ALS.TO - Altius Minerals

[ItsAValueTrap]

b) It could have been royalty + nothing. Royalty + equity is better

Yeah, more is better.  Of course the person sitting on the other side of the negotiation will want the opposite.

[Guest Dazel]

http://www.ibtimes.com/influential-investor-jim-rogers-talks-commodities-japanese-stocks-qa-1560197

 

 

Permanent supply in commodities is not in place according to Jim Rogers...I would agree with that.

 

Dazel.

 

 

 

[yader]

Finished the whole thread last night.  Thanks Dazel, Trap, Hohi, SD, Gio, and others.  Great discussion.

 

Started a position in ALS and will be buying more.  Also picked up ADV this morning.  We'll see if I have the crip effect too.

 

Hope to contribute when I can.

[hohi]

Started a position in ALS and will be buying more.  Also picked up ADV this morning.  We'll see if I have the crip effect too.

 

Hope to contribute when I can.

 

Welcome aboard! Looks like you got a good deal at todays prices. Let's hope you'll have the crip effect so I can buy some more also ;).

[craigatk]

Yes many new things in the presentation as you all have stated already.

 

Also Highvale will be a producing royalty in 2016 something I had been wondering about...

 

I think I posted on this maybe not? I looked very hard in the filings to understand about Highvale and why they reported buying a royalty that didn't pay anything. Basically they don't own 100% of the royalty rights in that mine's territory. At some other mines, it's not an issue and they basically prorated by percentage owned. At Highvale, the miners literally have to be digging within their royalty geographical zone to earn their due. Good news that there is an actual date attached now.

[original mungerville]

Not good timing for Alderon trying to raise funds is it?

 

 

Iron Ore Plunges Most Since August 2009 on China Concern

 

Iron ore extended its decline into a bear market, slumping by the most since August 2009, amid concern that demand in China is slowing just as rising output signals a global glut.

 

Ore with 62 percent content delivered to Tianjin fell 8.3 percent to $104.70 a dry ton, the lowest since October 2012 and the biggest drop in more than four years, according to data from The Steel Index Ltd. yesterday. The benchmark price lost 27 percent since Aug. 14, when it reached a five-month high of $142.80. The raw material dropped into a bear market on March 7.

 

BHP Billiton Ltd. (BHP) and Rio Tinto Group predict lower prices this year after producers in Australia and Brazil spent billions of dollars to expand output. Banks from Citigroup Inc. to UBS AG predict a global surplus, and Goldman Sachs Group Inc. listed iron ore among its least-preferred commodities for 2014. A surge in stockpiles at China’s ports spurred speculation that the inventory overhang threatens imports.

 

“The fall in iron ore prices may reflect the beginning of a buyers’ strike in China’s iron ore markets, much like we saw in September 2012 when prices tumbled below $90, as surplus concerns mount,” Lachlan Shaw, an analyst at Commonwealth Bank of Australia, wrote in a report today. The market is “biased to oversupply in the very near term, and may prompt a further drop in the iron ore price.”

 

....

 

http://www.bloomberg.com/news/2014-03-10/iron-ore-plunges-most-since-august-2009-on-china-demand-concern.html

 

 

[Guest Dazel]

Original Mungerville,

 

 

The same headlines are out now that were around in 2012...the drop in prices has been largely in the last five days. In 2012 it lasted for a month or two before heading back to $145 in the next 6 months.

Chinese iron ore production is in the cost range of $130 and that is rising because their quality  of reserves has dropped as their  iron content has fallen to around 20% on average....they will cut production below the $120 range...

 

So the answer is yes financing would be better timed when we are at $130 or $140...the Canadian dollar helps at .90 cents...however, steel producers need to look long term for supply and Alderon is the best available large resource with infrastructure close by.

 

Market conditions will likely mean that Kami will be sold whole rather than financed in my opinion.

 

Dazel

 

 

[giofranchi]

Market conditions will likely mean that Kami will be sold whole rather than financed in my opinion.

 

Dazel

 

Dazel,

what do you mean exactly? You no longer think Kami will get financing?

 

Let me summarize my valuation for ALS:

They have paid $255 million to purchase their share of the PMRL Royalties, adding $27 million in annual revenues. Assuming they have not overpaid, and I don’t think they have, let’s say that true value is the price they have paid: $255 / $27 = 9.44 x annual revenue.

Then they have $3 million in annual revenue from the Voisey’s Bay royalty, which could be valued at: $3 x 9.44 = $28 million.

