ALS.TO - Altius Minerals

[hohi]

I have to admit, I really appreciate the vivid discussions taking place here in the last few weeks. I am an ALS shareholder for almost 10 years now and there were a few very exciting times I remember. But other than the NLRC prospects I never saw more upside in the stock than now. Over the years I accumulated ever more shares because I believed in management and their execution of the business model, but in the last few month I bought even more shares as I see great promise in our Iron Ore properties. Fortunately the royalty deal came along and only made me sit even more comfortably waiting for the rest of the properties to work out.

I know (don't ask why) that ALS management is very optimistic about Julienne Lake. Let's just say I am super excited about JL too. I would be very surprised if we won't have a 20mtpa+ operation up and running by 2020, collecting our 3% royalty. That is the thing most people don't put enough optionality value on. It'll catch most investors totally by surprise.

 

I am grateful I've got my full position ;).

[JAllen]

I'm surprised no one is discussing what's going on with Hebei at all, especially with Kami being a significant part of Altius' total value.

 

 

Certainly the deal could potentially still get done with Hebei with what's going on but I'm curious as to what happens if there's a material delay from Hebei.  Can Altius cancel the agreement and seek new partners?  This is why I asked about the Altius-Hebei contract details on here last week.

 

 

This article is from today and has quite a bit of background information on Hebei and its history.  I had no idea it is/was an amalgamation of 12 private companies....

 

 

Gov't-Backed Consolidation of Hebei Steel Industry Melts Away

Three years after Hebei Iron & Steel Group incorporated 12 smaller players, everyone involved wants to go their own way

 

 

http://english.caixin.com/2014-01-15/100629481.html

[original mungerville]

It certainly looks like a company undergoing change. The deconsolidation thing to me, from that article, does not seem that huge a deal as it seems in practice, their consolidation over the last 3 years was just a formality with Hebei owning only 10% of each of the private firms.

 

The fact Hebei was losing money in 2013 and the new CEO wants to return to profits in 2014 seems like he thinks he can... I guess?

 

 

[ItsAValueTrap]

Alderon has multiple routes to get financed.  They do not have to go through Hebei.

 

I'm hoping that Alderon releases financing news soon.  If they have nothing to report then that means they are having difficulties in getting financed.

[nostradamus]

ItsAValueTrap

 

As Alderon has cash at the moment, doesn't it make sense to hold off agreeing the financing for the full project until the permitting, power and rail are all sorted? There is residual risk in all of these (hopefully very low levels), and so if the financing is done after these are sorted it should be cheaper right?

 

N

[ItsAValueTrap]

I think management is going to try to get financing ASAP.

 

They actually can't use most of their cash due to the JV agreement with Hebei.  They can only use that cash for building the mine.

 

I think they only have around a year or two's worth of un-restricted cash left.  (It's somewhere in the MD&A.)

 

2- The risks with power never struck me as being high???  Don't they have enough power for a 8mtpd operation?  It's the 16mtpg expansion that would require more power.

 

I don't think that there are significant risks in getting permitted.  Obviously if they don't get permitted in time then Hebei will be entitled to money.

 

3- The time value of money is important.  Getting the cash flows from the mine sooner is a good thing.

 

4- It's normal in the junior mining world for companies to be raising money all the time.  Gotta pay for those corporate jets and stuff.....

 

5- The TSX Venture has been a bloodbath since 2011 so raising money is very hard in this environment.

[nostradamus]

I think management is going to try to get financing ASAP.

 

They actually can't use most of their cash due to the JV agreement with Hebei.  They can only use that cash for building the mine.

 

I think they only have around a year or two's worth of un-restricted cash left.  (It's somewhere in the MD&A.)

 

2- The risks with power never struck me as being high???  Don't they have enough power for a 8mtpd operation?  It's the 16mtpg expansion that would require more power.

 

I don't think that there are significant risks in getting permitted.  Obviously if they don't get permitted in time then Hebei will be entitled to money.

 

3- The time value of money is important.  Getting the cash flows from the mine sooner is a good thing.

 

4- It's normal in the junior mining world for companies to be raising money all the time.  Gotta pay for those corporate jets and stuff.....

 

5- The TSX Venture has been a bloodbath since 2011 so raising money is very hard in this environment.

