ALS.TO - Altius Minerals

[giofranchi]

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.

 

While I obviously would prefer an 11.11% yield to an 8.9% yield, I am still happy to get the second one, and have a management of shrewd businessmen to invest that cash on my behalf.

It’s a steady and safe stream of cash that is important in business. If you enjoy that, everything else will follow. Of course, I agree: the juicer that stream of cash, the better! ;)

But please consider: BRK has operating businesses that in 2012 earned 16.3% on net tangible assets worth $22.6 billion, and Mr. Buffett has paid a total amount of $48.6 billion to get control of those businesses. This gives him a yield of: (16.3 / 48.6) x 22.6 = 7.58%. Those investments create value, don’t they?

What I mean is that the “quantity” of the yield is important, but also “quality” matters. Its safety, for instance, is very important. You want to have a machine that puts cash into your hands, when everybody else is scrambling for it, when times are tough.

In business you must take decisions every day, and to take them with the peace of mind a safe stream of cash provides is very important. People constantly underestimate the difference it really makes to enjoy the clearness of thought a safe stream of cash provides.

This is the true value added by the PMRL purchase. :)

 

Gio

 

[Guest Dazel]

 

Blue really?

13 to 27m for Voisey bay royalty? Are you on vacation in Colorado? Just use the market transaction valuations...for a bottom end and a top end. Royal gold gets 30 PE on their share of Voisey.

 

Why is it world class royalty? There is a massive difference.

Vale operator

Lowest world cost producer

Mine is relatively new

They just put $2 billion into an upgrade..life extended...surrounded by potential to expand further.

 

We are not talking about Eddie Lamberts sears stores here...there is no better asset than a royalty stream with Voisey's characteristics. You can't buy them because no one will sell an asset like that unless they get 37x as Altius did with it's sale of IRC. So would they sell it for over $100m of course they would...is worth that today? No.

 

If you want to call a $27m bottom price I get it...If the market is depressed enough to buy another $27m Voisey bay...then Altius will make a killing. However, that is not the case...royalties trade at massive premiums as they should. Unless they garbage.....buying an income stream from a third rate producer is not what Altius is in the business of doing that is why the PMRL is so good. Their counter parties, life of resources, location and cost of production.

 

If anyone wants to find out what royalties are worth for fun go try to buy one...or look at what they have sold for in the past. High quality royalties....garbage is priced accordingly.

 

Dazel.

 

 

[giofranchi]

If anyone wants to find out what royalties are worth for fun go try to buy one...or look at what they have sold for in the past. High quality royalties....garbage is priced accordingly.

 

+1 ;)

 

Gio

[Guest Dazel]

 

Gio,

 

I completely agree on your PMRL thesis. If the market and posters doubt the deal as much it seems they do...then we may have an opportunity of a lifetime to pick up more royalties. Berkshire's businesses that he bought are not as good as the royalties and he would tell you this. The difference is what you do with income stream...mr. Buffett takes it and reinvests it elsewhere with similar type yields as that business creates. That is the magic....it's not the initial return although PMRL is high. It is the capital allocation of the cash. Altius has proven they can reinvest so the PMRL cash yield will then be reinvested into other royalty  cash yields increasing the rate of return. The model becomes a math model on predictable and stable cash-flow....the banks love it, investors love it, and you do not have to deal with any capex, employees etc. There is no business like it...and that is why they are so expensive!

 

Dazel.

[SharperDingaan]

cash is riskier than coal and potash royalties?

 

By itself no, but cash has a time limit. Sit on a big pile of it long enough & you will feel pressure to either spend it or give it back to shareholders as a special distribution. All managements have agency bias, & the outcome is usually doing a deal ahead of returning capital. We have to assume that this is a very good deal, but the reality is that we will not actually know for some time yet.

 

We have swapped the potential do something stupid, for a hard & leveraged royalty stream. We still have risk, but at least it is now something more quantifiable. The risks look different, but on balance - most would argue that they have actually declined.

 

Different view, but unfortunately it too often turns out to be the case .....

 

SD

 

 

[Blue Macaw]

Dazel

 

How much would you pay for the Voisey Bay royalty? 55 M for something that might give 60 in the future. Voisey B have another 20 years to go and we see a royalty revenue of 3 M per year. I don´t see the great value to pay more that 30. If I pay 22 today and I expect an annual compounded return of 5 % then I would end up with 60 after 20 years. I can´t see how you would pay more.

