ALS.TO - Altius Minerals

[Guest Dazel]

http://www.metalbulletin.com/Article/3135150/Iron-ore-and-coking-coal/Spot-635-Fe-iron-ore-prices-rise-further-to-140-142-cfr.html

 

 

Altius is sitting in the sweet spot for a rebound in china...which is happening. Iron ore has sky rocketed yet iron ore stocks and headlines are muted. When this happens companies start buying up cheap assets. It appears that this will be the case as the investing public is oblivious to the strength of this rally.

 

 

Dazel.

[biaggio]

different view on china from Kuppy.

 

http://adventuresincapitalism.com/post/2012/12/24/How-Many-Malls-Does-China-Need.aspx

 

the music may stop one day in China + there may be big problems as a result.

 

ALS + Alderon may hopefully be out of the iron play by then.

 

Or perhaps all this and other infrastructure that people worry about will be used once all those billions of people move to more affluent lifestyle i.e. build it + they will come.

 

The western world needs these 3rd world countries to thrive. For their and our sake I hope they succeed. Hopefully the corruption will not get in the way.

 

 

[Guest Dazel]

 

 

http://www.mining.com/china-to-buy-major-african-iron-ore-project-for-1-45-billion-79462/

 

 

The resource is under a billion tons and is in the Congo....smaller than Alderon...The Chinese acquisitions continue unabated.

 

Say what we will about the economy and the future of china...money talks in my mind. They obviously need the resources or they would not continue to buy them at an incredible pace.

 

Dazel.

[hohi]

The tonnage may be lower but it's 57% Fe. But still 1,45 billion dollar for some project in the middle of Africa without the infrastructure...

 

Also some comments from our CEO about Altius and China:

http://www.vocm.com/newsarticle.asp?mn=2&id=29496&latest=1

 

cheers,

hohi.

[Guest Dazel]

http://www.metalbulletin.com/Article/3135484/Iron-ore-and-coking-coal/Spot-635-Fe-iron-ore-prices-jump-5-on-Monday.html

 

 

Almost touching $150....

 

Dazel.

[Guest Dazel]

http://www.theglobeandmail.com/report-on-business/asian-led-group-takes-11-billion-stake-in-arcelormittal/article6830959/

 

 

$1.1 billion for 15% stake...of annual production of 15 million tons...

 

Alderon is looking  to produce 16 million tons in annual production...it has obvious production start up costs etc...however, this latest transaction gives an example of what these mines are worth to steel producers...once they go to production...there is massive upside to Alderon amd Altius if iron ore prices remain where they are.

 

Dazel.

[beerbaron]

Did I get that right, they valued the MT Open pit at 7.3B$ ? What's the expected lifetime of that pit at 15MT/Y?

 

BeerBaron

[Guest Dazel]

 

Beer baron,

 

 

You have it right...Mont Wright mine has a billion tonne of iron ore resource at 30%. very similar to that of Alderon...same time period for lifetime of the mine at 25 years.

 

Altius and Alderon are going to appreciate many times. They are clearly ridiculously priced...iron ore stocks globally are skyrocketing on the 85% rise in iron ore pricing in the last 3 months. it looks like Posco got a good deal in the Labrador trough as they started bidding for assets in September when the credit agencies got on large producers to cut debt. They would not get that deal today.

 

We expect 2013 to be extremely rewarding....

 

Dazel.

[biaggio]

http://greatinvestors.tv/video/how-to-use-hidden-options-to-beat-inflation-with-matthias-ri.html

 

How to Use "Hidden Options" to Beat Inflation, with Matthias Riechert of Polleit & Riechert

 

This is sort of how I was thinking of ALS. as far as protection from inflation

 

If Alderon was to do a similar deal as noted above at $7.3 billion , ALS share would be 25% or ~$1.8 B or ~ $60 per share (+ the royalty).

 

I am not including capital needed for mine

 

Wow this seems too good to be true (I have been saying this since the beginning of the thread). Even at half the valuation this would be a homerun.

