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Silly worries about “cash drag” are part of how a sophisticated player like Rio Tinto ends up buying Alcan for $38 billion and Riversdale Resources for $4 billion. Colossal blunders right at the top of the market.

 

Altius is going to exit the coming commodity bull market, which will be long and glorious, with a lot of cash drag. It will look like a drag until everyone else goes bust.

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777 began production with around 2 billion pounds of copper equivalent reserves. Curipamba has around 1.3 billion pounds of copper equivalent resources. That should increase with the next resource update.

 

777 increased its reserves 31% during production. Its mine life runs from 2004 to 2021.

 

The 2% royalty at Curipamba is less impactful than the 4% royalty on 777. But Curipamba should partially replace 777. The timeline is about right. I expect Kargl-Simard will try to bring Curipamba into production by 2021 or 2022.

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Silly worries about “cash drag” are part of how a sophisticated player like Rio Tinto ends up buying Alcan for $38 billion and Riversdale Resources for $4 billion. Colossal blunders right at the top of the market.

 

 

+1

 

Funny how no-one ever talks about cash drag at Berkshire. No, that’s optionality for the next downturn.

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Copper vs Gold, Ecuador Edition

 

Sandstorm just paid US$32.75 million for a 0.9% royalty on Fruta Del Norte, a gold deposit in Ecuador that will begin production in late 2019. The mine is targeted to produce 330,000 gold ounces a year for a 15 year mine life.

 

330,000 ounces x 15 years x $1300 gold price x 0.9% royalty = US$58 million total royalty revenue to Sandstorm.

 

Altius paid US$10 million for a Ecuadorian copper royalty that could equal or surpass in Fruta Del Norte in total revenue over a similar mine life. Caveats: Fruta Del Norte is far more advanced and is scheduled to begin production in late 2019; both Fruta Del Norte and Curipamba could expand resource or extend mine lives.

 

The takeaway for me is that the intense competition in gold royalty space is driving gold royalty prices sky high. Altius has very few competitors in the diversified royalty space and is still able to make accretive deals.

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Silly worries about “cash drag” are part of how a sophisticated player like Rio Tinto ends up buying Alcan for $38 billion and Riversdale Resources for $4 billion. Colossal blunders right at the top of the market.

 

 

+1

 

Funny how no-one ever talks about cash drag at Berkshire. No, that’s optionality for the next downturn.

 

Buffett has shown the ability to deploy large amounts of capital at good returns. When he was dealing with amounts similar to what Altius is dealing with, he was doing 40-50% a year, and even with hundreds of billions he's been doing pretty well.

 

What I'm saying is that I haven't seen that out of Altius lately. And if you can't deploy the money at high returns to make up for the drag during times when the cash is sitting there, then it's a real problem.

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Silly worries about “cash drag” are part of how a sophisticated player like Rio Tinto ends up buying Alcan for $38 billion and Riversdale Resources for $4 billion. Colossal blunders right at the top of the market.

 

 

+1

 

Funny how no-one ever talks about cash drag at Berkshire. No, that’s optionality for the next downturn.

 

Buffett has shown the ability to deploy large amounts of capital at good returns. When he was dealing with amounts similar to what Altius is dealing with, he was doing 40-50% a year, and even with hundreds of billions he's been doing pretty well.

 

What I'm saying is that I haven't seen that out of Altius lately. And if you can't deploy the money at high returns to make up for the drag during times when the cash is sitting there, then it's a real problem.

 

No, you haven't seen that out of Altius lately. I agree. But you have seen royalty revenue grow like a weed, and probably closer to the bottom of the cycle than the top. We will see how things look at the top.

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No, you haven't seen that out of Altius lately. I agree. But you have seen royalty revenue grow like a weed, and probably closer to the bottom of the cycle than the top. We will see how things look at the top.

 

Royalty revenue grew a lot because they spent a lot of cash for royalties. They traded cash for cashflowing assets. The question is, what will the return be on that investment over longer periods?

