ALS.TO - Altius Minerals

[Guest Dazel]

 

Gk,

 

companies accounting is something that can be altered...usually to the companies advantage....so scientific is tough...as for a mining company...cost allocations...you can imagine the swing you could have as I pointed out.

 

Big bath describes it well... Does anyone care if Cliffs has production cost of $69 in the third quarter 2012? The answer is no...if they do in the first quarter 2013 with prices at $155...and they predict them falling to $60 over the year...the analysts jump up and down and raise the stock to outperform etc...it takes off...if it's high enough they go out and raise money etc...miners are cyclical...

 

In this case the investment community wrongly bet the cycle was over...if I am right about the Cliffs example they have loaded up future earnings during the good price environment where we are now at $155... Huge margin and cash-flow for 2013.

 

Short sellers jumped all over iron ore with both feet...end of the cycle...production costs too high etc...I still have not seen much on the massive upward move in iron ore prices..or in the price of the miners shares...

 

If Cliffs did what I think they did it will be home run at Bloom Lake this year....but no one will hear about it or care unless you were involved in the Cliffs short squeeze or profited from the raising share price on the incredible margin they pulled off. Cliffs by the way raised $500m from bond investors during this period in the blink of an eye.

 

The only reason I am talking about this is too help some not be afraid of the short seller headlines...do your homework...when the headlines come out...they drive the price down...no uptick rule and they cover on the fear.

 

Bloom Lake was brought into this short argument and Alderon was dragged in as well...as a comparison. Wrongly...in my opinion.

 

Altius is easy to understand...and as many here on this board have learned...it is a good way to invest in iron ore without worrying about the above games that go on in the stock market everyday.

 

Dazel.

 

 

[ItsAValueTrap]

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 guess I am cynical... :P  There are a lot of companies that overpromise and underdeliver.  You can always blame failures on "operational troubles"... every mine has them.

 

I looked at your blog...you have asia pacific production costs at half of what they are.

I don't know.  I could definitely be wrong but I don't know which part you are talking about.

 

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.

I really don't know where iron ore prices are headed and I don't have a strong opinion on it.

 

Normally I'd rather not mess with iron ore because the price of iron ore and production of iron ore has gone up several times over the past few years.  This is highly unusual... theoretically you might expect a wave of overbuilding to eventually occur.  But... it's possible that iron ore prices don't crash.  Apparently China's infrastructure isn't overbuilt... even though they have too much high speed rail, real estate (their RE is the most overpriced in the world), too many malls, etc. they are lacking in other areas of infrastructure (e.g. sewers).  So I really don't know.  China is a huge anomaly in the iron ore/steel market and it could stay that way for a long time.

 

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?

The standard practice is to use the 3-yr trailing average.  I believe that's what the engineers are taught in school.

 

If they are assuming a low iron ore price, it makes the economics of the project look worse than if you assumed a higher commodity price.  So the technical report may potentially be understating the economics of the project.

 

At the end of the day... my thesis is that the Alderon/Kami mine will have economics slightly worse than Bloom Lake (take Bloom Lake's opex and add $15/ton).  That is my wild ass guess.  We'll see what happens...!  At current prices, I think I would rather be long Alderon than short it if I was forced to pick a side.

 

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...

I don't really know where iron ore prices are headed.

 

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

I don't think Bloom Lake's opex will come down much.  I don't think that they will find operational efficiencies because they should have found them all after a few years of operation.  Larger operations (BL is expanding) will reduce opex since there are some economies of scale to larger operations.

 

Over time, opex will likely go up due to cost inflation, a higher strip ratio (*depends on the geometry of the deposit and the pit), lower grade ore, etc.  Inflation in mining costs has been much higher than the CPI over the last decade and I expect this trend to continue.  We are only finding lower quality deposits... they take more people and machinery to mine.  Higher demand for people and machinery is pushing up costs.  There hasn't been major technological advances that have pushed down exploration or mining costs (e.g. technology like what 3-d seismic did for oil/gas, shale exploitation for natural gas).

 

I do think that a Kami mine will be built.

 

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

Yes we are both long Altius... why are we arguing!!  ;)

 

Cheers

 

[GlennAS]

Dazel and ItsAValueTrap, like Biaggio, I must say I really appreciate the back and forth. After holding off for months now on taking a position in Altius, I established a full position this week at an average cost around $10.30.

 

Looking very forward to Alderon's cc next week. Excellent value in Altius shares, and now seems like as good a time as any to go "all in".