[hohi]

Dazel

 

How much would you pay for the Voisey Bay royalty? 55 M for something that might give 60 in the future. Voisey B have another 20 years to go and we see a royalty revenue of 3 M per year. I don´t see the great value to pay more that 30. If I pay 22 today and I expect an annual compounded return of 5 % then I would end up with 60 after 20 years. I can´t see how you would pay more.

 

Voisey's Bay will probably operate for a lot more than 20 years. The royalty covers a huge land position with excellent exploration potential. $3M / year is on the very low side of revenue. In the past it was more like $4 -5 M p.a. (excluding the years when the workforce was on strike).

[giofranchi]

 

Gio,

 

I completely agree on your PMRL thesis. If the market and posters doubt the deal as much it seems they do...then we may have an opportunity of a lifetime to pick up more royalties. Berkshire's businesses that he bought are not as good as the royalties and he would tell you this. The difference is what you do with income stream...mr. Buffett takes it and reinvests it elsewhere with similar type yields as that business creates. That is the magic....it's not the initial return although PMRL is high. It is the capital allocation of the cash. Altius has proven they can reinvest so the PMRL cash yield will then be reinvested into other royalty  cash yields increasing the rate of return. The model becomes a math model on predictable and stable cash-flow....the banks love it, investors love it, and you do not have to deal with any capex, employees etc. There is no business like it...and that is why they are so expensive!

 

Dazel.

 

And that’s exactly why 8% of my firm’s portfolio already is in Altius. I would gladly and quickly get to 15%, if and when a correction in its share price comes. Maybe, my idea that ALS’s share price might come down is just foolish… And, if ALS were a private business, I would have built a full position right away at these prices… Yet, the nature of the beast (the stock market) is too ingrained in me, that I must always leave ample room to average down, even if the business is among the very best that I know of… Maybe, I am making a mistake here… We will see. :)

 

Gio

 

[ap1234]

Gio, I always enjoy our discussions. I have a lot of respect for your approach to investing. But I’m not sure I fully agree with your thoughts on this.

 

Before responding, I want to make it clear. I am NOT an expert on either mining or royalties. If ANYONE thinks I am missing something obvious, please CORRECT me. I want to hear from people who are more knowledgeable than me and have a variant view.

 

1. I don’t think you can simply say that commodities are in a bear market without looking at history. You provided a chart from 2007-present which shows that commodities have not recovered from their peak. But this is too short-term of a picture. From the late 1990s to 2007, commodities were in a HUGE secular bull market. Effectively, you are picking the top of a prolonged commodity cycle and suggesting that because prices are lower today they are in a bear market. I have no way of predicting how bad things could get in commodities. But I find it hard to believe that things can’t get worse in the future. 

 

2. All royalties are not created equal. I don’t think you can simply look at the transaction multiple of PMRL (9x) and compare it to prior transactions (11-37x) without understanding why the multiple was lower.

 

Imagine I presented you with two different stocks and did not tell you anything about either business. You had no information on their competitive position, financial strength, growth prospects, management quality, etc. Would you always just pick the company with the lower P/E multiple? I doubt it. Otherwise Buffett’s entire investment philosophy wouldn’t work. Some businesses are WORTH higher P/E multiples. Other businesses are not. A business that trades at a higher P/E multiple is not always more expensive than a business with a low P/E multiple. I know you agree because you own many high quality businesses at premiums to book value when you could buy their competitors at discounts to book value.

 

In the case of royalties, I suspect there are lots of factors that drive valuations. For example, what is the mine life of the royalty? What is the opportunity for organic growth (i.e. expansion to the existing mine resulting in higher royalties in the future)? What is the diversity of the royalty portfolio?

 

If I look at the acquired coal roaylties, the average mine life is 20 years. One of the mines has a life of 9 years. Another one has a life of 13 years. A shorter mine life equates to a shorter cash flow stream. I wouldn’t pay the same multiple for a royalty steam with a shorter life versus a longer life.

 

Also, I suspect the organic growth of the coal royalties is a lot less than other royalties. One of the advantages of royalties is that the owner can often benefit from increased expansion of the mine (i.e. greater production in the future = higher royalties). For example, Franco Nevada has benefitted from owning royalties where the production has increased over time. This type of royalty would be worth more than one that had no organic growth.

