ALS.TO - Altius Minerals

[ItsAValueTrap]

They are many different ways of getting financed:

 

A- Selling stock of course.

 

B- Getting bought out by a senior miner.  If share prices are low, miners will come in and buy.  The price they pay fluctuates.  Because there is uncertainty in mining, there is some leeway in the price that another company will pay.  That's why there are bidding wars over juniors.

 

C- Debt

 

D- Royalties, streaming deals

 

E- Rights offering.  Most juniors don't do these.  If you want to make sure that all rights get subscribed for, you need somebody else to backstop the rights offering.  That party will likely want to get paid; you might as well go with option A in that case.

I believe the fees are high and you might have problems if the rights offering isn't backstopped.

 

A rights offering is arguably the fairest way to raise capital.  Unfortunately, it is rarely used in the junior mining world.

 

F- Private placement.  This is arguably unfair to shareholders who get diluted (depending on the price), but the fees on this type of financing is low.

 

G- Joint ventures.  Instead of selling the whole company you sell a part of it.  There are lots of legal fees and JVs can cause conflicts of interest.

 

---

Juniors often don't have to sell shares when the share price is low.  If their cash bleed isn't that high relative to their cash reserves, then they don't have to sell stock right away.  They often don't have cash flow obligations (like debt coming due) that would force them to issue equity unlike a company like Sirius XM.

 

Some juniors have higher-than-necessary cash bleed from the insiders' excessive salaries.  But the real problem with those companies is that they are management employment agencies.  (Alderon and anything Forbes & Manhattan has this problem.  But you put up with this nonsense because the value of Alderon's flagship project overshadows that.)

[Guest Dazel]

 

 

 

The mining area has been destroyed in the market because the expansion was done through debt. This problem has caused the pull back of the traditional miners...cliffs etc. Rio selling off their cdn operations are all moves to shore up debt that they took on. What this means is that there are new entrants into the mining arena. These buyers are looking to take advantage of the depressed prices. Posco bought into the trough for $1.5b and it looks like China Minmetals may get Rio's stake in the Iron ore company of Canada. We find this the most interesting as Alderon is really a spin off of Carol lake and Bloom Lake with most of the Alderon management built Carol Lake's recent expansion and the geologist and CFO from Bloom Lake o board. The infrastructure will use Carol Lake's rail to a brand new port giving it some of the best infrastructure in the industry.

 

The reality is that if the infrastructure around the world is not there the projects will not happen... we are seeing proposed production come off all over the world because they cannot build a 300 km rail system etc....Alderon's greatest advantage is it's location that is why Hebei is there and that is why

other non traditional miners will have a great interest. Glencore has entered the iron ore area and you will see other non traditional buy up assets on the cheap because of the value out there.

 

At these prices there is no question that everyone is a takeover target in the entire mining complex...that means from gold companies to iron ore companies...those with cash are going to make a lot of money on the carnage....smart companies like Posco have taken advantage and we will see others step in as they are stealing companies at these prices.

 

Altius is in the drivers seat with their huge cash hoard as mining asset prices in the market are below

2009 for the most part. It is a "blood bath" out there.

[Guest Dazel]

It would make sense for Hebei or anyone else to buy all of Alderon now. It is free when you back out the cash....markets are bi polar...you would get locked up if you were selling your private company for cash and a billion tons of iron ore right on infrastructure, millions in studies and permits etc and 8 years of time putting it all together are for free.

 

If they put it on the market and auctioned it off they would likely get $5 a share...I am surprised hat we are not seeing bidders coming in for these assets and others.

 

8000000@ $120 ( current price for iron ore per ton) =$960m at half the cost which is above Alderon's cost projection Hebei would save $480m in costs a year if they owned all of Alderon at 16mt the would save a $1 billion a year...at those rates it would take 2 years to pay for buying it and building it...and reaping the rewards for 30 years...incredible economics even in a falling iron price environment.

 

 

Why are integrated steel makers not looking to buy all of mines like Alderon at these ridiculous prices? It does not make sense that operators in the steel industry are not cutting their costs this way.

 

Dazel.