 

Kind regards,

glenn

[original mungerville]

I echo those comments and am also thankful - I'm into Altius as well as of this week for a around 10.20 avg purchase price.

[Guest Dazel]

 

It's a value trap,

 

 

I appreciate your time and effort...and I would like you to continue to speak your mind. That is what this board is all about...I think it is likely the one of he best educational mining conversations on the planet.

 

Thankfully, we both own Altius which is not really a mining company but the lowest cost royalty company on the planet....

 

Having said that...my point is t hat Alderon " may" be a 5 to 10 bagger...Thompson consolidated was a 20 bagger....so if you think that Kami's economics are a little worse than Bloom Lake well I can live with that. Bloom Lake was sold when the price of iron ore was $190 a ton in 2011. Cliffs immediately tried to expand it to take advantage of high prices...there is no way to know what was capex and what was production cost so I feel the cash production costs are wrong for now..the mine does not have scale yet.

 

Either way Kami gets built....Altius collects a royalty  in their estimates at $115 is around $30m a year...double that at a full 16  mta production. I will not bother to do the math on the price now at

$155 a ton. That as we know is nirvana to the stock price.

 

Kami will gain world interest as did Consolidated Thompson...I do not know that Altius equity investment will be another 5 bagger...or exactly what their cash cost will be...however, there is an extremely good chance with the rebound in iron ore prices against everyone's belief.... that Altius and Alderon are home run's. Right place right time and ton of work pardon the pun.

 

Dazel

[ItsAValueTrap]

Cliffs immediately tried to expand it to take advantage of high prices...there is no way to know what was capex and what was production cost so I feel the cash production costs are wrong for now..the mine does not have scale yet.

In the press releases for earnings, I believe that Cliffs states operating costs along with D&A.  That suggests that they separate out capex from production costs.

 

Of course, you can always play games with what to capitalize and what not to capitalize.  If they are leasing equipment or (this wouldn't make sense for Cliffs) using contract mining / renting equipment, it could unnecessarily inflate their opex... though the technical reports for Consolidated Thompson would state their intentions regarding leasing or contract mining.

 

- Consolidated was in the process of expanding the mine when Cliffs bought them out.  I think they were thinking of expanding in the feasibility study stage.

 

- If one were to really do the legwork, you could probably get a rough idea of opex between ~16MT/yr versus ~8MT/yr.  I am guessing that it is at most a 20% difference... it still doesn't bridge the gap between BBA's feasibility study numbers and actual numbers.

BBA's technical reports might give estimated opex for 16MT/yr versus 8MT/yr... I haven't checked.

[ItsAValueTrap]

In general, to predict the economics of a mine (to figure out what a mining project is worth):

 

- You could do a feasibility study.  This often takes millions of dollars as you do a lot of tests to optimize the processing plant's design, the mine's design, etc.  Some tests involve obtaining a bulk sample of the ore, make a pilot scale processing plant (which can cost tens or hundreds of millions of dollars for unproven processing technology), etc. etc.

The feasibility study should be pretty close, though there is always uncertainty (e.g. Vale's Goro project).  Engineering is not a perfect science (think of all the infrastructure projects that have crazy cost overruns).

 

- You could do a preliminary feasibility study / economic assessment.  Less accurate, less costly.

 

- If a mining company has done a full-blown feasibility study, then you could simply double-check their work.  Senior miners generally do this. 

If you look at the Bre-X scandal, Freeport Mcmoran didn't get burned because they sent a time in to double-check that the ore was real.  Normally, at the very minimum, you run assays on a number of drillcores (this is relatively) cheap).  Bre-X (this is highly unusual) destroyed all of their drillcore.  So Freeport brought in their own drilling team and duplicated Bre-X's drilling (drilling is expensive... at the very minimum Freeport spent several thousands of dollars).

As far as I can tell, institutional investors generally do NOT do this level of due diligence.  I definitely am not doing this level of due diligence.

 

- In the wake of the Bre-X scandal, various regulations were implemented.  NI 43-101 is the most relevant.  Unfortunately... I don't think you can really rely on NI 43-101 compliant technical reports.  There's a lot of charalatanism going on with such reports in my opinion. 

