ALS.TO - Altius Minerals

[original mungerville]

N. And Gio,

 

Yes the simple math you used puts  us at our current market cap...the PMRL purchase has brought us here.

 

Break down of the purchase of PMRL on a standalone basis

 

$233 purchase price...market multiples at $20m (all the PMRL royalties plus Voisey Bay) brings us to our current market cap. So Altius has created almost two times the purchase price in market cap. They bought at 9X and AngloPacific trades at more than double that multiple. I would argue that Altius portfolio post deal is of much higher quality than Anglo Pacific's...12 world class royalties to 3 at AngloPacific. I will agree the deal is not complete yet so there will be some discount...but not really as you will see below. On the fundamental basis of this example post deal the PMRL and Voisey Bay Royalty should trade at AngloPacific's multiple or better so we get our current market cap.

 

 

A p1234,

 

On those metrics there is very little if any value being priced in for Kami, marketable securities, Julienne lake and the other assets they own. The dry powder question you raise is admirable but clearly the market does not pay for dry powder as AngloPacific only has $13m. That being said I appreciate your thoughts and margin of safety in dry powder. No one has mentioned an upside to commodity prices either.

 

Altius has evolved into a world class royalty company post deal that will command the market multiples associated with that type of company. We are not paying for Kami and the other assets the market is paying for the royalty company transformation.

 

I agree with this statement. Post-deal when the stock went up to $13 or so, that was the old $10 price pre-deal. In both cases "we were not paying for Kami and the other assets" even though the price moved up significantly after the deal.

 

[original mungerville]

Gio, thank you for sharing your thesis on the company. Let me try and provide my perspective:

 

1) We both own ALS. My posts have NOT been focused on whether investors should own the stock today or wait until a downturn. The posts have simply been focused on debunking some of the misconceptions about the business (i.e. the company does not still have tons of dry powder, the company still has a cyclical component, etc.).

 

2A) I do NOT believe that Altius’ royalties are worth 22x earnings. I am not a relative value investor. I believe in absolute value. Just because another company’s implied valuation is 20x does not mean that Altius’ portfolio should be worth the same. I can point to many sectors where you can take the valuation of one company and use it to imply the valuation of another stock is cheap. I don’t believe in this. Relative value is a dangerous game.

 

Royalties have private market values. That is what I care about. What would an informed buyer pay for the collection of royalties that Atlius owns? Fortunately for us, the VAST majority of Altius’ royalties (excluding Voisey Bay) were just valued in a private transaction. So we have a peg on what the royalties could be worth.

 

Now just because there is a private market transaction does not mean that the acquisition price is always reasonable. If that was the case, Buffett’s investing track record would be a lot worse. The market is not perfectly efficient all the time. However, I do NOT believe that the Sherritt deal was an example of an inefficient private market transaction.

 

The Sherritt auction was a competitive auction. Altius was NOT the only bidder. It was not a distressed sale. In fact, I have heard some industry observers suggest that Franco may have been a bidder in the Sherritt royalty. If this is true, this provides us with some clues. Franco is an experienced royalty investor, has a lower cost of capital and a larger balance sheet than Altius (i.e. they could afford to pay a higher price). Yet, Altius won the bid.

 

Also, Altius management has stated that the price paid was a ‘fair price.’ The benefit of the transaction was transforming their own company from a lumpy project generation business into a cash generative royalty model. Altius has never stated that they ‘stole the royalties’ or they got a bargain on the deal.

 

To be very clear. I believe the royalty was a good transaction for the business. I just don’t believe they bought the royalty at 50 cents on the dollar.

 

2b) Gio said: “It doesn’t really look like the market is assigning any value to ASL’s stock portfolio: $27 million (assuming $3 million of operating expenses) with a 30% tax rate gets you to $19 million after tax x 23.3 = $440 million, slightly higher than today’s market cap.”

 

I disagree. I believe the market IS ascribing a value to the company’s stock portfolio. I think your $19 million annual cash flows is too high.

 

Here is my back of the envelope math on the cash flows of the business:

 

Sherritt royalties: $25 million EBITDA ($18-20 million after-tax)

Voisey Bay royalties: $3 million EBITDA ($1.8-2million after-tax, there is a 20% royalty tax in NF)

Operating expenses: $5 million ($3 million G&A + $2 million exploration spending)

Interest expense on debt: $8 million (6-7% int. rate on $130 million debt)

Tax savings: $3 million

 

Total after-tax cash flows = 20 + 2 – 5 – 8 + 3 = $11-12 million

 

I arrive at $11-12 million in annual cash flows. You arrive at $19 million. This changes how we think about the valuation of the business.