 

3. I didn’t get the sense that Altius stock was up significantly because the company bought the PMRL royalty at a bargain price. In fact, management hasn’t suggested they stole the royalty. It’s true that when Altius first looked at Sherritt’s royalty portfolio 4 years ago it probably would have been more expensive and there would have been more bidders. But today, the Sherritt portfolio was still a competitive bidding process. It was not a distressed sale.

 

So why did the stock rally so significantly if the royalty purchase was not at a bargain price? My best guess would be:

 

a) Altius has been sitting on $100-200 million in cash for several years. In a low rate environment, the cash earns nothing. Investors were not giving the company credit for the optionality of the cash. By deploying the cash, the company was able to take $130 million of cash earning nothing and put it to work earning a reasonable return.

 

b) Altius historically had VERY lumpy results. Effectivelly, outside of Voisey Bay they had no recurring cash flows. Investors hate lumpy businesses and award them with lower valuation multiples. You and I know this is the wrong way to think about businesses which is why companies like Leucadia and Fairfax can often trade at ridiculous prices.

 

By acquiring Sherritt’s royalty portfolio, they have transformed their business into a company that has a significant amount of recurring cash flows. This provides less lumpiness to the financial results and more predictably. As such, investors are likely to award the company with a higher multiple/

 

c) The interesting optionality in the PMRL transaction was the CDP portfolio. The purchase price was $21 million (could end up being $40 million if they acquire 100% of it). Management seems to think that there is the potential for significant optionality in this resource.

 

[ap1234]

Blue Macaw, where did you see Sherritt mentioned that the 2013 royalty revenue would be 20 million and not 27 million?

 

In the Altius investor presentation (page 18), they show that the historical royalty revenue (assuming Sherritt + Voisey Bay) would have been:

 

2010: $30 million ($2.5 million Voisey, $27.5 million Sherritt)

2011: $32 million ($3.7 million Voisey, $28.3 million Sherritt)

2012: $31 million ($3.5 million Voisey, $27.5 million Sherritt)

LTM: $30 million ($3 million Voisey, $27 million Sherritt)

 

It appears Sherritt's portfolio has consistently ranged from $27-28 million over the past 4 years .

 

What is the discrepancy between the numbers in Altius’ investor presentation and your comments above?

 

[hohi]

Gio, I always enjoy our discussions. I have a lot of respect for your approach to investing. But I’m not sure I fully agree with your thoughts on this.

 

Before responding, I want to make it clear. I am NOT an expert on either mining or royalties. If ANYONE thinks I am missing something obvious, please CORRECT me. I want to hear from people who are more knowledgeable than me and have a variant view.

 

1. I don’t think you can simply say that commodities are in a bear market without looking at history. You provided a chart from 2007-present which shows that commodities have not recovered from their peak. But this is too short-term of a picture. From the late 1990s to 2007, commodities were in a HUGE secular bull market. Effectively, you are picking the top of a prolonged commodity cycle and suggesting that because prices are lower today they are in a bear market. I have no way of predicting how bad things could get in commodities. But I find it hard to believe that things can’t get worse in the future. 

 

2. All royalties are not created equal. I don’t think you can simply look at the transaction multiple of PMRL (9x) and compare it to prior transactions (11-37x) without understanding why the multiple was lower.

 

Imagine I presented you with two different stocks and did not tell you anything about either business. You had no information on their competitive position, financial strength, growth prospects, management quality, etc. Would you always just pick the company with the lower P/E multiple? I doubt it. Otherwise Buffett’s entire investment philosophy wouldn’t work. Some businesses are WORTH higher P/E multiples. Other businesses are not. A business that trades at a higher P/E multiple is not always more expensive than a business with a low P/E multiple. I know you agree because you own many high quality businesses at premiums to book value when you could buy their competitors at discounts to book value.

 

In the case of royalties, I suspect there are lots of factors that drive valuations. For example, what is the mine life of the royalty? What is the opportunity for organic growth (i.e. expansion to the existing mine resulting in higher royalties in the future)? What is the diversity of the royalty portfolio?

 

If I look at the acquired coal roaylties, the average mine life is 20 years. One of the mines has a life of 9 years. Another one has a life of 13 years. A shorter mine life equates to a shorter cash flow stream. I wouldn’t pay the same multiple for a royalty steam with a shorter life versus a longer life.