 

Thanks ItsAValueTrap, in response:

 

1. I think a year or two of cash should be more than enough to get past the permitting, power and rail issues.

2. Good question, my reading of the press release was that they need the power line for the 8mt operation. It was Muskrat falls that they needed to go ahead for the 16mt to be possible. Can someone on the board confirm?

3. The time value of money is import, but so is the time cost of debt/equity. Eg, you should not burden yourself with debt now, if you don't need it until later, unless of course you want to take advantage of a great financing environment, which as you note in point 5 it isn't. (that is not to say that it cannot get worse, but you get my point).

4.  ;D

5. Agreed. But all things being equal, financing should be easier the more they have derisked the project. So I still think they may wait until permitting (and maybe rail and power) is dealt with before finalising the financing.

[original mungerville]

Getting the second half of the Hebei payment - to me - sounds like it would be important to do first. This provides a base equity investment for the mine. Then more equity and/or debt should be more easy to raise.

 

 

[Guest Dazel]

13 major players just walked through Carol Lake to look at Rio Tinto's operations which is down the road from Kami. The price tag was $4b....so you would assume they are large  even if they were looking at bidding a couple billion. The money is there Alderon needs its power agreement finalized...It is possible someone would buy the whole thing....Alderon and Hebei being taken out or a mixture of.

 

However, I posted awhile back on how Hebie gets financed. This is a "Government company".... And the link I posted was a bond issue guaranteed by the export and reserve division of China. They have "$3 trillion" in reserves.....yes $3 trillion dollars....not leveraged. Hebei and the other major companies are vehicles of the country of China. So do you buy a 30 year source of iron ore in a no risk country in which you control a company and get  a 5% discount on your supply or do you buy

U.S Treasuries?

They just got a 10% discount on the Canadian dollar..so you get to move some of your reserves out of U.S currency in into a long tern producing asset of "stuff" you need to build your Countries infrastructure. It does not seem like a hard choice....In china they think decades ahead.

 

30 year U.S treasuries yield 3.65% vs. Hard assets that you need over the coming 30 years and you have to yield 3.65%.

 

What would you do?

 

 

[SharperDingaan]

Look at the last announcement. They raised 254M (124M Cash, 80M Scotia, 50M Convert) to fund a 244M deal (223M PMRL, 21M CDP).

There was an additional $10M, & they did not spend it all on UW fees.

 

Following a transaction like this, many would expect significant noise in the stock price; ie: base price of $X +/- Y% of noise.

Most would suggest the evidence points to roughly $15.00 +/- 7.5%. High of $16.12, low of $13.87; $14-$16 trade range.

 

Now if your stock has just jumped 50%, you have an industry imperative to continually raise financing, & there is recent evidence that you have done exactly that - how long can it really be before there is a private placement. And why would I think that it is not going to feature at least some of the Sprott & Liberty Mutual Investors - who know this deal best. Dilute the share price to $13.87 (after-expenses), to get an idea as to how big a capital raise.

 

Add to it the current disruption in emerging markets, & the fact that year-end financials are close to completing their audit; and most would also argue that that potential private placement is also very near.

 

Not a bad thing, but watch out for bumps!

 

SD

[Guest Dazel]

 

 

SD,

 

We all all appreciate your mind and math formula's. But I would suggest you look at two things that are creating noise besides the PMRL deal which I agree is large.

 

The Kami project that has been almost 10 years in the works will any day get the green light for a billion tonne mine (world class) and all the associated financing, off take agreements for Alderon that go with it....this has been a long wait.

 

And

 

The Julienne Lake project which if won by Altius is almost 3 times the size of Kami's initial production was supposed to be announced in the autumn of 2013 by the government.(hint-you can't announce a project without the power to Labrador west so the government needs to green light the transmission line before they award the project...you would think)

 

I would love to see Altius with more capital....but at the right price.

 

Dazel.

 

 

[Guest Dazel]

 

 

SD,

 

The emerging market turmoil you mentioned helps Altius in two ways...the Canadian dollar has dropped 10% making all Canadian projects more attractive (cost drop).

