ALS.TO - Altius Minerals

[matts]

No one is asking that you reduce your posts Dazel, let's just give a bit more recognition to the downside risks.

 

Btw, congrats on your 1000th post.

 

[ap1234]

Thanks to everyone for all of the great color on the company!

 

1. When people calculate a sum of the parts valuation (cash + royalties + public securities + Cranberry + optionality, etc.) I haven't seen anyone make a deduction for the ongoing costs of the business. What is a normalized level of SG&A on an annual basis? Why don't you include this figure in your analysis? For example, if the Voisey Bay royalty is offset by the annual G&A, shareholders don't actually receive the Voisey cash flows. Why put a value on the cash inflows but not the cash outflows?

 

I'd love to hear thoughts on why you exclude the G&A. I presume the reason you don't capitalize G&A and subtract it from your valuation is that you are looking at what the value of the business is if you acquired 100% of the business. In other words, if owned 100% of Altius, there would be no G&A as you are just paying for the existing portfolio of assets. As such, the annual G&A is really 'growth capex.' To the extent that Altius can create more than $3-5 million/year year in value, their G&A is offset by future value creation. If you don't credit the company for future value creation, you shouldn't subtract the growth capex either.

 

2. One of the interesting aspects of Altius was their significant cash holdings. They used to hold $130-200 million in cash on the balance sheet for years. This is very attractive as they could create tremendous value during a bear market in commodities (i.e. put the cash to work and earn attractive returns). However, after the Sherritt deal they spent all of their cash. I understand the attractiveness of the transformation to a royalty business model. But did investors lose out on the optionality of creating value if China slows down and we have a bear market in mining?

 

For example, let's assume that we have a bear market in commodities 5 months from now (after the Sherritt deal closes) and commodity prices (and commodity assets) get crushed. Altius doesn't seem to have any dry powder to take advantage of the bargains. Does this make Altius' future value less interesting because the optionality to take advantage of fire sale prices has gone away?

 

 

 

[Kraven]

 

 

I do get the point however, I will let Altius do the talking...181 pages is enough...

Everyone deserves their opinion and do your own homework as always.

 

Dazel.

 

Good lord this board has some whiny people on it.  I only rarely read the posts on this thread, but Dazel has posted a lot of great information.  So what if he is enthusiastic about it.  If folks don't like it, skip the damn posts.  It's not his responsibility to post more or less on anything he doesn't want to.  Why people would want to force one of the better posters on this board to slow down or stop posting is beyond me.  It's not enough that he has spoon fed the analysis, but now people want different things discussed.  So irritating.

[alertmeipp]

Dazel, thanks for all your work on this. Still good value here is my take. Mining stocks, especially juniors one have been depressed for years.

 

Als is an excellent viechle for me to get into that area and with their stable income and expertise, i see many opportunities ahead.

[cwericb]

I also want to add my thanks to Dazel for all the information and education I have received in reading his posts. I am sure no one wants you to post less. I also want to complement you on your patience when countering negative arguments that have been asked and answered numerous times before.

 

Fortunately and for the most part, negative questions raised here seem to be legitimate concerns unlike some of the animosity and the negative baiting that seem to invade the tech threads

 

Raising legitimate concerns gives balance to the thread and no one wants to see it reduced to cheering section for Altius. The back and forth discussion on the pro’s and con’s make us all better investors and I am sure that some questions helps Dazel examine his own thesis on Altius. I think I am going to be with ALS for some time to come and had it not been for the information received on this thread I would have missed this opportunity.  eb

[hohi]

Thanks to everyone for all of the great color on the company!

 

1. When people calculate a sum of the parts valuation (cash + royalties + public securities + Cranberry + optionality, etc.) I haven't seen anyone make a deduction for the ongoing costs of the business. What is a normalized level of SG&A on an annual basis? Why don't you include this figure in your analysis? For example, if the Voisey Bay royalty is offset by the annual G&A, shareholders don't actually receive the Voisey cash flows. Why put a value on the cash inflows but not the cash outflows?