 

3) Altius’ managers are very skilled. But they did NOT hand pick their entire investment portfolio (although they did hand pick Virginia and Callinan). Recall that Altius’ core business is prospect generation. They put up very little capital upfront to stake various mineral rights. The hope is some of the mineral rights will be valuable in the future. They rely on being able to sell the rights to a larger player who will be interested in the property and is willing to take on the project and invest the capital to bring the project to production.

 

As a result of their project generation model, from to time they will own equity stakes in companies that they would never have acquired themselves (if they had not staked the original land). Altius has a $130 million investment portfolio. Almost 50% of the portfolio is one stock – Alderon. Altius did NOT buy the stock in the open market. They have owned it since Alderon was formed. Alderon is using the original land that Altius had a stake on.

 

If Altius did not own the royalty on Kami, I can NOT imagine they would go into the open market and acquire 25% of Alderon today. They own it because of history not because it is their favorite place to allocate capital. In fact, if Altius could sell their Alderon stock without damaging the value of their royalty, I suspect they would do it. As such, you can’t simply look at their investment portfolio like any other portfolio manager and assume that these represent their favorite ideas.

 

4) Without Alderon coming online or the disposition of one of their investments (ex. Alderon or Virginia), it is very difficult to see how they come even close to the original $130 million in cash over the next several years.  Please see my math above. I arrive at $10-12 million in annual cash flows based upon the cash producing assets. And Altius will probably pay down their debt over time (there are contractual debt repayments on the senior debt). As such, their cash balance could take a while to be replenished if Alderon does not come online.

 

In 2b above,

 

1) Why would you include exploration expenses (without assuming growing royalty revenue) as these relate to future royalties Altius will develop over time? So I would take those out of this valuation.

 

2) We have $3M left in G&A. That's going to be tax deductible right? - ie its a corporate expense which is tax deductible- so is the net something like $2 M here after considering 33% in tax deductions (ie a savings of $1M)

 

So if I take these two adjustments, the $5M becomes $2M and your 10-11 becomes $13 to 14 million annually in after-tax cash flow.

 

Now, if I take Altius' total equity investments (which includes Alderon) plus 2 years of cash flow from the royalties (ie 13.5 M x 2 or 27M) and call that roughly equal to the debt owed two years hence, in two years I wipe out the debt. I am up to 18 to 19 million in annual after-tax cash flows. (I am doing this to make the valuation simpler and don't necessarily think they will wipe the debt out in 2 years.)

 

If I assign a crazy royalty type multiple to that 19M, say 20+ times, I get close to the current Altius market cap and one could then argue that the Kami and Julienne royalties aren't even factored into the current price of Altius's stock.

 

If I assign a lower multiple (say 10-12 times), I would have to say some of the Kami royalty is getting baked in already into Altius' stock price.

 

I think, in simple terms, this is the gist of the debate here. Right?

 

 

 

 

[ap1234]

Thanks Original mungerville. Here are some additional comments on your valuation approach:

 

1) I agree. Exploration spending should not be included in a ‘normalized’ earnings figure. It really can be counted as ‘growth capex.’ In my previous post, I just put down the annual after-tax cash flows of the business. Rather than valuing the business, I was trying to come up with the amount of annual after-tax cash flows  to figure out how long it would take to replenish the $130 million spent on the Sherritt transaction.

 

2) I already accounted for the tax deduction from both the G&A and the interest expense on the debt (see my $3 million tax savings in my earlier calculation). That said, the normalized earnings works out to approx. $13-14 million as you mentioned.

 

3) Your valuation assumed they could simply sell all of their equity investments at current prices and pay down all of their debt within 2 years. This might be complicated for several reasons.

 

a) The investment portfolio might not be that liquid. Almost 50% of the portfolio is in Alderon which can’t simply be sold in the open market. Also, the Cranberry investment of $20-25 million is unlikely to be liquidated.

 

b) You have ignored the capital gains that Altius will pay if they liquidated their investment portfolio (they have a low cost base on their larger holdings).

 

c) I don’t know if they can simply wipe out the debt without a prepayment penalty.

 

d) Of the $130 million in debt, $50 million is convertible debt that is in the money today. I suspect Altius won’t use the convertible debt. But if   

they do, they will face equity dilution which you have not accounted for.

 

4) I still don’t understand how Altius paid 9x EBITDA for the Sheritt royalties in a competitive bid and yet the market should immediately value it at 50-100% higher valuation when Altius has done nothing to improve the assets? Hard to believe Altius bought the assets for 50 cents on the dollar. I would love to know if I am wrong on this. That would make the business significantly more valuable.