 

 

 

 

[Liberty]

Q&A with alderon CEO:

 

http://alderonironore.com/_resources/media/Tayfun_ADV_interview_GBReports.pdf

[JAllen]

http://agmetalminer.com/2013/06/20/cliffs-natural-resources-inc-hedges-against-iron-ore-price-fall/

 

 

[zippy1]

If China gets into a major crisis, how would that affect these mining companies?

http://www.economist.com/news/finance-and-economics/21579862-chinas-central-bank-allows-cash-crunch-worsen-shibor-shock

On June 19th China’s interbank market stayed open late as banks scrambled to borrow funds from each other. On June 20th the seven-day repo interest rate shot up to 12%, the highest on record (see chart). The Shanghai interbank offered rate (SHIBOR), an average of the rate at which big banks say they will lend, also rose.

 

[ItsAValueTrap]

http://agmetalminer.com/2013/06/20/cliffs-natural-resources-inc-hedges-against-iron-ore-price-fall/

Cliffs is kind of crazy.  First they bought Consolidated Thompson (which owns Bloom Lake) with a large amount of debt and told investors that it would have amazing cash costs (in the $35/ton range).  It turns out that Cliffs wasn't even close about Bloom Lake's cash costs.

 

Then iron ore prices fell (to be fair, this is not Cliffs' fault).  Cliffs wrote down Bloom Lake.  When iron ore prices crashed, it halted the expansion at Bloom Lake and flew all the construction workers back on chartered 747s.  Now the CEO says that the Bloom Lake expansion may be restarted... depending on iron ore prices.

 

Basically, Cliffs' CEO has expansion on his mind.  He effectively wants to take more risk, not less.  Cliffs is a little crazier than its counterparts because Bloom Lake is lower margin than Brazilian and Australian mines.  The lower margins mean that Bloom Lake is much riskier than other expansion projects.

 

2- Cliffs is also waging a legal battle with KWG Resources.  It is the largest shareholder in KWG.  It wastes money fighting itself.

[Guest Dazel]

http://www.bloomberg.com/news/2013-06-20/hebei-says-iron-ore-to-rally-on-chinese-steel-output.html?cmpid=yhoo

 

 

 

[finetrader]

For what it's worth I've initiated a position in Altius.

 

 

 

 

 

[Blue Macaw]

Added today...

[GlennAS]

Me too ... but still very cautious. Methinks things could get really ugly here with the broader markets/financial system.

 

glenn

[Blue Macaw]

Everything under $10 should be a steal.

 

Assume 28 million shares

 

Securities and money - 157 million/28 = 5,60

Alderon shares - 33 million/28 = 1,17

Voisay bay - 60 million (3 million for 20 years)/28 = 2,14

Century iron - 0,9 million/28=0,03

Mining and other investments = 35 million/28 = 1,25

 

Total = 10,19

 

So a lot would then be for "free".

 

Very interesting in a near future: Jullienne Lake

Interesting: New partner for Paladin in Canada? Chinese interested?

[TwoCitiesCapital]

These prices do seem to be a steal. I did a basic FCF analysis of the kami mine based on their production projections.  In a range of scenarios with their price for iron ore between $80 and $125, and discount rates ranging from 5-10% on their cash flows, you end up with a value between $6-15 per share just for that royalty.  Large range,  but at $8.80 the choice is simple.

[ItsAValueTrap]

Hmm I'm starting to think that maybe Hebei is just crazy.

 

Their $120M investment in the Kami project puts Alderon's value at $360m.  So Altius, in theory, should use its cash to buy shares of Alderon.  I think that the reason why Altius is abstaining is this:  Kami is very marginal right now.  You can re-read this thread where I speculate on Kami's economics - it should be worse than Bloom Lake.

[Blue Macaw]

I don´t think they are crazy.

 

These are normal ups and downs. I do believe Cons. Thompson also was valued like this as they went forward. Right now we are down, very down and that is why I am in. People. management and companies are all the same. Cliffs bought C.T with a bit of goodwill and they have paid for this now. I can name 100 of companies that have just made a bad moves at the wrong time and with that I mean not just buying when very expensive but also missing out on the opportunities.

 

People are just scared..that is all.