 

I'd love to hear thoughts on why you exclude the G&A. I presume the reason you don't capitalize G&A and subtract it from your valuation is that you are looking at what the value of the business is if you acquired 100% of the business. In other words, if owned 100% of Altius, there would be no G&A as you are just paying for the existing portfolio of assets. As such, the annual G&A is really 'growth capex.' To the extent that Altius can create more than $3-5 million/year year in value, their G&A is offset by future value creation. If you don't credit the company for future value creation, you shouldn't subtract the growth capex either.

 

2. One of the interesting aspects of Altius was their significant cash holdings. They used to hold $130-200 million in cash on the balance sheet for years. This is very attractive as they could create tremendous value during a bear market in commodities (i.e. put the cash to work and earn attractive returns). However, after the Sherritt deal they spent all of their cash. I understand the attractiveness of the transformation to a royalty business model. But did investors lose out on the optionality of creating value if China slows down and we have a bear market in mining?

 

For example, let's assume that we have a bear market in commodities 5 months from now (after the Sherritt deal closes) and commodity prices (and commodity assets) get crushed. Altius doesn't seem to have any dry powder to take advantage of the bargains. Does this make Altius' future value less interesting because the optionality to take advantage of fire sale prices has gone away?

 

Fantastic post, ap1234! You are absolutely right about the G&A expenses (G&A is about $2M/year I think). On the other hand you also should give some value to the management team. That's the reason I'm not actually deducting the G&A expenses - I give more value to great management then to G&A expenses if that makes any sense. But I like your thinking and I'll probably include those deductions in my worst-case scenario calculations from now on.

 

As for the cash... Yeah it was a huge cushion of protection and one I really loved. I always loved the fact that ALS had very limited downside because of all that cash. Now it's a completely different story. Not only is there more downside, but we even got a boatload of debt. Don't get me wrong - I really like the Sherritt deal as I think they created value there. But no one can deny that the downside is greater also.

But you have to recognize that the commodity sector is in a bear market and ALS took advantage of that. Maybe commodity prices aren't that depressed, but the equities have suffered severely. In "normal times" ALS would have paid a substantial premium to what they paid now. We'll have to see what the coal assets are worth, but I am pretty sure it was the right time to buy distressed coal assets. Who knows - only time will tell.

[Guest Dazel]

 

Can someone else correct Ap1234? On what Altius cash and marketable security position will be after the deal? How can no one else correct this? This is a monumental mistake in homework....you are creating a liquidity risk that is not there!I am gone for 5 minutes and we already have $100m in cash and marketable securities that disappear?

 

Why do you think I am posting about consolidating the industry? How are they going to do that without dry powder and or financing? They remain highly liquid with cash as the deal is leveraged.

 

When you are looking for risk you will find it....but don't make it up....

 

If you thought there was that risk of liquidity and dry powder which would be a large risk! How much is it worth now?

 

You can come back and say leverage that is risk...and I would say yes it is....but can the royalty purchase off set this with it's steady cashflow even in a depressed situation..I woud answer yes...not much risk.

 

The 181 pages are full of risk....put your own spin on it guys...but don't create risk that is not there.

 

Tiring.

 

 

 

 

 

 

[hohi]

I am not saying we don't have any cash left. Before the deal we had ~ $130M in cash+very liquid investments (treasuries etc.) + the marketable securities (Alderon, Callinan, Virginia, equity in Cranberry ...).

After the deal is closed (sorry, just my calculations) we have some cash left (< $10M) + the ~ $ 130M in marketable securities. Those $130M just may not be worth that much in a disaster scenario. You know very well I am super excited about ALS, Dazel. But as we are now discussing some of the downsides, this also has to be acknowledged. The probability of a disaster is very low in my opinion though ;).

[ap1234]

Thanks Dazel. Given your familiarity with the business, I am always interested to hear your thoughts.

 

I apologize as my earlier post probably wasn't very clear. I'll quickly what through my math. Please let me know what I am missing in my analysis.