[ItsAValueTrap]

You have to account for the different economics of the mines.  If you look at Cliffs' various operations, operating costs vary a lot.

 

You might compare Alderon to Bloom Lake... the reality so far has been that Bloom Lakes' opex and output has been much lower than originally claimed by Consolidated Thompson and Cliffs.  They claimed opex of around $30-$40+/ton and production of 8MT/yr expanding to 16MT/yr.  Opex will likely be around $80/ton, production is barely hitting 8MT/yr.  I'm not sure why but Cliffs has decided to postphone its mine expansion:

http://www.cbc.ca/news/canada/newfoundland-labrador/story/2012/11/19/nl-1119-bloom-lake-layoff.html

 

The MT mine might have 24 MT/yr of production (15MT concentrate and 9MT in pellets).  I am guessing that their operating costs will be lower than Alderon.  I believe that have some infrastructure in a private railroad and (presumably) a pelletization plant.

 

2- Here's my back of the envelope calculation for Alderon:

 

http://www.cbc.ca/news/business/story/2011/01/11/consolidated-thompson-iron-mines-takeover.html

Bloom Lake was purchased for $4.9B

 

I'm not sure exactly how much capex was put into Bloom Lake at the time but let's assume $0.9B.  (I'm too lazy to check SEDAR.)  So now you have $4B.

 

There is risk to mine development and Alderon's cash flows don't happen right away so you need to discount Alderon further.  Who knows what the right discount rate is.

 

But say at $2B, Alderon is still worth far more than its current market cap (around $200M).  Of course iron ore prices are much lower now than when Cliffs bought Consolidated Thompson/Bloom Lake.

 

In the stock market, iron ore miners are not getting very high multiples.

 

3- Of course Alderon (EDIT: Altius, not Alderon) has a lot of leverage to iron ore prices because it has a lot more land.  The Julienne Lake project may be promising and could be worth a lot.  It has many joint ventures exploring for more iron ore.  It has a lot of upside exposure to iron ore.

 

4- Altius continues to buy back shares.  It's trading near book value but some aspects of its book value are understated, e.g. the nickel royalty has a carrying value that is too low, the Alderon/Kami royalty is worth more than book, etc.

[Guest Dazel]

It's a Value Trap,

 

For 3. I think you meant "Altius" has a lot of land....and I agree...Altius has huge exposure to the Labrador iron ore trough...

 

4. Agreed on book value being understated...all of the royalties have 0 cost bases for the most part...under our assumptions whatever you price Alderon at $1,2 or $3 billion...production makes the royalty to Altius a home run...with a cost of 0...roi would be the highest in the royalty industry...

 

Every one billion of market cap at Alderon almost doubles Altius' current market value with their 25% ownership stake....

 

*cliffs cancelled expansion during the same time fortes cue arcellor bhp and vale cut back on expansion plans...the iron ore price is up 85% since then...

 

As I said earlier I think Posco was opportunistic with their purchase...they tried to buy a company in Australia and were rejected.

 

Iron ore Stocks are following the price upwards and multiples will expand with continued stability in the iron ore price at current prices around $150... All of the big producers are up very big from their bottoms in October...BHP is at a 52 week high.

 

Dazel.

[no_free_lunch]

Have been doing some digging on this one and it does sound promising however I have a few questions.  I am very much a complete novice when it comes to mining companies so please take my comments below in that context.

 

In regards to the comparison to other mines, I have read that there are issues with the quality of the iron concentrate at Alderon's upcoming mine.  According to the articles I have read, there are higher levels of Manganese than is standard and as such it has to be sold offshore as North American plants won't process it.  The articles also suggested that there could be a $15 price reduction as a result of the quality.  However, this would seem to contract Hebei's agreement to purchase 60% of the product at a 5% discount to spot.  What is your guys take on this?  Will the remaining 40% go for a lower price?