 

Also, I suspect the organic growth of the coal royalties is a lot less than other royalties. One of the advantages of royalties is that the owner can often benefit from increased expansion of the mine (i.e. greater production in the future = higher royalties). For example, Franco Nevada has benefitted from owning royalties where the production has increased over time. This type of royalty would be worth more than one that had no organic growth.

 

3. I didn’t get the sense that Altius stock was up significantly because the company bought the PMRL royalty at a bargain price. In fact, management hasn’t suggested they stole the royalty. It’s true that when Altius first looked at Sherritt’s royalty portfolio 4 years ago it probably would have been more expensive and there would have been more bidders. But today, the Sherritt portfolio was still a competitive bidding process. It was not a distressed sale.

 

So why did the stock rally so significantly if the royalty purchase was not at a bargain price? My best guess would be:

 

a) Altius has been sitting on $100-200 million in cash for several years. In a low rate environment, the cash earns nothing. Investors were not giving the company credit for the optionality of the cash. By deploying the cash, the company was able to take $130 million of cash earning nothing and put it to work earning a reasonable return.

 

b) Altius historically had VERY lumpy results. Effectivelly, outside of Voisey Bay they had no recurring cash flows. Investors hate lumpy businesses and award them with lower valuation multiples. You and I know this is the wrong way to think about businesses which is why companies like Leucadia and Fairfax can often trade at ridiculous prices.

 

By acquiring Sherritt’s royalty portfolio, they have transformed their business into a company that has a significant amount of recurring cash flows. This provides less lumpiness to the financial results and more predictably. As such, investors are likely to award the company with a higher multiple/

 

c) The interesting optionality in the PMRL transaction was the CDP portfolio. The purchase price was $21 million (could end up being $40 million if they acquire 100% of it). Management seems to think that there is the potential for significant optionality in this resource.

Great post, thanks a lot!

 

Here some thoughts:

 

1. Inflation-adjusted prices aren't that high. all-in sustaining costs of the major players are quite high and the margins are low. If prices would collapse, then a few years later the world would run out of resources to use. That's not going to happen.

 

2. The aquired royalties are super high quality. Especially the potash ones with mine lifes north of 70 years and expansions of 30%+ under way. One has to value the coal royalties depending on ones opinion of coal's future in Albertas electricity production. I personally think we will have coal for a long time so I can see the power plants operating for a longer time than expected.

 

3. My take is it's just the publicity ALS got from the deal. Maybe, but only maybe someone dug so deep and found out about Julienne Lake.

 

[giofranchi]

ap1234,

I also enjoy our discussion very much!

And in theory I agree 100% with every point of yours… but I don’t understand why they should apply to the PMRL purchase… Just look at the first three lines on page 4 of the presentation:

-Attractive purchase price multiple

Apparently, management thinks they are truly getting a bargain. Maybe, not a distressed price, but surely a very good price.

-Assets rank among the highest quality within the royalty sector

Apparently, management thinks the quality of the royalties they have just purchased is very high.

-Strong upside potential

Apparently, management thinks there is substantial opportunity for growth here.

Therefore, if you believe in management, basically they have already provided the answers to your points 2 and 3. Is management reliable? If it is not so, I have made a big mistake! ;)

About your point 1: the mineral sector, like all resources, imo is very predictable in the long run: humans will go on consuming more and more. The problem is it is subjected to wild fluctuations around a positive growth trend… That’s why I think 3 years of decline in prices, though a very short time, like you have suggested, are also a cushion against the probability that we are at the top of a cycle in those fluctuations. Of course, I am not saying it cannot get worse… All I am saying is we probably do not find ourselves at the top of the cycle right now.

As far as the big jump in price is concerned, I am, and probably will always be, pretty agnostic about stock price movements. Why did it go up? I don’t know, and I didn’t ask myself the question either.

 

Gio

 

[Blue Macaw]

Sheritt´s Q3 report. There you have under the coal production section info about coal and potash.

[SharperDingaan]

We might want to remind ourselves that one of the resources metrics commonly used is expected minelife/payback period.

 

In an up-cycle the mine may take 3-4 yrs to repay its capital cost. But if the life of that mine is 20 yrs – you have either a 20 yr period over which that up-cycle can occur (highly likely), &/or you could experience multiple up-cycles (20/3.5/2) over that mines life. Hence, the lower the required capital investment, & the longer the expected mine life; the more that property is worth.