 

At the end of the last quarter, they had $130 million in cash/marketable securities. They are spending $254 million the Sherritt royalty acquisition. This is financed with $124 million in cash and $130 million in debt.

 

If you have $130 million in cash and you spend $124 million on a deal, you are left with $6 million. As such, it appears that

their 'dry powder' has been spent. If we enter a true bear market in commodities over the next few years, they have given up a lever with which to create value in the future (i.e. they don't have the $100 million in cash to buy other assets at distressed prices).

 

It is true that they have other publicly traded investments which could be a source of liquidity. By my calculation, they have approx. $100 million in a few equity positions (Alderon, Virginia, Callinan, Century Iron). But this is not the same as cash. If we have a commodity bear market, the price of these stocks will likely fall as well. As such, selling one asset that has fallen in value to acquire another asset that has fallen in value isn't quite the same thing as using cash that is sitting on the balance sheet. Also, the liquidity of selling something like 33 million shares of Alderon (this is $60 million of their $100 million in investments) might be limited.

 

I am not suggesting that the Sherritt deal was not very attractive. Or that it wasn't the right thing for the transformation of the company. I am simply asking whether it changes the optionality of the business? Two months ago, an investor in Altius had lots of optionality given the company's war chest of cash. The cash has been spent.

 

If I made any oversights in my numbers, please let me know. I'd love to hear from people who know the business much better than I do.

 

 

 

 

 

 

[jwfm1985]

 

 

I do get the point however, I will let Altius do the talking...181 pages is enough...

Everyone deserves their opinion and do your own homework as always.

 

Dazel.

 

Good lord this board has some whiny people on it.  I only rarely read the posts on this thread, but Dazel has posted a lot of great information.  So what if he is enthusiastic about it.  If folks don't like it, skip the damn posts.  It's not his responsibility to post more or less on anything he doesn't want to.  Why people would want to force one of the better posters on this board to slow down or stop posting is beyond me.  It's not enough that he has spoon fed the analysis, but now people want different things discussed.  So irritating.

 

+1

[hohi]

Maybe some of you may comment on my valuation of ALS (after Sherritt deal)

 

$ 6 M Cash

$ 130 M Marketable Securities

$ 55 M Voisey's Bay Royalty ($6 /lbs Nickel; 5% discount)

$ 227 M Kami Royalty ($100 /mt iron; 8% discount)

$ 45 M CMB Royalty ($40 /lbs uranium; 8% discount)

[[ $ 358 M Julienne Lake ($100 /mt iron; 8% discount) ]]

$ 80 M Genesee (5% discount)

$ 33 M Paintearth (5% discount)

$ 38 M Sheerness (5% discount)

$ 0 M Highvale (5% discount)

$ 27 M Cardinal River (5% discount)

$ 80 M Potash Royalties ($350 /t; 5% discount)

$ 10 M Other Royalties (5% discount)

 

$ 50 M Exploration Portfolio

$ 21 M CDP

$ 10 M Chile Exploration Alliance

 

- $ 95 M non revolving debt ($ 80 M @ ?? %)

- $ 60 M subordinate debt ($ 50  M @ ?? %)

 

Those are the values I work with. Am I off?

 

[ItsAValueTrap]

Regarding the G&A:

 

I don't think that you should discount Altius for its future G&A.  There are some situations where I would discount it:

1- Many oil and gas companies do not include all of their G&A in the calculation of SEC PV-10 calculation... even though G&A is necessary to operate the business and to pay the royalty owners and so on and so forth.

2- Altius' royalty stream will have a small amount of G&A expense.  They need to run calculations on their royalty to make sure that they are being paid correctly.  If not, they will incur legal fees in lawsuits.  This happened once for Altius as they had to sue Vale.  Unfortunately for Altius their legal fees weren't tax deductible in the past.