 

Also the fact that the product needs to be shipped to China will add some $25 / MT to costs, I wonder if the comparable mines are selling to North America or not?

[ItsAValueTrap]

Those issues have been discussed in this thread before.  (I don't think we ever really reached a conclusion though.)

 

I'd note that Hebei's agreement is to purchase the first several million tons at 5% off the benchmark price.  If a mine only produces less than 8MT/yr (which is likely in my opinion, given what happened with Bloom Lake; there is a connection between Bloom Lake and Alderon as both used BBA for technical reports and the management teams of both are associated with Forbes and Manhattan).  If the mine produces less, Hebei will be buying more than 60% of the output at a discount.

I presume that Hebei will receive a lower price based on the level of manganese in the ore.  It's standard practice for there to be smelter deductions.  You pay a lower price based on the level of unwanted elements in the product.

 

The off-take agreement also gives Hebei an option on the remaining 40%.  This option is probably worth something.

 

Also the fact that the product needs to be shipped to China will add some $25 / MT to costs, I wonder if the comparable mines are selling to North America or not?

A lot of iron ore in the world and in the Labrador Trough is being sold to China.  Drybulk shipping rates have fluctuated enormously in the past and have affected the iron ore trade.

 

In Alderon's case, the Hebei price is based on a benchmark price for iron ore delivered to a certain port in China.  So Hebei would be paying for shipping.

[Guest Dazel]

 

 

http://www.bloomberg.com/news/2013-01-03/arcelormittal-deal-fuels-iron-ore-rally-corporate-canada.html?cmpid=yhoo

 

This is why this deal within the Labrador Trough is so important..It gives us  a direct comparison and shows us what kind of demand for iron ore their is globally. Steel suppliers know the difficulty involved in mining iron ore and they know what it was like to try to ge supply at $190 a ton. They are willing to put up capital to ensure supply.

 

The fact is mining is expensive...infrastructure costs are massive...location matters. As Brian Dalton has stated "Alderon" is advantaged because it has the right address. They do not have to be the highest quality mine in the world...but they have to be make sense on capital cost to bring to production  and over the Long term bring down costs of production to make their shareholders a nice profit on the spread. The economics of your location are everything in mining.

 

We know the demand is there...and we know the capital is there....execution matters...

 

As for Altius...if the entire labrador trough gets built out...They become the Gina Rinehart of Canada...they are the largest holders of land leases in Newfoundland Labrador.

 

http://en.wikipedia.org/wiki/Hancock_Prospecting

 

 

 

 

 

Dazel

[Ross812]

In regards to the comparison to other mines, I have read that there are issues with the quality of the iron concentrate at Alderon's upcoming mine.  According to the articles I have read, there are higher levels of Manganese than is standard and as such it has to be sold offshore as North American plants won't process it.  The articles also suggested that there could be a $15 price reduction as a result of the quality.  However, this would seem to contract Hebei's agreement to purchase 60% of the product at a 5% discount to spot.  What is your guys take on this?  Will the remaining 40% go for a lower price?

 

I would like to read the articles you read about manganese content in the Kami ore. Can you provide a link?

 

Here is what I came up with earlier:

Smelter deductions as far as I can tell don’t really come into play with respect to iron ore. Smelter credits/deductions are given to compensate the smelter for waste above a certain benchmark. For iron smelting this is usually in the form of credits or deductions above an agreed upon %Fe. The factory has to use the same amount of energy regardless if 58% Fe or 64% Fe ore is used and the recovery from 58% Fe ore is lower and waste higher so a credit/debit is given in the form of $5/%Fe to compensate. Sulfur and Manganese are not smelter deductions because they are actually incorporated into the steel (not a waste product).  Quality deductions may come into play. Most European iron ore contracts I could find state a max allowed sulfur % at 0.05. As far as Manganese goes, 0.4-1.1% is desirable. Alderon ore will have 1.6% Manganese and .053% sulfur which means it will probably be blended with lower manganese/sulfer/fe content ores during sintering. The ore as-is is acceptable to make steel in China, but blending a lower quality 60% Fe Indian ore with Alderon’s 65.5% Fe ore would create a product that could be sold in Europe. Manganese does not start affecting the quality of the steel produced until ~4%. 65.5% Fe 1.6% Mn or can only produce 2.45% Mn steel. Sulfur and the grain size distribution are the two main detractors to this ore’s marketability.