 

----------------

 

You know... I feel like a huge idiot when it comes to these mining stocks.  I can't say that I have really done my due diligence on them (compared to what many senior miners do).  So far, I rely on the following shortcuts:

a- Is management ethical?  The problem here is that very, very few managements in the junior space are ethical.  Almost all of them are undercapitalized and have to be promotional to raise capital.

b- Compare the project to something similar.  Hopefully they are similar enough that you can make a wild guess about the economics.  The accuracy of this is far below a preliminary economic assessment or pre-feasibility study.

c- Did somebody else do their due diligence?  Sometimes large mining companies will take a strategic stake in a junior.  (In Alderon's case, Hebei made a strategic investment.)  Sometimes they don't actually do their own due diligence and they get burned.

d- Read through the technical report and see if there is anything dopey.  Peter George's reports for example are generally dopey.  But this is an unreliable method as I didn't see anything dopey with BBA's work.

 

Are these shortcuts a good idea?  I don't think so.

 

Though here's a shortcut that may work:  If you look at Altius, it is buying back its own shares and isn't buying Alderon shares any more.  This would imply that Altius has a lower price.

[Phaceliacapital]

I have been following ALS for a while now, and with the upcoming feasibility study of Alderon thought it worthwhile to do a write up. For those interested:

 

http://phaceliacapital.com/AltiusMinerals_PhaceliaCapital.pdf

 

Don't mind the blog, it is very under construction..

[Guest Dazel]

Its Value trap,

 

I do not pretend to be a mining expert and appreciate the points you have made on due diligence. I also know that Leucadia are not mining experts. Yet

they are two for two in home run's in the mining sector. My approach i think is similar to their thinking...is their a margin of safety? At fortescue they backed a self promoting stock broker Andrew Forest. why? because the economics at worse would give them their money back. Iron ore took off...home run.

 

Studying Leucadia led us to Altius...I think we are allowed to go back in time and get the positions that Leucadia had...with knowledge of where commodities have gone.

I look at Altius as Leucadia...except Altius is in a better position. why?

Because Brian Dalton and Altius bought their land leases before Leucadia did and they have many more of them (you cannot get these leases anymore without paying up...Leucadia's profitable hand has been played!)....fortescue gambled big time on taking on $10 billion in debt for a quick build out...and won...Altius has been slow and precise with Alderon...remember how long they have owned the land...they have not spent anything..they have I believe $2m into this project...that could produce a billion dollars in market cap for Altius...I do not know of anything like that anywhere...Leucadia spent $400m and took out about 7 times that...Inmet I am not sure how much they have made...(it is still ongoing with a bidding war for Inmet happening now)..."yummy"returns as Cummings from Leucadia said.

 

ethics-Altius checks out with the top tier in the industry

 

ethics Alderon- it checks out because of Altius' full backing...why would you bank your future on a royalty if you did not believe in it? they have played the long game

 

BBA- and other feasablilty studies? well I know Anglo American is $6b over budget in Brazil...it does happen...and I have seen some that are ridiculous.

 

Hebei- the fact is that they are securing iron ore...they are not playing a fools game..they need the product whether Alderon stock is a homerun or not

 

short cut: It is tough to buy something after it has doubled in price...so you can imagine what it would feel like for Altius to directly buy more at this stage.

 

In fact, they are buying more of Alderon through buying their own shares...They have spent $5m buying back their own stock over the last 12 months (sadly that is the most they can buy per day!)...We think that is the best investment they can make because not only are they buying a portion of Alderon's equity which they own they are buying back the royalty and all of the other projects and royalties for pennies on the dollar. We "Love" stock being bought back at these levels...we wish they could up the buy back.

 

To "believe" is to trust Brian Dalton and his team...the value (margin of saftey) is in the land leases they secured a decade ago and the cash they have generated internally. The "home run" is in the execution of Dalton (Dalton is in the alderon picture for the Hebei deal and I would think has been instrumental in that contract and any new ones that are signed) and his team... We are betting on both in a big way!

 

Dazel.

 

[Guest Dazel]

phaceliacapital,

 

thanks for the link...well done...I like your conservative approach...

 

I would add a couple things to people's thinking... on the upside of course our downside is covered. Mining Royalties trade at massive premiums

for good reason...(ITs A Value Trap) and I have beaten it to death...It is extremely difficult to produce an economical mine. The royalties are heavenly and inflation protected...they will be sought after like no other when the bond bubble bursts. Market mulitples take the value of the royalty up many fold...Leucadia had a problem here...their royalty at Fortescue had a timeline and Forest was trying to dilute them...Altius does not have those issues. Look at the average multiple of a royalty company...crazy.