 

[Guest Dazel]

thanks guys..I am getting lazy.

 

AP1234... I know you know you used the bottom number $25m and $3m not $27m and $4m Voisey...

 

-actually there should not be any G&A associated or exploration ($3.8m is the number in actuality) with this -$5m..How much does it cost to hire someone to check your bank account and see if the money is there? some monkeys can probably do that...okay hire a lawyer every 2 years to check the royalties...another $100k?

 

-the royalties have amortization expenses......PMRL will be a material higher non cash expense than Voisey...together they will bring down the tax bill

 

 

* If you want to use the G&A then we need to add the $2.5 m interest income and $8m other revenue number likely this year (20% of Mamba shares at $40m market cap-other income was $4m in 2012) and capital gains you just mentioned Ap1234

 

- Altius has deferred tax assets of about $3m? they use the equity method so they wrote down $11.7m last year in Alderon more this year...

 

We are using assumptions in our process so no one is wrong...but in a perfect world the cost of adding PMRL to Altius....is 0. infrastructure is already there...you can add the debt expense but in our separating of the business scenario it could be wiped out leaving 0 interest expense (remember AngloPacific has $13m cash as a comparable). The reality is that each incremental royalty add to Altius have close to 0 in fixed costs (after acquisition price) and the variable cost is virtually nil unless they use debt....remember economics 101 when a company hits economy of scale? well its all profit above that number for those that forget. There is no better business on the planet...that is why all of the other royalty companies blew there brains out over the last 4 years thye were adding revenue streams at no additional G&A (they paid themselves more though!)..it is perfect economics unless you over pay. and that is what happened. The whole royalty sector is now gun shy and with a lot less dry powder.

 

The market is starting to understand what this means for Altius...and it is being priced accordingly.....they waited for the right price and that is the only thing they have to worry about in the economics of this business.

 

Dazel.

 

 

 

 

 

 

 

 

[original mungerville]

Thanks Original mungerville. Here are some additional comments on your valuation approach:

 

1) I agree. Exploration spending should not be included in a ‘normalized’ earnings figure. It really can be counted as ‘growth capex.’ In my previous post, I just put down the annual after-tax cash flows of the business. Rather than valuing the business, I was trying to come up with the amount of annual after-tax cash flows  to figure out how long it would take to replenish the $130 million spent on the Sherritt transaction.

 

2) I already accounted for the tax deduction from both the G&A and the interest expense on the debt (see my $3 million tax savings in my earlier calculation). That said, the normalized earnings works out to approx. $13-14 million as you mentioned.

 

3) Your valuation assumed they could simply sell all of their equity investments at current prices and pay down all of their debt within 2 years. This might be complicated for several reasons.

 

a) The investment portfolio might not be that liquid. Almost 50% of the portfolio is in Alderon which can’t simply be sold in the open market. Also, the Cranberry investment of $20-25 million is unlikely to be liquidated.

 

b) You have ignored the capital gains that Altius will pay if they liquidated their investment portfolio (they have a low cost base on their larger holdings).

 

c) I don’t know if they can simply wipe out the debt without a prepayment penalty.

 

d) Of the $130 million in debt, $50 million is convertible debt that is in the money today. I suspect Altius won’t use the convertible debt. But if   

they do, they will face equity dilution which you have not accounted for.

 

4) I still don’t understand how Altius paid 9x EBITDA for the Sheritt royalties in a competitive bid and yet the market should immediately value it at 50-100% higher valuation when Altius has done nothing to improve the assets? Hard to believe Altius bought the assets for 50 cents on the dollar. I would love to know if I am wrong on this. That would make the business significantly more valuable.

 

Yes, I am not saying that they will pay down the debt in 2 years. I was saying to roughly frame the situation in terms of what we are paying for at today's Altius market cap, its kind of handy to assume two years of cash flows plus the equity investments (I guess as you say they will pay capital gains ... but on a corporate tax rate ... that should not be huge) is roughly equal to the debt of $130M, plus or minus a 10M or two. That was my only point. Further, I am not getting into the conversion of the debt. I am just saying take all this stuff and call it a rough wash.

 

That leaves us with the multiple assumed for that 13-14M cash flow which you can add 5M to assuming the above rough wash. So 18-19 M. But the key question is as you say, what multiple do you put on that?

 

If its 23x, then the current market cap of Altius (more than 430M?) does not at all account for the Kami or Julienne royalty potential (nor any other potential future royalties) as 23 x 18-19M is roughly 430M;

 

if its 12x, then the current market cap is already accounting for some of Kami or Julienne and other potential streams (ie roughly 430M market cap minus around 230M (ie 18-19M X 12x) equals 200M is being attributed to these future royalties).