 

The grain size distribution means the ore would have to be formed pellets before it could be used in North American electric arc furnaces. The quality factors make the Ore unusable in the US without blending sintering then pelleting the ore. There is really no reason to do this because the US already has an ample supply of DSO and acceptable ore pellets from Canada. The grain size distribution is not a problem in China as they sinter and use blast furnaces. China is primarily concerned with the %Fe. Chinese iron plants can buy cheap ore with low sulfur and low manganese from India. The problem with Indian ore is it has a low Fe content 56-60%. This is solved when blending it with hi Fe Canadian ore.

 

Kami ore is also 65.5% Fe which means it would be priced at a premium to the 62% Platt price. This is about +$5-5.50/%. Which means Kami ore could fetch a price at Platt + $17.5. Hebei was smart when they locked in a price at 95% Platt. Manganese levels do not particularly matter when selling to China. Sulfur levels are just outside the range of what is acceptable in Europe (6% too high), but they are not selling to Europe anyway. Prices for ore are negotiated directly; Hebei gets preferential treatment at 95% Platt. I don’t think other companies are going to get this sweet heart deal. I would look for Platt + $5-17 for everyone else.

Hebei is not stupid. They would not have negotiated a price of 95% Platt if they could get Platt - $15. The Platt price is based off 62% Fe. Alderon ore is 65.5% which would fetch a premium of Platt + $5/%Fe if pricing gets really competitive. Using Platt for the product price assumption seems pretty reasonable and a little conservative.

 

[no_free_lunch]

I would like to read the articles you read about manganese content in the Kami ore. Can you provide a link?

 

http://glennchan.wordpress.com/2012/08/08/iron-ore-miners-mainly-in-the-labrador-trough/

 

The article has a link to a scotiabank analysis of Alderon as well.  Well the link is purportedly from scotia, it's actually hosted on a different site which is kind of strange.  In it, they include the $25/MT transport cost to China so they are assuming the pricing is on a delivered basis.

 

http://www.grandich.com/wp-content/uploads/2012/07/Iron-Ore-Report-July-2012-ADV-only.pdf

 

The transport cost is unfortunate but the pricing might actually be higher than spot based on these comments:

 

• Hebei will purchase 60% of the annual production

 

up to a maximum of 4.8Mt of the first 8.0Mt of

 

iron ore concentrate produced at the monthly

 

average price per DMT for iron ore sinter feed

 

fines quoted by Platts Iron Ore Index (including

 

additional quoted premium for iron content

 

greater than 62%) less a 5% discount.

 

• Hebei will also have the option to purchase

 

additional tonnage at a price equal to the Platts

 

Price, without any such discount.

 

Quote is from page 8 in this document:

 

http://www.alderonironore.com/_resources/presentations/ADV_PPT.pdf

[ItsAValueTrap]

Hebei is not stupid. They would not have negotiated a price of 95% Platt if they could get Platt - $15.

 

I think what will happen is this:

 

Hebei gets the Platt benchmark price

They may pay extra if the Fe% is high, as specified in the benchmark.

There will likely be quality deductions as outlined in the Kami technical report.  Maybe it's $15/ton... who knows.

In general, deductions are based on the level of unwanted elements in the ore.  Over the life of the mine, the quality of the ore will vary.  By using a variable price, the smelter will pay less for bad one.  Using a fixed price would be stupid... otherwise the mine could sell some really crappy ore to the buyer and they could adjust the processing circuits to output more concentrate at the expense of delivering lower quality concentrate.