 

One of Altius' core business is its prospect generation business.  It will incur expenses in keeping a staff of geologists to find and explore these prospects (and all of the overhead associated with that).  On top of that, they need dealmakers to go out and to find joint venture partners.  Altius is spending money now to make money in the future.  Normally these types of expenses are capitalized.  In Altius' case, many of these costs are expensed.... creating hidden value that you don't see on Altius' balance sheet.

[jwfm1985]

Thanks Dazel. Given your familiarity with the business, I am always interested to hear your thoughts.

 

I apologize as my earlier post probably wasn't very clear. I'll quickly what through my math. Please let me know what I am missing in my analysis.

 

At the end of the last quarter, they had $130 million in cash/marketable securities. They are spending $254 million the Sherritt royalty acquisition. This is financed with $124 million in cash and $130 million in debt.

 

If you have $130 million in cash and you spend $124 million on a deal, you are left with $6 million. As such, it appears that

their 'dry powder' has been spent. If we enter a true bear market in commodities over the next few years, they have given up a lever with which to create value in the future (i.e. they don't have the $100 million in cash to buy other assets at distressed prices).

 

It is true that they have other publicly traded investments which could be a source of liquidity. By my calculation, they have approx. $100 million in a few equity positions (Alderon, Virginia, Callinan, Century Iron). But this is not the same as cash. If we have a commodity bear market, the price of these stocks will likely fall as well. As such, selling one asset that has fallen in value to acquire another asset that has fallen in value isn't quite the same thing as using cash that is sitting on the balance sheet. Also, the liquidity of selling something like 33 million shares of Alderon (this is $60 million of their $100 million in investments) might be limited.

 

I am not suggesting that the Sherritt deal was not very attractive. Or that it wasn't the right thing for the transformation of the company. I am simply asking whether it changes the optionality of the business? Two months ago, an investor in Altius had lots of optionality given the company's war chest of cash. The cash has been spent.

 

If I made any oversights in my numbers, please let me know. I'd love to hear from people who know the business much better than I do.

 

Of course it has reduced optionality - the company just made a transformational investment which required a significant commitment of capital. Would you prefer they just sit on the pile of cash and not deploy it at all? Should Dalton wait and try to find a better deal? The management team seems to think that these are high quality royalty assets worthy of an all-in (almost) investment. Based on their track record and the facts at hand I am happy to back them in that...

 

For the record, Dazel, would appreciate if you DIDN'T post less on the topic. Not sure what all the fuss is about

[nostradamus]

Some comments from an infrequent poster but long time follower of this board:

 

1. My god this board has become far too bitchy since the ALS price started to rise. People should stop trying to point score and try to add to the analysis.

2. Dazel deserves a huge amount of credit for the information he provided. He has helped me make quite a lot of money in ALS, and to me the investment thesis going forward is rock solid. That said, I do think you should be a bit less defensive Dazel when people are trying to look for, and point out, potential downside. As many people have already said, many of us are ALS investors simply trying to test the reaffirm our positive outlook.

3. I fully agree with the last post of ap1234, the Sherritt transaction has increased both the upside and downside of ALS by reducing cash. We should be aware of this, but, as I think ap1234 would agree, the track record of the ALS management suggests that the upside has likely increased more than the downside.

4. You absolutely have to add the NPV of future G&A into any valuation, you can't value the business on revenue alone.

 

Now a question:

 

Do the Canadian tax authorities get more money when a mine is subject to a royalty? By that I mean, is the royalty payment subject to two sets of tax, a royalty tax and then general corporation tax when the royalty owner earns a profit on the royalty?

 

I am just trying to work out whether this is something that is a positive selling point for the Altius bid to develop Julienne Lake (ie the authorities might like the fact that the get more tax).

 

N.

 

[SharperDingaan]

ALS actually became LESS risky when they spent their cash. They are now actually in the game, it is what they do, & we  know exactly what they got for that cash. This is their business; they know it better than any of us on this board, & you either trust management’s judgment or not. Their BS is also more than capable of financing what they are doing; & they would have little problem in lining up additional financing should they so require it.