 

That's it, that's all I'm saying. I think its a good simple way to look at it because it washes out all that noise (debt, other equity holdings) and focuses only on the big chunks: 1) which multiple do you assign to the current royalties (including the Sheritt deal), and 2) therefore how much is the market placing on Kami, Julienne and other future royalties at present (understanding we have quite a few hurdles to clear between now and those future cash flows).

 

Once the market places too high a value on those future cash flows, that will be the time to sell. 

 

 

 

[tengen]

Sherritt clearly wanted to get rid of PMRL as part of their strategy to "focus on core businesses".  Perhaps not a distressed sale, but not holding out for the highest possible offer either.

 

By the way, the premier of Newfoundland (Kathy Dunderdale) has resigned. One of the contributing issues was her poor handling of the electricity failures that happened earlier in January. While this has nothing to do with the power line needed for Kami, we can hope the person replacing Dunderdale will give a general swift kick in the backside of the bureaucrats who run the provincial power companies.

[Guest Dazel]

OriginalMungerville,

 

We are on the same page...simple math...royalty streams are a steady cashflow and the sector multiples will apply now...Altius costs of operations will be more than covered by the lumpy part of their cashflow which are capital gains, revenue from project development and interest and dividend income. This should give Altius a higher multiple but we will settle for something along the lines

everyone else is receiving in the royalty sector. When that premium gets to high we will be sellers as well.

 

Dazel.

 

 

[goldfinger]

When that premium gets to high we will be sellers as well.

 

This premium would have to be high enough to eliminate your interest in optionality with Julienne, Kami and any project that's not fully finalized (by a yes or no) right?

[original mungerville]

Yes, that's right. The premium has to get high enough to eliminate the benefit of the optionality in the other projects. At this point, I don't think the premium is high enough as there is likely to be some progress on Kami this year and I don't have to get too deep into the other projects to demonstrate this:

 

In order to sell here,

 

1. You have to assign a 10x multiple to current royalties (incl Sheritt) of 20M annually.

2. And also 10x to the Kami $25M annually (which isn't a sure thing but as a first go lets assume it is 100% probable).

... So something like 10 times 45M annually = 450M market cap. (Given the framing I put together in my previous post, the 130M in debt would roughly net out against other equity holdings so that's a rough wash - so forget all that, along with the G&A and all the minor stuff).

3. Now, you have to then also assume there is no further growth at Kami beyond the $25M annually (ie the potential expansion/doubling of Kami isn't going to happen to $50M annually), and

4. Nothing comes out of Julienne or any other streams in future.

 

I think you have to assign at least a 30% probability to #3 and #4? which is not insignificant...If you want to be conservative, you could assign a 70% probability to #2 and call that a wash with the 30% probability of #3. ie (70% X the first $25M annually from Kami) plus (30% X the next 25M from Kami) is roughly 100% X the first $25 M in Kami royalties annually.

 

You are still, however left with a 30% probability on Julienne which could be quite large.

 

So a very conservative estimate of the value would be $450M (ie 10x multiple giving 70% probability to Kami's first 25M and 30% to its second 25M annually - so call that the equivalent of 100% probability of the first $25M) plus 30% probability of Julienne plus some probability/value for other options in the portfolio.

 

So in my view, even if you are being quite conservative, its really really hard to get a reasonable value for Altius that is at or below the current market cap.  That's why its not time to sell.

 

 

[original mungerville]

So continuing this train of thought. What is Julienne worth roughly to Altius if they win the government bid? In that deal Altius said they get a 3% royalty of a certain $ amount annually - what is that $ amount annually for Julienne? Trust me, I searched this thread.

 

To complete my low ball valuation of Altius in my previous post, I just need to know what a 30% probability x 3% royalty X $ amount annually for Julienne is.

 

(I know, Altius also owns the rights to everything around that central area owned by the government but lets not factor that upside in either or any of their other projects overseas or otherwise.)

[Blue Macaw]

ap1234 and mungerville

 

Very well written, could not have done it better myself.

 

As it is now you are paying a premium with the so called "Dazel effect" to the value just to enter and get to the royalties. You could also argue that the Kami is valued partly in this.

 

So why am I not selling now?

With the full value of Kami, Altius shares should be valued around 20-26 CAD (depending on which p/e). This comes from the fact that we would have a net profit of approx 1,3 CAD per share (36 MCAD/28M shares) for the company in 2016. Has anything changed really? Do I still believe in Kami? Kami is the key to Altius and the probablity has increased since the EA was approved on a provincial level. Federal is expected next month and the power line (which I believe is what everyone is waiting for) after that.