 

All the iron ore companies in Canada are at the moment valued about 30 % of their assets mainly meaning investment in exploration. There are some that will never be build of course but some I do believe will, like Kami and hopefully Julliene Lake. I am also trying to surf on the back of the chinese. They will need iron ore and they seem to be attracted to Canada. Min metals might buy Rio´s part now in iron ore canada. 59 % for about 4 billion with current production of 22 million tons. This equals 13 million tons for 4 billion or 307 dollars per/ton of production. Cliff paid like twice that and Rio needs to sell because of all their debts.

 

I agree with you that Blooms lake has high cash costs. I will follow that closely to see if they will go down. Cliffs is talking about 40-60 in their latest presentation if I don´t remember wrongly. Kami will most likely be as Blooms lake.

[ItsAValueTrap]

Most mines should have their cash costs go up over time.  This is because miners aim to mine the most economic ore first.  (You can't if there is less economic ore in the way and if it doesn't make sense to stockpile lower-grade ore.)

 

The Bloom Lake expansion might bring costs down very slightly due to economies of scale.  However, Cliffs stopped the expansion.

 

There is no way that they are going to hit $40-60/ton.  Especially considering the trend of inflation in mining costs.

[Blue Macaw]

yes you are right I think. Cash cost will go up and that means that price needs to go up if they are to build these mines. The ones that cannot keep up with this will be lost as usual. I think that the Chinese have higher cash costs in China which means they need to look abroad. Hopefully Cananda can serve their purpose. So China could close down the expensive mines in China and take control over the ones in Africa and maybe Canada?

 

The only thing that I am a little hesitant over is that the margins for the Canadian mines are fairly low. The mines in USA and Australia seem to have a higher margin. The iron ore of labrador is of higher quality though but should be reflected in the margins....

[Phaceliacapital]

http://www.steelguru.com/raw_material_news/Alderon_Concludes_Community_Participation_Agreement_With_Nunatukavut_Community_Council/316577.html

[Blue Macaw]

The next earning report should be out this week or the next...

[Guest Dazel]

The management have continued to support their cost projections with comparison to Carol Lake NOT BLOOM LAKE which is now being sold for a nice price by Rio. The Alderon management built the expansion that Rio is cashing in on saying that Carol Lake has similar iron to Kami...they have done it before a few miles away. Bloom Lake was built by outsiders from different geographies and industries in huge hurry.

 

Bloom Lake has had a stripping problem which has driven costs up...Cliffs bought during the most inflationary period there has been in 30 years...for mining...how many mines do you think are

ramping up or heading to  production? anything without infrastructure nearby has been shelved.

 

Costs have come down over 5% from the cdn dollar depreciation, mining equipment is not inflationary it is deflationary because of gold, silver and all other commodities coming down. It is

excellent timing for Alderon...management has indicated that the may be able to build cheaper than previously forecast because of the above changes in their building environment.

 

The Rio auction is solidifying the demand for iron ore in the Labrador trough...the losers of that bidding process will next look at Alderon....the Rio auction is a private process as was the the deal Posco came to a few months ago...these transactions will give you an idea of the actual value of these assets to companies that need the iron ore... The stock market is bipolar and that is why you are seeing the prices you are...they are not rational.

 

 

 

Dazel.

 

 

 

 

[Guest Dazel]

 

 

Altius is busy buying it's own shares back which essentially is buying more Alderon....we would like to see them spend a lot of money on this at these prices!

 

 

Dazel.

[ItsAValueTrap]

I don't think that it happens often where one management team is a lot better at mine engineering than another.  In fact, Alderon isn't even doing its own engineering work.  It was contracted out to an Australian company.

 

PDF link:

http://www.alderonironore.com/_resources/news/ADVNR20130503.pdf

 

And of course we've gone over this before.  Alderon spends too much on G&A.  Insiders are paid too much.  They advertise on Google Adwords (have you seen their ads?).  They pay shills like Grandich.  etc. etc.  The stock promotion costs may be disgusting but they are at least defensible as Alderon needs to raise money.  Overpaying insiders does not help shareholders in any way.  This makes the Alderon management team the high-guy costs.

 

I think that Altius and Hebei see the Kami project very differently.  Altius could be buying shares of Alderon with its cash (I believe it has done so previously); it is not.  Hebei presumably sees the project as economic as it has invested $120M for 25% of the Kami project.  Implied value of Alderon shares is >$360M.  Hebei could also buy shares of Alderon... but I don't think that Hebei is that smart.