 

Their business model, & risk profile, is not for everyone; & it will be years before we can assess if these were actually good deals or not. You could have bought tech royalties, or medical patents, with broadly similar risks.

 

If you are not comfortable with what you are holding, or the amount you are holding, nobody is forcing you to keep it.

 

SD

 

[ap1234]

Nostradamus, my understanding is that Altius pays a separate top-line royalty tax in addition to their corporate taxes. For example, on the Voisey Bay royalty they pay a 20% royalty tax in addition to their normal corporate taxes. I believe that the $3 million in royalty revenue that is disclosed is already net of the 20% royalty. The royalty taxes are withheld (i.e. Altius only receives the net revenues from the mine). 

 

 

[ItsAValueTrap]

The effective tax rate on the Voisey's Bay royalty is actually very high... though I never figured out the real amount.  Altius was arguing that it was 55%:

http://www.nr.gov.nl.ca/nr/mineralstrategy/submissions/Altius.pdf

 

Accounting companies will often put out good white papers on tax issues. 

KPMG: http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/5539_KPMG_A%20Guide%20to%20Canadian%20Mining%20Taxation_web.pdf

PWC: http://www.pwc.com/en_ca/ca/mining/publications/canadian-mining-taxation-2011-04-en.pdf

 

Taxes vary from province to province.

 

(Somebody please shoot me... I hate thinking about complicated tax issues.)

 

ALS actually became LESS risky when they spent their cash.

Dalton made Altius pretty leveraged in the royalty deal.

[FFHWatcher]

SD - so cash is riskier than coal and potash royalties?  Hmmm ? Are you just being a shit disturber?  We are all here because we are willing to deal with risk for an added rate of return.  If you are saying that over 20 years, holding cash is 'riskier' than owning good equities (during good markets), than most would likely agree (the ability to keep up with inflation argument). 

 

Future catalysts are virtually impossible to analyze.  ALS has had many over the years and only hit a few...and done quite well with a few. The catalysts that were discussed 3 yrs ago, for the most part, did not play out. Dazel has been awesome at analyzing the facts and finding value here. Likely helped create significant unrealized gains.  Now that most of the facts have been mostly discussed, let's sit back and wait for new facts to come in such as new info on Alderon, coal/potash deal details, etc.

 

 

[nostradamus]

Many thanks ItsAValueTrap and ap1234. Much appreciated.

 

From what you have provided it seems that a potentially material positive for the Julienne lake bid is that, relative to bids that do not involve royalties, the ALS bid will result in more tax revenue - both because of the double taxation of the royalty and because it will be a bigger operation than other bids due to the ALS rights that surround the government land.

 

Governments are, or at least should be, aware of allegations of corruption or special favours when they give contracts. They need a good clean explanation as to why they selected one bid over another. The fact that the ALS bid will likely involve materially higher tax revenue seems like a good explanation to me.

 

Hopefully we do not have too long to wait on this one. If successful I think JL is much more important to the value of ALS than the Sherritt transaction.

 

N.

[ItsAValueTrap]

The mining company gets a tax deduction on any royalties it pays or something like that.  I don't think the ALS bid will result in materially higher tax revenue???

 

*I have not read the tax white papers completely.  I have may mis-read the parts I did read.\

**As far as Newfoundland goes, Altius has been arguing that the effective tax rate on royalties is too high because they didn't get to deduct legal fees and G&A.  Now they get to deduct legal fees.

[roughlyright]

Gary Shilling who has this to say about commodities in Economist. He thinks we should short commodities.