 

Then we have the real deal which is Julliene lake. 60 M per year would that bring in and should have a full value on the share of approx. 20 CAD. That would be when it is in i full production which we would see in 2018-20 maybe. With a go on that I would say the share price would jump some or you could argue for a linear valuation of about 3 CAD/share and year.

 

If Kami is turned up side down and Jullinne lake also then I think we would see the share price rush down to 10CAD again. I would have lost the opportunity to get out with +50% profit.

 

What I expect this year is following:

1. Kami will get through at federal level but will struggle with power line. It will drag some months and we can expect some ups and downs in Alderons shares

2. New deal with chinese parter after the power line approval and financial terms set. Construction of Kami will start but productions start will be delayed.

3. Jullienne will go in the favor of Altius.

4. Share price could reach as high as 20CAD (could go higher but I would say with "true value" it should be around 20)

[hohi]

For my own calculations I always use DCF models and not only multiples. I think that is more appropriate for valueing the quality of the underlying assets. To get to my fair value price (that's when I am thinking about starting to sell) I use a model of 66% DCF NPV and 33% Multiples (17,5x).

Just using some multiples is not the best way to value resource stocks in my opinion. On the other hand DCF of a 70 year potash mine does not give enough strategic value to that investment. Thus the 66/33 i use.

[giofranchi]

Total after-tax cash flows = 20 + 2 – 5 – 8 + 3 = $11-12 million

 

I arrive at $11-12 million in annual cash flows. You arrive at $19 million. This changes how we think about the valuation of the business.

 

Wow, it really seems that ALS makes people think… and write! ;D

I have not read everything yet, and I will do so next. Anyway, I think this is basically my answer: even if yearly cash flow were just $12 million, $12 million x 23.3 = $280 million, $430 - $280 = $150 million, which is roughly the value of ALS’s investment portfolio. … And how is growth valued by the market? Zero? A company that has grown 29% annual for the last 17 years? And that is transitioning from a purely cyclical business into a cash flow machine? For which, therefore, imo future growth has even better prospects than in the past? Because it will be based on very safe streams of reliable and constant free cash? Really?! Don’t you think that being able to buy growth basically for free in such a company is a HUGE margin of safety?

 

Now I will go on reading… :)

 

Gio

 

[giofranchi]

But let’s make a simple exercise: let’s assume that today the market is overpaying for royalty businesses and the right multiple to get a fair value should be 15 instead of 23.3. Let’s also assume that the value of ALS’s portfolio, should a correction in commodity prices come, would be 70% its current market value. Where do these assumptions leave ALS’s shareholders? Well, $12 million x 15 = $180 million, $130 million x 0.7 = $91 million, $180 + $90 = $270 million. With these assumptions, and I guess even ap1234 might agree they are conservative enough!, what we are paying to become ALS’s shareholders today is more or less 1.6 ($430 / $270 = 1.592) x BV, or the true worth of the assets we own. Now, if you discount the value of an equity that compounds 15% annual for 15 years, assuming a discount rate of 9%, you get to a present value of equity of around 2.23 x BV. Not only this valuation uses very conservative assumptions, not only it assumes that 15 years from now ALS simply stops creating value and closes doors, not only it assumes a rate of growth for the next 15 years that is ½ the rate of growth during the last 17 years, it also leads to a present value of equity that is 2.23 / 1.6 = 1.39 times larger than what we shareholders have to pay today.

 

One thing I am sure of: you must have a clear idea of what’s a margin of safety for you… because ask for too much safety and you simply won’t be able to invest in anything.

 

Now I will truly go on reading… but what I suspect I will find are very precise numbers… although very precise numbers have never helped me very much! ;D

 

Gio

 

[giofranchi]

3) Altius’ managers are very skilled. But they did NOT hand pick their entire investment portfolio (although they did hand pick Virginia and Callinan). Recall that Altius’ core business is prospect generation. They put up very little capital upfront to stake various mineral rights. The hope is some of the mineral rights will be valuable in the future. They rely on being able to sell the rights to a larger player who will be interested in the property and is willing to take on the project and invest the capital to bring the project to production.

 

As a result of their project generation model, from to time they will own equity stakes in companies that they would never have acquired themselves (if they had not staked the original land). Altius has a $130 million investment portfolio. Almost 50% of the portfolio is one stock – Alderon. Altius did NOT buy the stock in the open market. They have owned it since Alderon was formed. Alderon is using the original land that Altius had a stake on.