 

When you have a corporation that is basically a pile of cash and non-cash flowing assets that trades a big chunk of cash (and takes up debt and sells shares) for cash-flowing assets, it's normal to see revenues "grow like a weed", especially from such a small base. But looking at that alone doesn't tell us much about value creation.

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No, you haven't seen that out of Altius lately. I agree. But you have seen royalty revenue grow like a weed, and probably closer to the bottom of the cycle than the top. We will see how things look at the top.

 

Royalty revenue grew a lot because they spent a lot of cash for royalties. They traded cash for cashflowing assets. The question is, what will the return be on that investment over longer periods?

 

When you have a corporation that is basically a pile of cash and non-cash flowing assets that trades a big chunk of cash (and takes up debt and sells shares) for cash-flowing assets, it's normal to see revenues "grow like a weed", especially from such a small base. But looking at that alone doesn't tell us much about value creation.

 

Indeed. Hence my comment about seeing what things look like at the top (and through the cycle).

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Indeed. Hence my comment about seeing what things look like at the top (and through the cycle).

 

If you read this thread, or basically any commodity business thread, you'll see that people have been saying we've been "just about to inflect higher from this temporary bottom" for many years, sometimes that was said right before another leg down (when oil went from 100 to 70, it was now cheap, and then it went much cheaper).

 

If commodities were easy to predict, it wouldn't be such a graveyard for investors and companies, and the industry as a whole wouldn't have so much trouble barely making its cost of capital in ROIC. Commodity price movements are basically random, and commodity companies are levered to those movements and have to spend capex ahead of unknown revenues, and since there are no barriers to entry, high prices always plan the seed of low prices. Just when you start to get used to decent results, the rug is usually pulled from under your feet before you can react. Tough business...

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Copper vs Gold, Ecuador Edition

 

Sandstorm just paid US$32.75 million for a 0.9% royalty on Fruta Del Norte, a gold deposit in Ecuador that will begin production in late 2019. The mine is targeted to produce 330,000 gold ounces a year for a 15 year mine life.

 

330,000 ounces x 15 years x $1300 gold price x 0.9% royalty = US$58 million total royalty revenue to Sandstorm.

 

Altius paid US$10 million for a Ecuadorian copper royalty that could equal or surpass in Fruta Del Norte in total revenue over a similar mine life. Caveats: Fruta Del Norte is far more advanced and is scheduled to begin production in late 2019; both Fruta Del Norte and Curipamba could expand resource or extend mine lives.

 

The takeaway for me is that the intense competition in gold royalty space is driving gold royalty prices sky high. Altius has very few competitors in the diversified royalty space and is still able to make accretive deals.

 

linealdin, I really enjoy your posts and appreciate the work you are doing. But everyone would agree that you tend to be very optimistic about ALS. I just wanted to comment on the Sandstorm (SSL) vs. ALS deals, as I am a SSL shareholder also and familiar with the ecuadorian mining sector (or developing mining sector).

 

You are comparing apples to oranges again, frankly. The most important facts (but not all!) that you don't sufficiently take into account are the following, imho.

Fruta del norte:

1) world class gold project

2) Resources (not reserves!) of ~ 10 million high-grade oz (at 330koz thats 30 years mine life)

3) good metallurgy, 90%+ recovery

4) 644 square km land package

5) mine almost built

6) mine built by serially successful mine builders

 

vs.

 

Curipamba

1) looks like a really good VMS deposit, but still in exploration phase

2) Resources of 10Mt of high-grade polymetallic ore (thats a good start for sure)

3) haven't seen metallurgy ? complex?

4) 220 square km land package

5) no mine will be built for many years

6) the people involved have no idea of bulding successful mines

 

In the end only time will tell. Probably both good deals in the end.