 

another catalyst is uranium...more on that later.

 

Dazel

[Guest Dazel]

http://canadianinsider.com/node/7?ticker=ALS

 

 

Great buys!

 

[nostradamus]

Hey Dazel

 

I would be very interested to hear your views/analysis of Altius' uranium assets. I find it hard to get overly excited and would like to be proved wrong.

 

I have no idea how to estimate the annual production of the Aurora/Michelin deposit that Paladin bought and on which Altius retains a 2% GSR.

 

However, Paladin's annual production is currently 8Mlbs of U3O8. So, let's say, for the purposes of illustration, that the Michelin deposit allows Paladin to double their production through mining another 8Mlbs (this would seem like an optimistic assumption). The current price for U3O8 is USD43.5/lb.

 

So if Paladin were producing 8Mlbs from Michelin today, this would give Altius a royalty of 8 * 43.5 * 2% = USD7m per year. Certainly great to have, but small relative to the kami royalty.

 

What am I missing?

 

N.

 

 

 

 

[Guest Dazel]

 

 

N.

 

I will get back to you...uranium spot price is 43... Long term price is 60......there is a supply and demand misbalance about to happen...prices in the spot market move quickly...Altius will not collect at below 70 or 80...because that is what it will take to get production out of Michelin.

 

I agree...it is no Alderon...the economics there are crazy good.

 

Dazel.

[Guest Dazel]

 

 

http://www.247bull.com/in-the-next-18-months-uranium-stocks-are-likely-to-rise-by-50-to-70/

 

Look at the chart of 2006 to 2007...

 

I do not like predictions in prices..but with Japan coming back online, Russia u.s nuclear arms dismantlement agreement ending, china and India build outs, energy costs globally...

 

With supply constraints taking place globally...it is a perfect storm. The high in 2007 that looks like a complete bubble only hit the 1976 currency adjusted price of 140...2008 and Japan have happened since then....oil has gone from 30 to 100...while the uranium price has been in free fall...all the

supply that was supposed to happen did not. The Japanese not only stopped their demand in their tracks they sold their inventory of uranium into the spot market...flooding supply...with a Japanese restart they will have to buy back inventory as well current supply for their plants...double their normal demand...

 

This is free at Altius as we know the 2% royalty is on the entire central mineral belt...tey have other uranium properties in their inventory of projects and leases.... at current prices this is

a non event...we think that will change quickly.

 

Dazel.

[nostradamus]

Cheers Dazel

 

I'm not really in a position to judge whether uranium prices are on the way up, but your points are quite compelling. If prices did return to their recent peak, I guess the properties would start to look a bit more like another Kami. The great thing is that this is just one of the many free options in Altius.

 

Back on iron ore, interesting to note that Mamba have raised some more funds to accelerate their exploration of the Snelgrove Lake Iron Ore Project:

 

http://www.reuters.com/finance/stocks/MAB.AX/key-developments/article/2670090

 

Other than Kami, what I'm really interested to hear some news on is the Julienne Lake project. It seems to me that even if Altius and their undisclosed partner were unsuccessful in their bid to develop it, their rights to the Altius owned extention will be worth a lot to whoever is successful...

 

N.

[Phaceliacapital]

Anyone else excited for January 9?

 

+

 

Do not know for sure whether it has already been discussed but anyone seen their september presentation by Chad?

 

Link: http://altiusminerals.com/uploads/2012-Sept-Chicago.pdf

 

Cliffs:

• Altius is largest landholder - Labrador
  
• Altius intends to dividend its royalty related free cash flow to
  shareholders upon development of the Kami project
  

 

http://www.phaceliacapital.com/uploads/Kamiroyaltygraph.png

 

And what do they mean with "Jurisdictional expansion underway "

[GlennAS]

((And what do they mean with "Jurisdictional expansion underway"))

 

Exploration alliances outside of Newfoundland/Labrador - specifically, (i) alliance with Virgina Mines in Southern Labrador and Eastern Quebec, but more importantly (ii) alliance with Zeus Capital in Chile.

 

glenn

[Phaceliacapital]

Oh bummer, I misread it and thought it hinted towards more clarity concerning the Julienne lake property, thanks!

[Guest Dazel]

http://www.metalbulletin.com/Article/3138029/Iron-ore-and-coking-coal/Spot-635-Fe-iron-ore-prices-now-at-158-160.html

 

Iron ore hits $160!!!!!!!!