 

If Altius did not own the royalty on Kami, I can NOT imagine they would go into the open market and acquire 25% of Alderon today. They own it because of history not because it is their favorite place to allocate capital. In fact, if Altius could sell their Alderon stock without damaging the value of their royalty, I suspect they would do it. As such, you can’t simply look at their investment portfolio like any other portfolio manager and assume that these represent their favorite ideas.

 

This reminds me of our discussion about FFH’s bond investments…

And my answer is, of course, the same: both mangers are in the business of using capital the best way possible (just like any great entrepreneur would do!).

 

1) If FFH’s bonds were overvalued (selling above par), it doesn’t matter FFH needs investment income… because they simply would sell overvalued bonds and go looking for cheaper bond investments! They would still get the required investment income, just replacing overvalued bonds with cheaper ones.

 

2) If ALS keeps the Alderon investment, it should really not be because of “history”… it should be, and it is, because of the future! They probably know Alderon better than anyone else and strongly believe in its future prospects. And, as you say, if Alderon “comes online”, the value of that investment to ALS would be much greater than it is today.

 

Anyway, though I do not agree either manager keeps overvalued assets because they are somehow “forced” to do so, in my last post I have assigned a value to ALS’s portfolio that is 70% its current market value, and still think ALS today is an enticing proposition. :)

 

Gio

 

[giofranchi]

If Kami is turned up side down and Jullinne lake also then I think we would see the share price rush down to 10CAD again. I would have lost the opportunity to get out with +50% profit.

 

If Kami is turned up side down and Jullinne Lake also, then… there will be other projects! ;)

And that’s exactly the beauty of partnering with astute capital allocators backed by steady and reliable streams of cash: there might be setbacks, they always happen, but the business usually deals successfully with difficulties and goes on. :)

 

Gio

 

[Guest Dazel]

Gio,

 

Cashflow back of the envelope is $20m....and I am going to call it light...like the Fairfax days Altius is getting 0 credit for their capital allocation skills

when 27% of the 29% annual return is from their skills in this area...the other 2% is from Voisey Bay and it is not reflected in book value. So there is approx a

$9m gain in Virginia Mines shares alone in the last 8 months, Mamba could be $8m this year etc....I ma not including them so the $20m cashflow is from Voisey and

PMRL alone. Ap1234 was including $5m g&a and not using the amortization (non cash expense on the royalties). Not only is G&A not relevant to PMRL and Voisey or

Kami for that matter....it is a net positive number. The rest of Altius is very profitable without the royalties...so you would be adding to the $20m not subtracting.

 

Original Mungerville,

 

we are not agreement on a 10% multiple on royalties...they are far superior businesses to "any" other you can think of and the deserve PE's in the high teens to low 20's. When they trade

at 30 and above we will be elevated which is common in the royalty sector....We will be receiving a nice dividend by then so selling will be tough here.

 

Julienne Lake numbers are just sickly good. 21m tonnes per annum proposed at $125 @ 3% is $78m a year royalty......at $100 iron ore it is $63m to royalty to Altius. This upside is not being paid for in the stock price in my opinion.

 

dazel.

 

[Liberty]

http://www.alderonironore.com/_resources/news/ADVNR20140123.pdf

 

Alderon Iron Ore Corp. (TSX: ADV) (NYSE MKT: AXX) ("Alderon" or the “Company”) and the Innu Nation of Labrador (“Innu Nation”) are pleased to announce that The Kami Mine Limited Partnership (“Kami LP”), an affiliate of Alderon, has signed an Impacts and Benefits Agreement (“IBA”) with respect to the development of the Kami Iron Ore Project (“Kami Project”) located in western Labrador.  The IBA is a life-of-mine agreement that establishes the sharing of benefits that will ensure a continued positive relationship between the Innu Nation and the Kami LP. The IBA represents full and final settlement to the Innu Nation.

 

“The successful conclusion of the IBA further strengthens Alderon and the Kami LP’s positive working relationship with the Innu Nation,” says Mark Morabito, Executive Chairman of Alderon.  “This IBA is the result of over three years of consultation and negotiation and we look forward to a beneficial future for both parties as we continue to develop the Kami Project.”

 

“We are pleased with this IBA as it gives financial benefits to the Innu people and opportunities for business contracts and jobs as well as environmental protection for Innu traditional pursuits,” says Innu Nation Grand Chief Prote Poker.

 

By entering into the IBA, the Innu Nation has given its consent and support to the Kami Project in keeping with the provisions of the Agreement.  In return, the Innu Nation will benefit through economic opportunities for community members including employment, training, business opportunities and financial benefits. The IBA also provides for various measures to ensure environment and cultural heritage protection, including the establishment of an environmental monitoring committee. The IBA does not contain any restrictions that would prevent the Kami LP from entering into agreements with other Aboriginal groups. 