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I’m a former Sandstorm shareholder. I understand their management. I noted in the original comparison post that Fruta Del Norte was “far more advanced” than Curipamba, that its 15 year mine life could be extended, that its total resources could be expanded, and that it is a gold project not a copper project.

 

Further distinctions between Fruta Del Norte and Curipamba:

 

1) Underground (FDN) vs open pit (Curipamba). Sometimes converting underground resources to reserves can be tricky or very expensive.

 

2) Fruta Del Norte initial capex of US$692 million likely to be much higher than Curipamba’s initial capex. The Adventus PEA in early March and feasibility study to be delivered late this year will make that certain.

 

3) 0.9% royalty vs 2% royalty. We know Sandstorm will receive a 0.9% royalty on 330,000 ounces of annual gold production for the first 15 years of production. Based upon my discussions with Kargl-Simard about their tradeoff studies for processing plant size at Curipamba I believe Altius would be projected to receive more annual revenue from its royalty (based on current gold and copper prices). Again the PEA will establish the parameters of how big a processing plant and how long an initial mine life at Curipamba.

 

*

 

I don’t know about “no mine for many years.” Curipamba is permitted for a 1000 tonnes per day operation. Permitting for a larger operation has begun. Open pit = lower capex and shorter construction period. I believe Adventus is targeting 2021 or 2022 for initial production.

 

I will revisit the FDN vs Curipamba comparison once the PEA is published.

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Indeed. Hence my comment about seeing what things look like at the top (and through the cycle).

 

If you read this thread, or basically any commodity business thread, you'll see that people have been saying we've been "just about to inflect higher from this temporary bottom" for many years, sometimes that was said right before another leg down (when oil went from 100 to 70, it was now cheap, and then it went much cheaper).

 

If commodities were easy to predict, it wouldn't be such a graveyard for investors and companies, and the industry as a whole wouldn't have so much trouble barely making its cost of capital in ROIC. Commodity price movements are basically random, and commodity companies are levered to those movements and have to spend capex ahead of unknown revenues, and since there are no barriers to entry, high prices always plan the seed of low prices. Just when you start to get used to decent results, the rug is usually pulled from under your feet before you can react. Tough business...

 

It's a very tough business. It only works for contrarians with a very long term mindset (because the cycles can be so long).

 

I can't speak for what others have said in the past. I bought a small amount of Altius in 2018 as a long term holding at what I regarded as a fair price with upside optionality. I have no idea when the next top is, and we may go down before we go up, but I am confident we are not at a top now.

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It's a very tough business. It only works for contrarians with a very long term mindset (because the cycles can be so long).

 

I can't speak for what others have said in the past. I bought a small amount of Altius in 2018 as a long term holding at what I regarded as a fair price with upside optionality. I have no idea when the next top is, and we may go down before we go up, but I am confident we are not at a top now.

 

I would be surprised if we were at a top too, but it's just a feeling, as you can't really analyze commodities (well, you can, but that doesn't increase your chances of being right much -- all the smart analysis in the world could never predict the moves in the price of oil/gold/copper/whatever).

 

My guess would be that ALS creates some value over time, but I don't have much confidence that they can compound much higher than 5-12% over longer periods (which would be an improvement over the past decade+), which doesn't make it an attractive investment when considering the alternatives.

 

Sometimes the best way to win is not to play. That's my approach with commodities. You say it's for long-term holders, but to me it seems more like it's for short-term traders who can successfully ride cycles and benefit from volatility, or speculators who like buying lotto tickets (usually negative expected return when opportunity cost taken into account, but hey, some people do get lucky). To me, good long-term holdings have time on their side and are decently predictable, two things that commodity businesses don't have.

 

FISV and JKHY can know with decent certainty how sticky their customers are, what margins they can sell their products to them, etc. Some miner or royalty holder can't know how much ore they'll get out, at what grade, be able to sell it at what price, what kind of cost inflations will hit its mines, and whatever it knows today, it can all change tomorrow and the commodity price can spike up or plunge down or whatever. Tough business...