 

It is highly likely that much of what was purchased , is in this category. Meaningless to Joe Investor; but right up there to a mine operator – or royalty holder – looking to grow their long-term business.

 

SD

 

[original mungerville]

ap1234,

I also enjoy our discussion very much!

And in theory I agree 100% with every point of yours… but I don’t understand why they should apply to the PMRL purchase… Just look at the first three lines on page 4 of the presentation:

-Attractive purchase price multiple

Apparently, management thinks they are truly getting a bargain. Maybe, not a distressed price, but surely a very good price.

-Assets rank among the highest quality within the royalty sector

Apparently, management thinks the quality of the royalties they have just purchased is very high.

-Strong upside potential

 

Apparently, management thinks there is substantial opportunity for growth here.

Therefore, if you believe in management, basically they have already provided the answers to your points 2 and 3. Is management reliable? If it is not so, I have made a big mistake! ;)

About your point 1: the mineral sector, like all resources, imo is very predictable in the long run: humans will go on consuming more and more. The problem is it is subjected to wild fluctuations around a positive growth trend… That’s why I think 3 years of decline in prices, though a very short time, like you have suggested, are also a cushion against the probability that we are at the top of a cycle in those fluctuations. Of course, I am not saying it cannot get worse… All I am saying is we probably do not find ourselves at the top of the cycle right now.

As far as the big jump in price is concerned, I am, and probably will always be, pretty agnostic about stock price movements. Why did it go up? I don’t know, and I didn’t ask myself the question either.

 

Gio

 

Gio and I think alike!

[Blue Macaw]

Gio, I always enjoy our discussions. I have a lot of respect for your approach to investing. But I’m not sure I fully agree with your thoughts on this.

 

Before responding, I want to make it clear. I am NOT an expert on either mining or royalties. If ANYONE thinks I am missing something obvious, please CORRECT me. I want to hear from people who are more knowledgeable than me and have a variant view.

 

1. I don’t think you can simply say that commodities are in a bear market without looking at history. You provided a chart from 2007-present which shows that commodities have not recovered from their peak. But this is too short-term of a picture. From the late 1990s to 2007, commodities were in a HUGE secular bull market. Effectively, you are picking the top of a prolonged commodity cycle and suggesting that because prices are lower today they are in a bear market. I have no way of predicting how bad things could get in commodities. But I find it hard to believe that things can’t get worse in the future. 

 

2. All royalties are not created equal. I don’t think you can simply look at the transaction multiple of PMRL (9x) and compare it to prior transactions (11-37x) without understanding why the multiple was lower.

 

Imagine I presented you with two different stocks and did not tell you anything about either business. You had no information on their competitive position, financial strength, growth prospects, management quality, etc. Would you always just pick the company with the lower P/E multiple? I doubt it. Otherwise Buffett’s entire investment philosophy wouldn’t work. Some businesses are WORTH higher P/E multiples. Other businesses are not. A business that trades at a higher P/E multiple is not always more expensive than a business with a low P/E multiple. I know you agree because you own many high quality businesses at premiums to book value when you could buy their competitors at discounts to book value.

 

In the case of royalties, I suspect there are lots of factors that drive valuations. For example, what is the mine life of the royalty? What is the opportunity for organic growth (i.e. expansion to the existing mine resulting in higher royalties in the future)? What is the diversity of the royalty portfolio?

 

If I look at the acquired coal roaylties, the average mine life is 20 years. One of the mines has a life of 9 years. Another one has a life of 13 years. A shorter mine life equates to a shorter cash flow stream. I wouldn’t pay the same multiple for a royalty steam with a shorter life versus a longer life.

 

Also, I suspect the organic growth of the coal royalties is a lot less than other royalties. One of the advantages of royalties is that the owner can often benefit from increased expansion of the mine (i.e. greater production in the future = higher royalties). For example, Franco Nevada has benefitted from owning royalties where the production has increased over time. This type of royalty would be worth more than one that had no organic growth.

 

3. I didn’t get the sense that Altius stock was up significantly because the company bought the PMRL royalty at a bargain price. In fact, management hasn’t suggested they stole the royalty. It’s true that when Altius first looked at Sherritt’s royalty portfolio 4 years ago it probably would have been more expensive and there would have been more bidders. But today, the Sherritt portfolio was still a competitive bidding process. It was not a distressed sale.