And what is Hebei doing with Alderon's management team in the first place?  They're overpaid and their technical disclosures (technical reports by BBA) aren't remotely accurate.  I think that Hebei isn't that smart.

 

*Long Altius.  These guys are smart and they are buying back shares.

[JAllen]

 

JAllen,

 

 

Optimistic yes.

You are entitled to your observations...the headlines out there are dreadful..."Price of iron ore Plummets! On over supply....yet the article talks about the 90% rise in prices since Sept and that china has the lowest stock piles of iron ore since the crash in 2009... In order to find any positiveness right now you have to look "very hard".

 

No one is talking about the killing that Leucadia made in Fortescue or Inmet....That is not optimistic that is fact...Altius has had similar returns in terms of scale...fact...the other I agree with you I will scale back on iron ore pricing I have done it long enough. I appreciate the comments.

 

Dazel.

 

Dazel:  Did you respond to my question?  I asked you if your interest in Altius is solely from being long the stock.  You agreed that you were optimistic but didn't say yes or no to whether your interest is solely being an unaffiliated long holder of the stock.  Just curious.  Thanks! 

 

And also, if anyone's interested, we don't have a position, but were long the stock until last week.

[turar]

And also, if anyone's interested, we don't have a position, but were long the stock until last week.

What was your reasoning for selling?

[JAllen]

And also, if anyone's interested, we don't have a position, but were long the stock until last week.

What was your reasoning for selling?

 

[*]The China liquidity/banking crisis

[*]The fact that China's exporting quite a bit of steel - this says to me that there isn't enough demand for their steel production capacity intra-country - why are they going to keep buying as much foreign ore?

[*]The mere fact that I just don't have any special insight regarding the probability of the Kami project being constructed/completed

[*]Iron ore had gone up the most in percentage terms over the last decade - but it isn't one where once you start consuming, you get used to consuming it and can't stop, unlike oil, gas, and coal.  In other words it's a growth commodity, less of a daily consumption commodity, so it's continually reliant on growth and construction.

[*]From what I understand, there is quite a bit of ore supply coming online over the next few years.  While I'm sure some will be curtailed and some already has been, I don't really have any idea how much

[*]Australia and Brazil probably have a cost advantage here

[*]Don't fully, fully understand the potential ore quality issues and potential mining problems that may occur and have been discussed by some here

[*]Let's say it does get constructed: if the price of ore is considerably less, the royalty is worth considerably less (this is obvious, I know, but what if the price is $60-80/ton - this is still 4-5X what ore sold for 10 years ago)

[*]Met coal prices are now down to multi-year lows; the demand relationship between met. coal and iron ore should be pretty strong, we think, so this is another negative for iron ore: http://online.wsj.com/article/BT-CO-20130611-703167.html

[*]We can't predict the financing probability and terms here.  We thought OXF would be able to refinance (different industry, thermal coal, but is just an example of where we were recently wrong on this risk) at 3X Ebitda on reasonable terms, but ended up issuing debt and warrants from Cerberus and another firm, get this - with an interest rate so high, it wasn't published in the 8-K (if it's somewhere in there, we couldn't find it after 5-10 minutes of looking for it).  This was for a well managed U.S. thermal coal company with middle-tier coal costs.

 

All this said, the mine could very well be constructed; we just don't have any special predictive ability and aren't aware of anything obvious that will for sure cause it to be built.  The biggest positive here is that Hebei has some sunk costs and will benefit from the purchase discount they get (although is this negated by the cost/distance differential between AU?).    They/China could finance it solely to gain supply security and to weaken the oligopoly without much regard to the economics. 

 

http://www.bloomberg.com/news/2013-06-26/australia-cuts-iron-ore-estimate-as-prices-drop-on-china-outlook.html

 

We're generally finding that over time, we raise the certainty-level bar for what we invest in, and frankly the China crisis tipped us over the brink as far as certainty goes.  There are just too many potentially very negative events here. 

 

We hope we're wrong for everyone involved though.  Dalton and his team are clearly the best of the best!