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It's a very tough business. It only works for contrarians with a very long term mindset (because the cycles can be so long).

 

I can't speak for what others have said in the past. I bought a small amount of Altius in 2018 as a long term holding at what I regarded as a fair price with upside optionality. I have no idea when the next top is, and we may go down before we go up, but I am confident we are not at a top now.

 

I would be surprised if we were at a top too, but it's just a feeling, as you can't really analyze commodities (well, you can, but that doesn't increase your chances of being right much -- all the smart analysis in the world could never predict the moves in the price of oil/gold/copper/whatever).

 

My guess would be that ALS creates some value over time, but I don't have much confidence that they can compound much higher than 5-12% over longer periods (which would be an improvement over the past decade+), which doesn't make it an attractive investment when considering the alternatives.

 

Sometimes the best way to win is not to play. That's my approach with commodities. You say it's for long-term holders, but to me it seems more like it's for short-term traders who can successfully ride cycles and benefit from volatility, or speculators who like buying lotto tickets (usually negative expected return when opportunity cost taken into account, but hey, some people do get lucky). To me, good long-term holdings have time on their side and are decently predictable, two things that commodity businesses don't have.

 

FISV and JKHY can know with decent certainty how sticky their customers are, what margins they can sell their products to them, etc. Some miner or royalty holder can't know how much ore they'll get out, at what grade, be able to sell it at what price, what kind of cost inflations will hit its mines, and whatever it knows today, it can all change tomorrow and the commodity price can spike up or plunge down or whatever. Tough business...

 

I think there's a lot of truth in that, although I think it is fairly easy to overestimate the long term predictability of "franchise" companies. I own lots of them but it's quite possible several of them won't make it through the next 50 years (which matters to me because that's roughly how long I will likely be around to spend the proceeds of my investments). Copper, on the other hand, almost certainly will. I think some commodities (maybe not coal!) are quite predictable over the very long term.

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I think there's a lot of truth in that, although I think it is fairly easy to overestimate the long term predictability of "franchise" companies. I own lots of them but it's quite possible several of them won't make it through the next 50 years (which matters to me because that's roughly how long I will likely be around to spend the proceeds of my investments). Copper, on the other hand, almost certainly will. I think some commodities (maybe not coal!) are quite predictable over the very long term.

 

There's a lot to unpack here:

 

It's not so much about certainty, which you'll never get in investing, or if you get it, you won't get any risk premium (T-bills), it's about comparing options. Can you be sure anything will be there in 50 years? Probably not for most things. Can you be a lot more sure that they'll make good economic returns on their capital than a commodity business for the next 5-10 years? Often, yeah.

 

Copper being there in 50 years doesn't mean anything. Water and air will be there in 50 years. What matters is can you make excess profit with that business, or will that be competed away until you basically make your cost of capital? Or worse, destroy capital because your are riding a wild bronco with debt and lots of fixed assets creating operating leverage (which cuts both ways)..

 

What needs to be predictable about a business is not whether someone will still do it in a long time, it's the stability of the ROIC in excess of your cost of capital (that's what a competitive advantage protects). Businesses with no moat tend toward that over the cycle, which is why when you look at long-term table analyzing the ROIC in various industries, commodities is usually the lowest with mid single digit returns.

 

I'm trying to find a certain table that I know I saw where they show returns over long periods for various industries, probably in a Mauboussin paper... Can't find it right now, but there's good stuff in his base rate book and his roic paper:

 

https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&source_id=csplusresearchcp&document_id=1065113751&serialid=Z1zrAAt3OJhElh4iwIYc9JHmliTCIARGu75f0b5s4bc%3D

 

https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&source_id=csplusresearchcp&document_id=806230540&serialid=C0owv4XbV7zL%2BTQLggWqjPthH7IUpSwUZpiIwdvDgtA%3D

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I think there's a lot of truth in that, although I think it is fairly easy to overestimate the long term predictability of "franchise" companies. I own lots of them but it's quite possible several of them won't make it through the next 50 years (which matters to me because that's roughly how long I will likely be around to spend the proceeds of my investments). Copper, on the other hand, almost certainly will. I think some commodities (maybe not coal!) are quite predictable over the very long term.