 

The Innu Nation asserts constitutionally protected aboriginal rights over the area of the Kami Project and is currently engaged in negotiations with Canada and Newfoundland and Labrador to complete a Final Land Rights and Self Government Agreement.

[ap1234]

Wuhan Iron & Steel Group backs away from Rio Tinto's Canadian iron-ore assets

 

http://online.wsj.com/news/articles/SB10001424052702304856504579337061862025916?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304856504579337061862025916.html

 

I haven't been following this closely. Rio Tinto has been shopping their 59% stake in Iron Ore of Canada. According to the article there isn't much interest for the assets at Rio's asking price.

 

Anyone have any thoughts on Rio Tinto's inability to sell Iron Ore Co. of Canada. Any read throughs for Alderon? Would this make it harder for Altius to sell their stake in Alderon to a strategic buyer?

 

[original mungerville]

Dazel,

 

You aren't quite getting my posts - when I put multiples on things. I am trying to low ball the crap out of the valuation using a 10x multiple (call it inverting, whatever) just to make the point clear that in no way is Altius overvalued here. That's the point!!!

 

Thanks for the Julienne numbers. So, continuing with my LOW LOW BALL approach here, if I simply put 10x on 30% of that annual Julienne stream (in my previous posts I assumed a 30% chance on Julienne - which is probably low to get the bid but incorporates some other mishaps to a degree) call it roughly 10 x $20M annually or something like another 200M in market cap right now could be assigned to probability adjusted Julienne. Then I assume no other opportunities ever come out of Altius' portfolio (for my LOW BALL estimate).

 

So working with round numbers:

 

1. With a 10x multiple on Sherrit and Voisey of $20M thats a $200M market cap;

2. With a 10x multiple on $25 M for Kami (made up of a 70% probability of the first $25M annually going through and 30% probability of expansion of another $25M - which equates to 100% of only one $25M stream; maybe with royalty taxes its 20M) thats a $200M market cap for that.

3. Other investments and cash at Altius are a rough wash with the 130 M in debt incurred for the Sheritt royalities.

4. Julienne at around 30% odds works out to about 30% of $70M annually or about $21M annually - maybe 17M after royalty taxes. So 10x 17M or 170M of market cap for Julienne probability adjusted.

 

Assume nothing else ever comes out of Altius.

 

With this LOW LOW ball estimate. I can't get a fair value for Altius right now that is lower than:

 

$200M plus $200M plus $170M equal $570M (versus current market cap of about $430M). So my point is there is upside from here of at least 150/430 - call it a nice round 35% gain.

 

So we have a stock price now at $15-16 and even if it went to $21 a share tomorrow it would not be expensive because I easily get to $21 a share using a LOW BALL 10x multiple! (Dazel man, that's my point! - I believe you that this thing will trade at a much higher multiple over time).

 

So if you sell this for less than $21 a share now, you have to disagree with my probabilities. And if you think a 10x multiple is too high, Dazel will slap you silly (so please don't think that because I don't want you to get spanked; unless you want to get spanked - lets not go there).

 

Now, at 15x multiples, this thing is worth $30 a share - and that's probability adjusted.

 

In two years, if Kami is producing the first 20M after tax (remember there is a good chance for the expansion at that point - so that would be another $20M at 15x multiple or 300M market cap) and Julienne is a go (another say $45M after tax - ie 70% of 80M - or 56M with some room for tax - as we already assigned a 30% probability to Julienne), that's another $675M in market cap - call it around a billion or so which is like another $30 a share Its going to get really silly to the upside...like $50-60 a share at 15x.

 

So to sell here, you are leaving a shitload on the table. The value at any point this year, however, will change as the probabilities of Kami change. (On that note, how freakin' hard is it to get a powerline over to the mine? That should be pretty simple, no? What's the issue with that that everyone is worried about?)

 

 

 

 

 

 

 

 

 

[value-is-what-you-get]

Wuhan Iron & Steel Group backs away from Rio Tinto's Canadian iron-ore assets

 

http://online.wsj.com/news/articles/SB10001424052702304856504579337061862025916?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304856504579337061862025916.html

 

I haven't been following this closely. Rio Tinto has been shopping their 59% stake in Iron Ore of Canada. According to the article there isn't much interest for the assets at Rio's asking price.

 

Anyone have any thoughts on Rio Tinto's inability to sell Iron Ore Co. of Canada. Any read throughs for Alderon? Would this make it harder for Altius to sell their stake in Alderon to a strategic buyer?

 

From what I've read on it, the Ask price was too high.  Apparently lot's of tire kicking, no takers.  I would say this increases the probability of an Alderon sale at the right price.  There's interest in the commodity, as for how it plays out, stay tuned.