 

So why did the stock rally so significantly if the royalty purchase was not at a bargain price? My best guess would be:

 

a) Altius has been sitting on $100-200 million in cash for several years. In a low rate environment, the cash earns nothing. Investors were not giving the company credit for the optionality of the cash. By deploying the cash, the company was able to take $130 million of cash earning nothing and put it to work earning a reasonable return.

 

b) Altius historically had VERY lumpy results. Effectivelly, outside of Voisey Bay they had no recurring cash flows. Investors hate lumpy businesses and award them with lower valuation multiples. You and I know this is the wrong way to think about businesses which is why companies like Leucadia and Fairfax can often trade at ridiculous prices.

 

By acquiring Sherritt’s royalty portfolio, they have transformed their business into a company that has a significant amount of recurring cash flows. This provides less lumpiness to the financial results and more predictably. As such, investors are likely to award the company with a higher multiple/

 

c) The interesting optionality in the PMRL transaction was the CDP portfolio. The purchase price was $21 million (could end up being $40 million if they acquire 100% of it). Management seems to think that there is the potential for significant optionality in this resource.

 

Agree with this. The c) part with the CDP is a very interesting one. I am one of very few in this world that still believe in coal. Could we set up deals with Chinese companies  and to ship coal to china? Would that benefit china in anyway? Would the chinese be interested in this? Other options?

 

The share price is holding up better than expected. When volume reaches original levels we will know more or less where new levels are but very likely 14-16 span. And then info from Alderon and Jullienne lake. If non of these come thorugh we are down to 10 again. I would say some of Kami is already priced in todays share price.

[giofranchi]

I am one of very few in this world that still believe in coal.

 

I don’t know if I “believe”, or if I “don’t believe” in coal. Regarding commodities I am pretty agnostic… I like to keep it simple:

1) I think that we humans will go on producing more and more, therefore also consuming more and more commodities;

2) I think that changes happen, but require major capital expenditures, and therefore proceed very slowly. What this means is, if 53% of Alberta Power Generation nowadays is through coal, most probably coal will still be used for a long time.

Besides my simplistic convictions about commodities, what I truly like about the coal royalties (the ones for power generation, not for metallurgical purposes) is that they are not linked to the price of coal, because they are tonnage based royalties. This way, even if the worst for commodities were yet to come, those royalties won’t be greatly affected. The cash would still flow in basically undisturbed, cash that will turn out to be very useful for further acquisitions, given the truly depressed commodity prices that would then be reached. :)

 

Gio

 

[EliG]

Besides my simplistic convictions about commodities, what I truly like about the coal royalties (the ones for power generation, not for metallurgical purposes) is that they are not linked to the price of coal, because they are tonnage based royalties. This way, even if the worst for commodities were yet to come, those royalties won’t be greatly affected. The cash would still flow in basically undisturbed, cash that will turn out to be very useful for further acquisitions...

 

Gio, don't count your chicken before they are hatched. Genesee royalty may go to a 3rd party. Two other electric royalties have a short mine life. The fourth one is not producing.

 

Mine life (years):

 

Genesee: 61

Paintearth: 9.2

Sheerness: 12.8

Highvale: nmf

 

[giofranchi]

Gio, don't count your chicken before they are hatched. Genesee royalty may go to a 3rd party. Two other electric royalties have a short mine life. The fourth one is not producing.

 

Mine life (years):

 

Genesee: 61

Paintearth: 9.2

Sheerness: 12.8

Highvale: nmf

 

Well, Blue Macaw quoted ap1234, who asked how ALS could take advantage of the fact the worst for commodities might still lie ahead. Of course, ap1234 doesn’t think 15 or 20 years in the future… We all are well aware of the threat a potential deflationary scare poses for the next 2 to 3 years, maybe 5 years from now at the maximum! That’s why I think cash flow from the purchased royalties most probably will do the work it is intended to: that is to provide liquidity in times of trouble. Because both Paintearth and Sheerness will still be producing 5 years from now, and therefore still paying royalties to ALS. With that cash ALS will then be able to buy other royalties at depressed prices.