 

And

 

Altius equity portfolio has risen substantially in the last 3 months with the rise of Gold etc...Virginia mine which they hold 9% of the company is up almost 40%. so while we are all worried about this as a risk their treasury (marketable securities) is climbing daily right now.

 

Dazel.

[SharperDingaan]

Agreed re Kami & JL, but would point out the following;

 

The ALS ability to finance their portion of these deals is not in question; but to do these deals they will have to dilute existing shareholders. Deal announcement has to result in that value addition divided over the larger share count resulting in a higher share-price than was previously the case. It probably will; but the rise in share-price may well be a lot less than originally anticipated.

 

Long term ALS will trade with a floor dividend yield; but that is not going to occur until after these deals are through, & CF predictability is established.

 

The risk here is in getting ahead of oneself, not whether events may transpire or not

… & this is what hedging was invented for ;).

 

SD

 

 

[Guest Dazel]

 

Agreed With most SD,

 

Altius will not add capital to their projects...lesson learned with NLRC...lower upside and lower downside.

 

So you are referring to buying royalties in doing "these deals"?

 

As I said earlier Altius has a  hedge with CDN dollar and their precious metal holdings as far us hedging...

 

I have purchased Fairfax for a hedge...U.S dollars, short the market and heavy Treasuries, Muni's and other bonds...Blackberry has done well and Bank of Ireland is a home run.

 

 

[Williams406]

SD--I echo Dazel in expressing respect and appreciation for your posts over the years and on ALS thread of late. Perhaps I'm missing a capital obligation for Altius with respect to Julienne or Kami...but wasn't aware either would require further capital from Altius. Could you clarify what you see as necessitating an Altius equity raise such that "to do these deals they will have to dilute existing shareholders"? Not saying Altius wouldn't do this under any circumstances, but I'm not seeing the necessity I'm picking up from your comments. 

 

406

[SharperDingaan]

Williams406:

 

Every mining deal is unique, & different, & it is not unusual to see some kind of capital commitment as a part of that deal. Could be the purchase of a royalty extension, or a higher royalty, or an option on an adjacent property, etc - & it is usually with a specific aim. ie: to equity fund some of the required infrastructure (power lines, etc.) needed to get that project into operation. The deal participants may also just be a few of many other contributors - & the deal itself may be a catalyst to bring those other participants in. You do not have to be actually developing the mine.

 

Kami & JL are both catalytic projects, so you have to think that ALS is not just going to benefit - it is also going to get hit up for a contribution. Pretty everyday occurrence; but to the extent that the cash used for that comes from an equity issue - there will be dilution. The counter to how much dilution there is -  is a solid management that knows what it is doing.

 

Believing that Kami will be accretive is probably quite right. Dividing that value addition by existing share count - not so much.

This is still a junior resource company, & it remains so until Kami actually comes in.

 

Different point of view.

 

SD

 

 

 

 

 

 

 

[naboo]

I want to ask a dumb question. Say in Feb 2014, the Alderon's Federal EP is granted and there is an off-take agreement,  what is the number (in CAD) you guys are expecting?  ALS will get 25% of that, right?

[TwoCitiesCapital]

Can we all agree to stop using multiples for Altius' cash flows to determine a fair value? It's driving the finance person in me crazy. Multiples should be used if cash flows are expected into perpetuity. Altius owns mines with finite lives. Multiples don't really make sense with the exception of maybe the mines that will last for 70ish years. It should be a discounted cash flow analysis. Let's look at the discounted cash flows for any idea of the range of values. Below are mutliple scenarios I have run.

 

Kami @ 8mT w/ 10% discount rate.

FE @ $80/ton - 150M

FE @ $100/ton - 187M

FE @ $120/ton - 224M

 

Kami @ 16mT w/ 10% discount rate

FE @ $80/ton - 299M

FE @ $100/ton - 374M

FE @ $120/ton - 448.75M

 

Julienne Lakes @ 21mT w/ 10% dicsount. Starts in 2018

FE @ $80/ton - 343M

FE @ $100/ton - 429M

FE @ $120/ton - 515M

 

As you can see, the ranges of value are large. I'll let you assign probabilities yourselves but if Julienne Lakes is a success and iron ore rates remain stable, that project alone is worth more then the entire market cap of the company. Same could be said for Kami under the most favorable conditions. Under the least favorable conditions, the two together are still worth more than today's market cap. You get the rest for free (Voisey, Sherritt royalties, investments in juniors, and an excellent management group). I'm pretty comfortable with this as the largest holding in my portfolio.