 

2- The other question is whether or not you should trust Alderon's management, BBA, etc.  The mining world is full of people who overpromise and underdeliver.  I would take the Kami technical report with a huge grain of salt considering what happened with BBA's technical report on Bloom Lake.  The economics of the project may not be as good as outlined in the technical report.

 

There is (a small amount of) metallurgy risk.  The concentrate may have lower than 65% Fe.  Sometimes we don't know how well a processing plant will perform until it is actually built... look at the failure that is Vale's Goro project (e.g. acid spills, environmental damage, etc.).  What happens on a bench or pilot scale doesn't necessarily extrapolate to production scale.  If you want to fudge the economics of a project, you would make minor tweaks to your metallurgy assumptions.  Of course, the Goro project is an extreme example where technological risk was very high because that type of processing is cutting/bleeding edge.

 

3- You can read skim through this book if you are masochistic:

http://www.scribd.com/doc/23475626/Wills-Mineral-Processing-Technology

 

Basically...

- What happens on a bench or pilot scale doesn't necessarily extrapolate to production scale.

- Mineral processing engineers have to optimize for getting rid of unwanted elements versus not getting rid of valuable ore.  Mineral processing techniques usually remove a lot of waste and a small amount of wanted ore... you have to find the right balance between getting rid of unwanted waste and throwing away less ore.

 

http://glennchan.wordpress.com/2012/08/08/iron-ore-miners-mainly-in-the-labrador-trough/

That's my blog by the way ;)

[ItsAValueTrap]

The article has a link to a scotiabank analysis of Alderon as well.  Well the link is purportedly from scotia, it's actually hosted on a different site which is kind of strange.

Technically those analyst reports are the intellectual property of the firm that put it out.  Sometimes there are bootleg copies floating around because there are people who want to pump a stock.  Sometimes you will find copies of analyst reports hosted (presumably with permission) on a junior's website.

 

Of course the analysts generally suck up to juniors because the analyst's investment bank may raise capital for the junior and collect big underwriting fees.  So I never trust analysts.  There may be academic studies that show that you should do the opposite of analyst recommendations.  Check out this book:

http://www.amazon.com/Confessions-Wall-Street-Analyst-Information/dp/0060747706

[Guest Dazel]

http://finance.yahoo.com/news/alderon-release-feasibility-study-kami-110000386.html

 

http://www.metalbulletin.com/Article/3136976/Iron-ore-and-coking-coal/Spot-635-Fe-iron-ore-prices-jump-13-this-week.html

 

 

Prices are now above $150....this is extremely positive for all involved in iron ore...Alderon's timing on the feasibility study has worked out very well.

 

Dazel.

[Guest Dazel]

Its a value Trap,

 

 

I enjoy your posts...so please do not take this the wrong way...

 

To take Cliffs production costs for a mine "bloom lake"  where they have had nothing but operational troubles and a change in strategy for a couple of quarters is "wrong". I looked at your blog...you have asia pacific production costs at half of what they are. Your timing of your report is at the crash point of the iron ore market...your assumptions are on prices that are unsustainable for producers in the market globally not just the Labrador Trough.

 

Example of the Alderon bash was that they used $115 in their PEA...instead of the market price of $135 at the time of production....

"which may indicate that they think the price of iron ore is coming down over time"....should they use $170 for the feasibility study if they think it will go up from the current $155?

 

Sounds a bit off does it not?

 

As for the bloom lake and Alderon bashing you have been doing...I will give you the benefit of the doubt as you and everyone else that joined the crowd in being wrong on iron ore pricing in August to October...

 

We are talking about nothing when prices are this high...bloom lake production costs will come down and Alderon will be a successful mine.

 

Sorry have to call a spade a spade...you are wrong on bloom lake and Alderon...

 

And in your genius you will make a fortune on Altius!!!!