Nothing is sure, I agree, but I will be content to bet on those outcomes that are reasonable! ;)

 

Gio

 

[tengen]

Capital Power Corporation (CPX) has the right of first refusal on the Genesee royalty. To exercise that right, they would have to pay $251 million (the portion of the PMRL purchase allocated to Genesee). That's well over half the aggregate purchase price of $460 million. From my admittedly superficial perspective, it doesn't seem to make any sense that CPX would do this. To flip this around the other way, if CPX already owned the royalty, I think they would be extremely happy to sell it for $251 million.

 

 

[EliG]

From my admittedly superficial perspective, it doesn't seem to make any sense that CPX would do this.

 

CPX operates three Genesee power plants that consume coal from Genesee mine. Genesee mine is a 50/50 joint venture between CPX and Sherritt. CPX is the party that pays the royalty, indirectly via coal price.

 

If they acquire the royalty, can they make an arrangement to stop paying the royalty altogether? If they can, the entire pre-tax amount of the royalty will go to reduce their operating expenses. Ergo, the royalty is worth more to them than to Altius.

 

Note also, CPX is a BBB-rated utility. They can borrow at a much better rate than Altius to finance the deal.

[ap1234]

Gio, I think you are missing my point. I am not suggesting Altius is either a good or bad investment today. My point is that Altius is a very DIFFERENT investment today than it was 2 months ago. In other words, to own the stock going forward, the investment thesis has changed. 

 

Why is the investment thesis different going forward?

 

On the positive side, the investment thesis is DIFFERENT because they have gone from a business with very lumpy cash flows to a stable stream of cash flows (this is likely why the market is excited about the company). The more royalties that Altius owns, the more the company gets valued like a traditional royalty company (a premium valuation) versus a closed-end fund that specializes in resources (a discounted valuation). Just look at the valuations of some of the publicly traded pure-play royalty companies to get a sense for the investor excitement towards royalty businesses. Also, investors seemed to penalize Altius previously for the cash drag from holding so much cash over the past several years (which made no sense given the company's capital allocation track record).

 

On the negative side, the investment thesis is DIFFERENT because they have deployed ALL of their cash and even took on some debt to finance the deal. IF the reason an investor bought Altius 6 months ago was to play a downturn in the mining cycle, this part of the thesis is NO longer intact. I suspect some investors used to own Altius as a way to bet on management's ability to deploy the cash at a high IRR when mining assets were selling at distressed prices.

 

Prior to the deal, the company had $130 million in cash on the balance sheet. You could own the stock EVEN if you were worried about a commodity bear market because you could feel confident that Brian Dalton and his team would opportunistically invest during the downturn and acquire assets at attractive prices (or simply buyback their own stock which would likely go down during a commodity downturn).

 

Today, Altius has no dry powder. If the royalty deal goes through, they have no excess cash. As such, they can’t opportunistically take advantage of a mining downturn.

 

According to their investor presentation, the company is expected to collect approx. $30 million in annual cash flows (pre-tax). Given that the Kami project is not expected to come online until late 2015/2016 (and this could be delayed) this is all of the cash flow the company has. So they have gone from having $130 million in cash on their balance sheet to $20 million/annum (after-tax). And this is before incurring some costs to run the business (annual G&A, exploration expenditures).

 

It is true that they have other equity investments (Alderon, Virgina, Cranberry, etc. ) which provides some liquidity. But selling one mining investment at a low price (which likely will happen during a downturn) to buy another mining investment is not the same thing as having a bunch of cash as dry powder.  So IF we have a downturn 6 months from now, the company does not have the ability to take advantage of the distressed opportunity the same way they did before they spent all of their cash.

 

Hence, all I was trying to point out earlier was that the investment thesis has changed. Again, I am not saying the thesis is worse (it probably is better). But the key is it different. As such, depending upon your initial investment thesis 6 months ago, investors have to check to see if they are happy with the new thesis going forward.

 

[alertmeipp]

maybe they have just taken advantage of the downturn by doing the deal. The deal will give them consistent cash flow to continue as well.

 

depends on your perspective

[Liberty]

The commodity prices might not be that low, but the valuations sure have taken a hit. The TSX Venture went from something like 2500 to 800 in a couple years. Deploying some cash now could very well turn out to be near the low of that cycle.

[Guest Dazel]

 

Ap1234,

 

Once again....................................READ the posts.

Lots of dry powder.....well over $100m in dry powder...Virginia mines is going up daily.

 

Dazel.