 

If Julienne Lakes fails, it'd be a catalyst for re-evaluating the investment but the optionality is worth A LOT at this point. I don't know as much about the industry as Dazel and SD and I don't know about the possibility for dilution, but my mouth is watering at these numbers and the potential developments in the next two to three years.

 

“Ideally, to protect against inflation, you want a royalty on someone else’s sales so you don’t have to invest any more capital—you license it to them and you make money as their volume grows. - Warren Buffett [/Quote]

 

Royalties are the best business to be in and offer a substantial inflation hedge. And with Altius, you're getting high quality royalties with a high quality management at a substantial discount to book value. Boys, this opportunity doesn't come often. I think this is one position that I won't be selling ever - barring insanely high valuations.

 

 

[ItsAValueTrap]

Hi Zach, I agree with you that using multiples to value the royalty makes no sense at all.  I may have said it earlier in the thread.

 

Regarding the Kami royalty... you have to remember that taxes are very high for royalties.  Also, it is unlikely IMO that the mine will produce at 8MT/yr.  If the mine is anything like Bloom Lake (BBA did feasibility studies for both Bloom Lake and Kami), then it is probable that the mine will miss its production targets.  This is a low-grade medium-tonnage mine.  (It is low-grade compared to other North American mines.  Some Chinese mines apparently run at a 15% grade... so there is a wide spectrum of mines on the cost curve.)  It is a marginal mine though I wouldn't be surprised if Alderon stock went up several times from its current price.

 

2- The discount rate is slightly complex.  A royalty should be less risky than the equity.  Presumably royalties should have lower discount rates.  Royalties also have free upside if the equity holders decide to (over)explore or to expand capacity or if more ore is discovered.  So that should be factored in too.

 

There is a good chance that the mine won't get built at all.  So you should model that in somewhere.

 

3- Mine life:

 

When engineers design a mine, the NPV is usually maximized when the mine life is somewhere between 6-20 years.  If the project is light on capex, then a shorter mine life will be ideal.  Underground mines with deep shafts tend to be heavier on capex (because you have to build the shaft and hoisting facilities).  They tend to be designed with longer lives.

 

In practice, there are some mines that have lasted for decades.  Most mines however don't keep running for decades.  One of the reasons why a mine might last a long time is if they discover additional reserves.  This happens often in underground mines because it is expensive to drill long holes.  After the shaft is sunk, the exploration costs go down.  As the mine goes on, they will do more exploration and may keep finding more and more ore.  This is the hidden value in Virginia Mines.

 

If a company hasn't yet built the mine but is saying that the mine life will be 30 years... they aren't entirely telling the truth.  They probably designed the mine to have a life of 20 years or less.  For open pit projects like Kami, the ideal mine life will be on the lower side of things.

(But you should have doubts about BBA anyways.  Go read Consolidated Thompson's old press releases...)

[ItsAValueTrap]

This is why Dalton is a smart guy.  The coal and potash royalties may continue to flow cash three decades from now.

 

I believe capacity at the potash mines is going up; all of the potash players have been expanding capacity.  Due to the cartel situation however, not all of this capacity is being used.

The nice thing about the royalty is that the royalty holders didn't put up any capital for the capacity expansions.  But they may very well get to see the benefits of the capacity expansion and enjoy the free upside.  For potash, the mine life is very high because the deposits are so huge.  Increasing capacity works until you flood the markets with too much supply.

[TwoCitiesCapital]

This is why Dalton is a smart guy.  The coal and potash royalties may continue to flow cash three decades from now.

 

I believe capacity at the potash mines is going up; all of the potash players have been expanding capacity.  Due to the cartel situation however, not all of this capacity is being used.

The nice thing about the royalty is that the royalty holders didn't put up any capital for the capacity expansions.  But they may very well get to see the benefits of the capacity expansion and enjoy the free upside.  For potash, the mine life is very high because the deposits are so huge.  Increasing capacity works until you flood the markets with too much supply.