 

19. Short commodities

 

"For the next 10 years, I like shorting commodities. I expect little inflation—and more likely, deflation—so changes in real and nominal commodity prices will be about the same. The attached chart shows that real commodity prices have fallen steadily since the mid-1800s, despite huge growth in commodity demand from the American Industrial Revolution after the Civil War, forced industrialization of Japan in the late 1800s, mass-produced autos starting in the 1920s, etc. Commodity price spikes caused by demand leaps in the Civil War and World Wars I and II were soon reversed as were price leaps due to the oil supply constraints in the 1970s. Many look for jumping commodity prices in future years since there are limited amounts of copper in the earth’s crust, two billion more mouths to feed, upgrading of diets and rising consumer spending in developing countries, etc. The reality, however, is that human ingenuity always beats threatened shortages. Coke made from coal saved the Industrial Revolution, which was threatened by a shortage of hardwood trees to make charcoal to smelt iron. In the early 1800s, overhunting had decimated the world’s whale population to the point that the lights would go out from a lack of whale oil, many feared. Then in 1858, Edwin Drake drilled a crude oil well in Titusville, Pa., and kerosene lamps rode to the rescue. I can recall when serious economists forecast the end of telecommunications growth because of shortages of copper for wires. Then came fiber optics."

 

—Gary Shilling, economist

 

 

 

 

[giofranchi]

2. One of the interesting aspects of Altius was their significant cash holdings. They used to hold $130-200 million in cash on the balance sheet for years. This is very attractive as they could create tremendous value during a bear market in commodities (i.e. put the cash to work and earn attractive returns). However, after the Sherritt deal they spent all of their cash. I understand the attractiveness of the transformation to a royalty business model. But did investors lose out on the optionality of creating value if China slows down and we have a bear market in mining?

 

For example, let's assume that we have a bear market in commodities 5 months from now (after the Sherritt deal closes) and commodity prices (and commodity assets) get crushed. Altius doesn't seem to have any dry powder to take advantage of the bargains. Does this make Altius' future value less interesting because the optionality to take advantage of fire sale prices has gone away?

 

ap1234,

you know I am a conservative and prudent guy, and I like to keep my eyes open to what is happening around me. I am the one who started the Macro “Musings” thread! ;D ;D And I like to keep lots of cash at hand. But I would never let macro ideas or facts prevent me from buying a great business at a great price, if I get that chance. And it is exactly what ALS has done purchasing the PMRL Royalties. If you look at the presentation, you see that the average price paid for other royalty transactions has been 23x on average, with a maximum of 37x. ALS has paid only 9x!! That’s what I call a great price!

Furthermore, it not like commodities are in a bull market right now. Please, take a look at the picture in attachment from the latest paper by Mr. Albert Edwards: commodities are far below their 2007 peak and not far away from their 2008 bottom… Equities… well, that’s a completely different story! ;)

 

Gio

Stocks_vs._Commodities.bmp

[Blue Macaw]

Ofcourse the real value creation comes from organic growth and not the purchase of the royalties. That was a fair deal and did not really create anything except that people now see a cash positve company and thus we can now value other things easier + it has created some more attention.

 

The deal showed more or less what 1 million a year of royalty is worth. With a factor of 10 as the deal went through on we can see that Kami would be valued at 280 million CAD or approx 10 CAD per share. Julliene lake with a wooping 60 million a year on royalties would thus be worth 600 million or 600/28 = 21,42 CAD per share. Julliene lake is the real deal. No question about it. And how can they fail? In the presentation all land around Julliene lake belongs to Altius except some smaller parts. Who could possible be able to compete with ALtius? Maybe other Chinese companies? Rio Tinto? If there are no environmental aspects to this or other issues, Altius will have this one. Government will of course get at tax boost from any new project. This is a huge one and the Chinese wants it.

 

Valuation of Voisey bay is between 13-27 MCAD not 55

[giofranchi]

Ofcourse the real value creation comes from organic growth and not the purchase of the royalties. That was a fair deal and did not really create anything except that people now see a cash positve company and thus we can now value other things easier + it has created some more attention.

 

Well, I don’t understand… I have invested in ALS because it has transitioned and become a royalty business, and I like royalty businesses… If the purchase of the royalties doesn’t add value, what the hell am I doing here?! ??? Except that, of course, it does add value! ;)

 

Gio

 

[Blue Macaw]

Gio

 

Sheritt claiming that 2013 the royalty revenue will be in the 20 M dollar span not 27 as stated by Altius. That would give a 11,25x instead of 9.