do something dumb) and 2nd part of potash royalty deal were deals that are likely to turn out well.  The problem is that 777 and thermal coal royalty purchases didn't work out as planned.  When they made the 777 purchase I think they felt it had a good chance of getting extended.  I would also guess that in their worse case scenario they didn't plan the thermal coal royalties working out this way.  I know the thermal coal and potash package came together but those deals just didn't work out well.  I don't think this stock is expensive but I also don't see it being super cheap.  Unfortunately, it looks like dead money to me. 

 

The one thing they have going for them is that commodities have been pretty brutal for quite awhile, majors seem to be only building tier 1 assets and sooner or later commodities are likely to turn.  The other positive is that Excelsior and Allegiance coal have a decent chance of replacing the 777 mine.  Those two mines have a decent probability of working out for Altius. 

[nostradamus]

Cheer up everyone. When commodities market moves decisively upwards:

 

- The royalty revenue will go up significantly AND it will be rerated by the market.

- The equity portfolio will go up AND the market will assign value to potential future deals that altius might do.

- The PG portfolio will start to reveal spectacular gains AND the market will assign value to potential future deals.

- Altius will pay off its debt and reroute the cash flow to a massive increase in dividends.

 

All of the above will happen at more or less the same time. Massive upside leverage, without the downside of financial leverage. It has been a long time coming, but when it does, it's going to be spectacular.

 

N.

 

[Liberty]

Cheer up everyone. When commodities market moves decisively upwards:

 

- The royalty revenue will go up significantly AND it will be rerated by the market.

- The equity portfolio will go up AND the market will assign value to potential future deals that altius might do.

- The PG portfolio will start to reveal spectacular gains AND the market will assign value to potential future deals.

- Altius will pay off its debt and reroute the cash flow to a massive increase in dividends.

 

All of the above will happen at more or less the same time. Massive upside leverage, without the downside of financial leverage. It has been a long time coming, but when it does, it's going to be spectacular.

 

N.

 

That's basically been the consensus in this thread since 2011. I certainly hope it happens for shareholders.

[SharperDingaan]

A producer doesn't sell a royalty/'off take' agreement unless it has to.

It may have been that bank financing wasn't available when it was needed, simply because they were the wrong industry at the wrong time. It may have been that backers weren't confident there was a buyer for the ore that your new mine would produce, and had made financing conditional upon it. The royalty buyer can either buy existing production (& hope there's more ore), or 'maybe' production - that could be significant if it occurrs, but timing is uncertain.

 

The royalty itself is essentially a floating rate bond - where payment, timing, maturity date, and discount rate are all up for grabs. Of course with so much risk, forecast future cashflow is discounted at a very high rate. Current cashflow is king, and forecast cashflow > 5 years is essentially worth nothing. Current cashflow depends on commodity price, & throughput - at a time when every other mine in the world is also trying to maximize its throughput. Volatility.

 

ALS has some great agreements, but until commodity prices rise - there isn't going to be any magic.

It's also highly likely that inital cashflow will go into strengthening the SFP. Debt reduced, & a 'pile' of marketable securities.

No change in dividend until the 'pile' starts attracting 'suitors' - welcome, or otherwise.

 

If you want 'predictable, slow & steady' this isn't the place. Wrong industry, and wrong structure.

As the objective is incompatable, 'dissapointment' over time is pretty much assured.

 

When things turn they should do very well, but it's going to be maybe a once/decade event.

Does it 'turn' tommorrow, or 5 years from now? Anyone's guess.

 

SD

 

[linealdin]

https://www.riotinto.com/documents/190118_Rio_Tinto_releases_fourth_quarter_production_results.pdf

 

See bottom of page 30 for IOC Q4 results:

 

4.830 million tonnes of production

5.234 million tonnes of sales

 

Great quarter. I like to see sales outpace production. It shows the strong market demand the market has for high quality ore and pellets.

 

I estimate LIF has C$96 million, or C$1.50 per share, in cash hoard. Altius’s share of that is worth C$5.25 million.

 

LIF management thinks it needs to hold cash in anticipation of a sale or public listing of Rio Tinto’s 58.7% stake in IOC. They may be right.

[linealdin]

Updated Prairie Coal Payback calculation (electrical and met coal):

 

C$77.338 million in royalties received (through 12/31/18).

 

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

 

= 64.2% payback in 4.75 years.

 

*

 

Despite the hysteria coal remains a steady money-earner for Altius. C$16.346 million in coal royalties received in 2018. At that steady annual clip it obviously won’t take long to achieve payback on the original purchase price and then start raking in profits.

 

I expect Altius to receive about C$215 million total over the lives of the power plants and mines. Those royalties are being continually reinvested as they are received every month. It’s not a home run but it’s certainly not the strikeout many of you claim it to be. It’s a single.

[linealdin]

By the end of 2019 Altius will have received 78% payback on the coal royalties.

 

91% payback by the end of 2020.

 

105% payback by the end of 2021.

 

There’s no credible coal phaseout scenario that affects Altius during those 3 years. The real phaseout damage begins in the middle of the decade. But I still think Altius squeezes C$215 million out of the package because of coal co-firing with natural gas and mine life extensions at Cheviot.