 

Thanks for your response. I did leave taxes out in my valuations. Apologies for the oversight on my part. I just wanted to throw something together quickly to correct this minor annoyance that I come to every time I read this thread. I'll go back an edit the figures (or someone else can post new ones). As far as the mine not producing at 8mT, I think it's more likely that it won't produce at 16m/t, but it does seem like it's likely it will produce more than 8m/T if the power line gets built and they expand production as we all believed is planned. I think this is a high likelihood. We may settle somewhere around 12-13m/t in a mid case scenario.

 

I also agree with your comments about royalties having lower discount rates. I did about 7-8% when I ran the numbers to make my investment decision BUT wanted to be extra conservative with my presentation here. The higher discount rate should sit well with certain board members who are concerned about extreme volatility in iron ore prices, delays in production/government approvals, etc.

 

I think most board members will get the idea though.

[ItsAValueTrap]

Bloom Lake (owned by Cliffs, which is publicly-traded) likely has better economics than Kami.  It is not currently producing at 12-13MT/yr.  I think that it is highly unlikely that Kami will even do 8MT/yr (unless iron ore prices were to go up a lot).

 

We'll see what happens.

[giofranchi]

Can we all agree to stop using multiples for Altius' cash flows to determine a fair value? It's driving the finance person in me crazy.

 

Well, it doesn’t seem to me that multiples have been used to get to a “fair value”… Multiples, instead, have been used as a relative valuation tool. And, of course, in a relative valuation analysis multiples can always be used.

 

Multiples should be used if cash flows are expected into perpetuity.

 

What do you mean by perpetuity? Businesses generally are assets with a duration of around 50 years, aren’t they?

 

Ideally, to protect against inflation, you want a royalty on someone elses sales so you dont have to invest any more capitalyou license it to them and you make money as their volume grows. - Warren Buffett [/Quote]

 

Royalties are the best business to be in and offer a substantial inflation hedge. And with Altius, you're getting high quality royalties with a high quality management at a substantial discount to book value. Boys, this opportunity doesn't come often. I think this is one position that I won't be selling ever - barring insanely high valuations.

 

With this I couldn't agree more! As I have already very often expressed! :)

 

Gio

[nostradamus]

Regarding the use of multiples, the finance person in me doesn't  think it is too bad to get to a rough approximation of value if you are talking about cash flows of up to 30 years. For a constant income stream the present value of the income after 30 year is marginal relative to the pv of the income in the first 30 years.

[original mungerville]

Zachmansell,

 

At this stage, getting the probabilities right of Julienne or Kami going through is more important than whether we use conservative multiples or conservative discounted cash flows. Iron ore prices are interesting for sensitivity around either of these however.

 

The point of the conservative multiple analysis and assumed probabilities was not that they are better than discounted cash flows (although, hey, good luck picking the right discount rate, why is 10% the right discount rate?, etc...) - it was to get us out of the weeds of debating little stuff like whether or not to include G&A, etc pre-tax or after-tax, etc. etc). And to focus on the big stuff:

 

1. 130 debt roughly nets out against other equity holdings and whatever cash;

2. Probabilities of Kami, Kami expansion, and Julienne going through are most important to understand;

3. Sure, iron ore price sensitivity analysis is also important as well.

 

I am not sure which is better: using conservative market multiples or picking discount rates out of your ass. What I mean by this is that a 10% discount rate is a big assumption. Is that too conservative? If other royalties companies trade at 15x or 20x, should you be using 10%? I mean 10% discount is nice for a conservative estimate - probably better than using a 10x multiple, I agree. But some idea on the market multiple (to understand potentially how high Mr Market may bid this up) is also important optionality to understand. Some of these companies trade at these high multiples because of the future growth in royalty streams which is assumed (this can happen via expansion of tonnage extraction on a same site, expansion of operations around a site (ie, Altius owns rights to the land around Julienne), price inflation, or other net new royalty streams). So you would have to deduct that growth from that discount rate (ie 10% minus annual growth becomes the new discount rate). In any case, its a crap shoot on the upside but understanding that potential is also important optionality and market multiples have a place in this.

 

So no, we can't all agree to not use multiples! (Although I can agree that a 10% discount rate for a conservative estimate is better than a 10x multiple for the conservative estimate!) Cheers.