 

There's a lot to unpack here:

 

It's not so much about certainty, which you'll never get in investing, or if you get it, you won't get any risk premium (T-bills), it's about comparing options. Can you be sure anything will be there in 50 years? Probably not for most things. Can you be a lot more sure that they'll make good economic returns on their capital than a commodity business for the next 5-10 years? Often, yeah.

 

Copper being there in 50 years doesn't mean anything. Water and air will be there in 50 years. What matters is can you make excess profit with that business, or will that be competed away until you basically make your cost of capital? Or worse, destroy capital because your are riding a wild bronco with debt and lots of fixed assets creating operating leverage (which cuts both ways)..

 

What needs to be predictable about a business is not whether someone will still do it in a long time, it's the stability of the ROIC in excess of your cost of capital (that's what a competitive advantage protects). Businesses with no moat tend toward that over the cycle, which is why when you look at long-term table analyzing the ROIC in various industries, commodities is usually the lowest with mid single digit returns.

 

I'm trying to find a certain table that I know I saw where they show returns over long periods for various industries, probably in a Mauboussin paper... Can't find it right now, but there's good stuff in his base rate book and his roic paper:

 

https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&source_id=csplusresearchcp&document_id=1065113751&serialid=Z1zrAAt3OJhElh4iwIYc9JHmliTCIARGu75f0b5s4bc%3D

 

https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&source_id=csplusresearchcp&document_id=806230540&serialid=C0owv4XbV7zL%2BTQLggWqjPthH7IUpSwUZpiIwdvDgtA%3D

 

We agree on the concepts you discuss here (although I may be more optimistic than you that copper will be conducting electricity in 50 years).

 

However, we also have to recognise that many fortunes have been created in the commodity business over the years. Ultimately that's because discovering a great resource, levering it somewhat, and then extending the mine life, can produce a great return for equity. Altius are sowing a lot of seeds with their exploration work, and also laying the foundation for a lot of royalties which eliminate some of the worries you cite because they sits above the fixed assets, the operating costs, and the debt. Is it somewhat speculative? Of course it is, but it's a speculation with a fairly firm foundation.

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We agree on the concepts you discuss here (although I may be more optimistic than you that copper will be conducting electricity in 50 years).

 

Sorry if I wasn't clear. I'm not saying I don't think copper will be there in 50 years. I'm saying that the fact of it being there doesn't mean you'll be able to make good returns mining or selling it. Television sets also have razor-thin margins and are commodity businesses, but at least there's some predictibility in pricing (deflation, mostly). What if the price of TVs went up and down 20-30% a year? How hard would it be to support building new factories and operating expenses? Add debt to it, along with managements known to screw shareholders by paying themselves high salaries and issuing lots of stock, and you're getting close to it..

 

Kind of like what Buffett said about air travel... Since Kitty Hawk tremendous progress, better planes, orders of magnitude more people flying... But cumulatively the industry has destroyed capital. Why? Because they aren't in control of their inputs and their outputs are commoditized, so they aren't in control of pricing either. Recently they've been doing a bit better because consolidation has lowered competition, but the point still stands, and it's easier to start a new miner than to start a new airline.

 

However, we also have to recognise that many fortunes have been created in the commodity business over the years. Ultimately that's because discovering a great resource, levering it somewhat, and then extending the mine life, can produce a great return for equity. Altius are sowing a lot of seeds with their exploration work, and also laying the foundation for a lot of royalties which eliminate some of the worries you cite because they sits above the fixed assets, the operating costs, and the debt. Is it somewhat speculative? Of course it is, but it's a speculation with a fairly firm foundation.