[biaggio]

Dazel, ItsaValueTrap, love your posts + recent debate- please continue.

 

This seems to be the case where nobody knows exactly how the mine will turn out i.e unknown & unknowable- it seems like the current valuation gives a lot of room for error.

 

I can see both your points + ALS still working out well for all of us i.e heads we win, tails we don t lose too much + probably win still -just a smaller amount

 

 

 

 

[Guest Dazel]

 

I am a business man.

 

So I will give you a hypothetical question on your business "bloom lake" mine.

 

You have made a large sum of earnings last year " 2011" because you are very profitable...

 

You have some operational trouble in your expansion of the mine "capital cost"....

 

For your 2012 year where you see that the iron ore price drops precipitously making your expansion plan that has operational issues look pretty bad...how do you book it for tax purposes?

 

As capital expenditure that depreciate over 25 years or do you book it as operational production cost for the 2012 and incur the full tax expenses of it in 2012?

 

If you are a business man you know the answer to that question. That would inflate the production cost now even though most of the work went towards expansion or capital cost for future production. It is smart business and tax strategy but it makes short term productions cost look bad...however, future production cost will fall and look stellar...making you look great. Analysts don't understand business because they have models and straightline thinking.

 

Anyone involved in business knows that quarterly and even yearly numbers can be massaged how you want them...and why everyone happens to hit their numbers..by a penny! That is nonsense...it is the longterm "cash production" that matters.

 

It's a value Trap.....I agree  with you that 80% of juniors are a ponzi scheme....producers are business people.

 

Dazel.

 

 

 

 

[Green King]

 

I am a business man.

 

So I will give you a hypothetical question on your business "bloom lake" mine.

 

You have made a large sum of earnings last year " 2011" because you are very profitable...

 

You have some operational trouble in your expansion of the mine "capital cost"....

 

For your 2012 year where you see that the iron ore price drops precipitously making your expansion plan that has operational issues look pretty bad...how do you book it for tax purposes?

 

As capital expenditure that depreciate over 25 years or do you book it as operational production cost for the 2012 and incur the full tax expenses of it in 2012?

 

If you are a business man you know the answer to that question. That would inflate the production cost now even though most of the work went towards expansion or capital cost for future production. It is smart business and tax strategy but it makes short term productions cost look bad...however, future production cost will fall and look stellar...making you look great. Analysts don't understand business because they have models and straightline thinking.

 

Anyone involved in business knows that quarterly and even yearly numbers can be massaged how you want them...and why everyone happens to hit their numbers..by a penny! That is nonsense...it is the longterm "cash production" that matters.

 

It's a value Trap.....I agree  with you that 80% of juniors are a ponzi scheme....producers are business people.

 

Dazel.

Great hypothesis and all.

How do you prove that is what happened ?

[Guest Dazel]

 

GK,

 

Its not a hypothesis...it's what I would do if it was my business...they would be idiots if I could prove it! Cliffs shuttered production in the U.S where production costs are much lower....only time will tell at bloom lake what the production cost will look like...but a couple of quarters is ridiculous to speculate over production costs in a mine or any business. My bet is costs drop significantly for a number of reasons...this being one of them...and when that happens and they get too low...they will also be wrong! It is what they average out to be over time that matters.

 

I have no interest in Cliffs...

 

Dazel.

[Green King]

 

GK,

 

Its not a hypothesis...it's what I would do if it was my business...they would be idiots if I could prove it! Cliffs shuttered production in the U.S where production costs are much lower....only time will tell at bloom lake what the production cost will look like...but a couple of quarters is ridiculous to speculate over production costs in a mine or any business. My bet is costs drop significantly for a number of reasons...this being one of them...and when that happens and they get too low...they will also be wrong! It is what they average out to be over time that matters.

 

I have no interest in Cliffs...

 

Dazel.

 

Just trying to be scientific. :) Big bath accounting has been one of the common tools just wondering if there was way to see it other than Gaming the mind of the operator.