[Phaceliacapital]

Incredible, I bought additional shares Altius today at around 11

 

http://www.grandich.com/2013/01/grandich-client-alderon-iron-ore-18/

 

What does this mean for Alderon?  Well, the above deal implies a value of $7.3B for 100% of the asset (15% for $1.1B), which is located approximately 17km from Alderon’s Kami Project.  Using a spot price of $110/tonne of concentrate (current price is around $140/tonne), mining analysts estimate the EBITDA to be $1.2-$1.3B annually.  This would in turn imply an enterprise value/EBITDA of approximately 5.5x.  Assuming the same spot price of $110/tonne, EBITDA for Alderon’s 75% interest in the Kami Project should be approximately $370M after general and administrative expenses.  At 5.5x, this works out to an implied enterprise value (EV) of just over $2B.  Using the results of Alderon’s Preliminary Economic Assessment, Alderon’s 75% share of the capital expenditures for the Kami Project is $800M.  This would work out to a market cap of about $1.2B once the project is in production – current market cap is only $240M.

 

Another way to value the Kami Project is to look at the implied EV/tonne of annual production.  The AMMC mine can produce 15M tonnes per year (mtpy) of iron concentrate.  If you assume a cost of $2.5B for the pellet plant and rail/port infrastructure, then the mine and mill would be valued at $4.8B ($7.3 – $2.5 = $4.8).  Based on 15mpty, this works out to $320 per tonne. Alderon plans on producing 8mtpy (they plan on ramping up to 16, but I’ll ignore that for this exercise) from Kami.  75% of 8mpty translates to 6mpty.  Multiplying that by $320 per tonne gives an approximate value of $2B.  Subtract the $800M capital cost and you also have an implied future market cap of $1.1B – again, current market cap is only $240M

 

The numbers are discussable of course, but I guess we all agree upon the upwards potential :)

 

Concerning the Feasibility study, in contrast to the PEA this study accounts for Rose central + North Rose

This adds an additional 500m tonnes to the equation..

[zippy1]

Alderon Announces Feasibility Study Results Demonstrating $3.244 Billion NPV and 29.3% IRR for the Kami Project

http://finance.yahoo.com/news/alderon-announces-feasibility-study-results-080500452.html

[Phaceliacapital]

"The study demonstrates robust economics on the Kami Property and the results meet all of the threshold criteria under our agreements with Hebei. Our schedule anticipates receipt of permits toward the end of 2013 and construction to follow immediately, with initial production in Q4 2015."

 

Very good news!

 

Thanks!

[Phaceliacapital]

Really striking that the news is not even related to Altius on any of the news sites.

[GlennAS]

Importantly for Altius investors, the Kami BFS projects a life-of-mine of 30 years, up from 20 years in the PEA. That's another 10 years of royalties on the 8 mtpa production.

 

glenn

[Guest Dazel]

Alderon's conference call was very informative.

 

All of the questions we had were answered.

 

Major one Bloom Lake vs. Kami. on costs.

 

-Alderon is being designed in the same operational scope as IOC. ( which makes sense since they have the man who constructed IOC's expansion)

hence they have a different design than Bloom Lake. It was very apparent that they are using their IOC knowledge and experience in this project...not comparable operationally to Bloom Lake.

 

Bloom Lake high costs

-they fly in labour (like IOC, Alderon will employ and house locals)

-they have 3 rd party managers...Alderon will be doing it in house

-Cliffs as a large organization has associated costs (this is likely a nice way of describing my accounting theory)

-They truck out tailings

-they boat material and then load to ship

-rail deal at Cliffs is not as good as Alderon is looking for...(there was a question asked on the call on how Alderon think they will get a better deal)

 

Study facts

-the study uses $115 and backs out shipping and the discount to Hebei..$107 (1-5 years) $102 (afterwards)

-255mt at mill lake not incuded in the study...When asked if there is upside to the 30 years. "absolutely"

-Hebei now has 15 days...$120m in early Febuary.

-higher start up costs associated with the extra build out of the 500 mt added to the study

 

questions answers

-Hebei has seen ore samples

-debt equity raise next year between 45% to 60%...

-looking for a strong top tier equity- off-take partner for remaining production

-do not need financing before economic assesment

-long lead equipment will be purchased now in anticipation of construction start up

-rail contract in 2013 likely

-hydro contract in 2013 likely

 

management was confident and knowledgeable....

 

Dazel.