 

Lots of fortunes have been made playing the lotto too, but that doesn't make it a good bet. It just means you're looking at the winners and not the losers (survivorship bias). Anything at the right price can be a good investment, but what separates investing from speculation IMO is the ability to make intelligent predictions about what is likely to happen rather than being along for the ride ("oh, oil just fell from 100 to 30, guess that wipes out everything we've made over decades, oops").

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I’m benchmarking Altius’s total return, including reinvested dividends, for the next 10 years against Fiserv and Jack Henry. 1/23/19 through 1/22/29.

 

You do whatever you want.

 

Fiserv opened the day at US$78.86

Jack Henry at US$130.07

Altius at C$11.31

 

Fiserv not a dividend payer. JH pays a 1.2% dividend. Altius pays a 1.4% dividend. I’m betting against the long uptrends. Back to earth over the next decade.

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I’m benchmarking Altius’s total return, including reinvested dividends, for the next 10 years against Fiserv and Jack Henry. 1/23/19 through 1/22/29.

 

You do whatever you want.

 

Fiserv opened the day at US$78.86

Jack Henry at US$130.07

Altius at C$11.31

 

Fiserv not a dividend payer. JH pays a 1.2% dividend. Altius pays a 1.4% dividend. I’m betting against the long uptrends. Back to earth over the next decade.

 

Do you often make long-term bets on companies you presumably don't know anything about just based on eyeballing their charts?

 

I could've mentioned Visa and Mastercard or MCO and SPGI too, JKHY and FISV were just too examples off the top of my head. Want to bet against those too?

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https://hotcopper.com.au/documentdownload?id=uOMxKKzFkiWRTLKhOROKAxjvSDYL4gy1yBnwv%2FRw%2FrFiGug%3D

 

Champion Iron is a cash machine: C$185 million in cash at the end of 2018. They received C$87.5 million net from operating activities in the quarter. Going like clockwork.

 

Market likes this news. CIA closed at C$1.28 in Canada and A$1.35 in Australia. Altius debenture conversion at $1, and shares purchased at 90 cents, both looking smarter.

 

Environmental permitting for Phase 2, doubling production, is on schedule.

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http://www.adventuszinc.com/news/122518

 

Adventus is gearing up for the engineering and construction stage of Curipamba by hiring both an independent director and a VP of projects with relevent experience building mines in Latin America.

 

Adventus also changing its name to shift away from the zinc thing. I would have preferred Adventus Copper. (Wolfden should change its name to Wolfden Zinc. Mt. Pickett has the 11% zinc grades.)

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https://hotcopper.com.au/documentdownload?id=uOMxKKzFkiWRTLKhOROKAxjvSDYL4gy1yBnwv%2FRw%2FrFiGug%3D

 

Champion Iron is a cash machine: C$185 million in cash at the end of 2018. They received C$87.5 million net from operating activities in the quarter. Going like clockwork.

 

Market likes this news. CIA closed at C$1.28 in Canada and A$1.35 in Australia. Altius debenture conversion at $1, and shares purchased at 90 cents, both looking smarter.

 

Environmental permitting for Phase 2, doubling production, is on schedule.

 

Champion closed the week at A$1.44 in Australia and C$1.35 in Canada. That may improve with news of Vale’s latest tailings disaster at an iron mine in Brazil. The disaster will likely delay both the restart of Samarco (extra scrutiny) as well as take the site of new accident out of operation for many years.

 

The Vale larger complex where the latest tailings dam break took place produces 26.3 million tonnes per annum, about 7% of their total capacity. 19 people died in the Samarco disaster. If the fatalities in this disaster are in the hundreds there will be very severe consequences for Vale in terms of penalties and closed mines.

 

There are environmental problems in Canada but this scale of disaster just wouldn’t be allowed to happen. The Labrador Trough is a safer place for iron ore production.

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