[giofranchi]

Dazel,

 

You aren't quite getting my posts - when I put multiples on things. I am trying to low ball the crap out of the valuation using a 10x multiple (call it inverting, whatever) just to make the point clear that in no way is Altius overvalued here. That's the point!!!

 

Thanks for the Julienne numbers. So, continuing with my LOW LOW BALL approach here, if I simply put 10x on 30% of that annual Julienne stream (in my previous posts I assumed a 30% chance on Julienne - which is probably low to get the bid but incorporates some other mishaps to a degree) call it roughly 10 x $20M annually or something like another 200M in market cap right now could be assigned to probability adjusted Julienne. Then I assume no other opportunities ever come out of Altius' portfolio (for my LOW BALL estimate).

 

So working with round numbers:

 

1. With a 10x multiple on Sherrit and Voisey of $20M thats a $200M market cap;

2. With a 10x multiple on $25 M for Kami (made up of a 70% probability of the first $25M annually going through and 30% probability of expansion of another $25M - which equates to 100% of only one $25M stream; maybe with royalty taxes its 20M) thats a $200M market cap for that.

3. Other investments and cash at Altius are a rough was with the 130 M in debt incurred for the Sheritt royalities.

4. Julienne at around 30% odds works out to about 30% of $70M annually or about $21M annually - maybe 17M after royalty taxes. So 10x 17M or 170M of market cap for Julienne probability adjusted.

 

Assume nothing else ever comes out of Altius.

 

With this LOW LOW ball estimate. I can't get a fair value for Altius right now that is lower than:

 

$200M plus $200M plus $170M equal $570M (versus current market cap of about $430M). So my point is there is upside from here of at least 150/430 - call it a nice round 35% gain.

 

So we have a stock price now at $15-16 and even if it went to $21 a share tomorrow it would not be expensive because I easily get to $21 a share using a LOW BALL 10x multiple! (Dazel man, that's my point! - I believe you that this thing will trade at a much higher multiple over time).

 

So if you sell this for less than $21 a share now, you have to disagree with my probabilities. And if you think a 10x multiple is too high, Dazel will slap you silly (so please don't think that because I don't want you to get spanked; unless you want to get spanked - lets not go there).

 

Now, at 15x multiples, this thing is worth $30 a share - and that's probability adjusted.

 

In two years, if Kami is producing the first 20M after tax (remember there is a good chance for the expansion at that point - so that would be another $20M at 15x multiple or 300M market cap) and Julienne is a go (another say $45M after tax - ie 70% of 80M - or 56M with some room for tax - as we already assigned a 30% probability to Julienne), that's another $675M in market cap - call its around a billion or so which is like another $30 a share Its going to get really silly to the upside...like $50-60 a share at 15x.

 

So to sell here, you are leaving a shitload on the table. The value at any point this year, however, will change as the probabilities of Kami change. (On that note, how freakin' hard is it to get a powerline over to the mine? That should be pretty simple, no? What's the issue with that that everyone is worried about?)

 

Well, original mungerville is very good with numbers… Damn! I am the engineer here… It is me who should be math oriented and skilled with probabilities! ::)

Anyway, he has come to the same conclusion I was trying to point out in a much more qualitative way: very big margin of safety at today’s price! :)

 

Gio

 

[original mungerville]

Thanks Gio. We think in a similar way that's for sure. I only like messing with the big numbers to get the big picture roughly right. (Its a bit of a waste of time to figure out what G&A or other little stuff is pre or post tax - lets leave that to the non-engineer financial types).

[original mungerville]

Again, all the thanks clearly goes to Dazel who understood this potential from the very beginning. A great great find. I mean a $10 stock that is probably worth at least $25, may trade at $30 in 1-2 years or less, and could go to $50 in 3-4 years?...and even then it may be hard to sell?... depending what else is going on. Its pretty interesting. (Of course I have kept my hedges on the Russell 2000 to hedge this and other equity positions because we are approaching or in major bubble territory, but lets not get into that here.)

[Guest Dazel]

 

Ap1234,

 

I think it is exceptional exposure for Kami as it is close by ...Rio was appeasing shareholders and unwilling to move from around the $4 b mark for 59% ownership mark from what i understand. Altius Julienne Lake proposal is for the same size as Carol lake and it is 6km away...Alitus likely did not help here as we know they partnered with two major steel companies out of China...who likely took a free look at Carol lake.

 

OriginalMungerville,

 

okay...I got ya...we are on the same page...

 

Gio,

 

I can"t spell or write but I can count!

 

Dazel