Then they have cash and investments worth $116 million.

Total Assets: $255 + $28 + $116 = $399.

Then they have total debt of $130 million.

Therefore, equity is: $399 - $130 = $269.

If you believe their equity portfolio is overvalued, like for instance ap1234 seems to believe, let’s say it is only worth 70% of today’s value: $116 x 0.7 = $80 million.

Therefore, equity is worth: $233 million.

Market Cap is $385 million.

ALS seems to be selling for $385 / $233 = 1.65 x its true net assets.

 

This doesn’t mean I think it is pricey… In fact, given its past growth, and most of all given future prospects for growth, I think it is cheap. Yet, I also think Kami is a large part of that future growth… don’t you agree? In their latest presentation they say financing for Kami is to be expected in the months ahead. Do you think, instead, the macro situation has so much deteriorated that Kami’s financing might be jeopardized?

 

Thank you,

 

Gio

 

[Guest Dazel]

 

Gio,

 

 

No I don't think Kami's financing is jeopardized....the last time we had a violent drop in iron ore prices (Hebei predicted it many months before hand when it happened)

 

There were a lot of steel producers that came into the market and tried to snatch up iron ore assets on the cheap. They did this because the steel producers know how much it costs to get iron ore and they are also aware of how the system works. It is the average price that matters...not short term volatility.

 

If I were a steel maker I would bid on the whole thing....it is ready to go. I am not saying that will happen...but Kami has passed all hurdles....it's in Play.

 

Dazel.

[Guest Dazel]

 

Gio...continued...

If you were a steel producer and your iron ore  mines had an average cost of production of $130 and they were going down in iron ore content as they are depleted...you would go out look for cheaper options for your supply that were long term...The steel producers want Kami...

 

Kami has two options 1. financing or 2. be sold to a consortium of steel producers...this has always been the case...

 

I would expect the steel producers to get aggressive now as the iron ore drop gives them opportunity to lock a long term supply contract when it gets back to $120 to $130 which they know could happen quickly...they will have to pay more.

 

Either way Altius wins...

 

 

[Guest Dazel]

 

As far Altius valuation take a look at the diversity that Altius will now have after the PMRL deal and the fact they are already negotiating deals for the properties...The presentation is an excellent proxy for where Altius is going.

 

I do not have any problem with the Macro situation....China will stimulate their economy just like the rest of the world is doing if they need to.

 

It Does not sound that bad...it depends whose propaganda you want to read....Ford sold more than 3 times they amount of cars that Tesla sold last year in one month in China in Feb...

 

http://www.reuters.com/article/2014/03/06/us-ford-china-sales-idUSBREA2506B20140306

[giofranchi]

Kami has two options 1. financing or 2. be sold to a consortium of steel producers...this has always been the case...

 

I would expect the steel producers to get aggressive now as the iron ore drop gives them opportunity to lock a long term supply contract when it gets back to $120 to $130 which they know could happen quickly...they will have to pay more.

 

Either way Altius wins...

 

Ah! Ok, now I get what you meant! ;)

 

Thank you!

 

Gio

[TwoCitiesCapital]

Market conditions will likely mean that Kami will be sold whole rather than financed in my opinion.

 

Dazel

 

Dazel,

what do you mean exactly? You no longer think Kami will get financing?

 

Let me summarize my valuation for ALS:

They have paid $255 million to purchase their share of the PMRL Royalties, adding $27 million in annual revenues. Assuming they have not overpaid, and I don’t think they have, let’s say that true value is the price they have paid: $255 / $27 = 9.44 x annual revenue.

Then they have $3 million in annual revenue from the Voisey’s Bay royalty, which could be valued at: $3 x 9.44 = $28 million.

Then they have cash and investments worth $116 million.

Total Assets: $255 + $28 + $116 = $399.

Then they have total debt of $130 million.

Therefore, equity is: $399 - $130 = $269.

If you believe their equity portfolio is overvalued, like for instance ap1234 seems to believe, let’s say is only worth 70% of today’s value: $116 x 0.7 = $80 million.

Therefore, equity is worth: $233 million.

Market Cap is $385 million.

ALS seems to be selling for $385 / $233 = 1.65 x its true net assets.

 

This doesn’t mean I think it is pricey… In fact, given its past growth, and most of all given future prospects for growth, I think it is cheap. Yet, I also think Kami is a large part of that future growth… don’t you agree? In their latest presentation they say financing for Kami is to be expected in the months ahead. Do you think, instead, the macro situation has so much deteriorated that Kami’s financing might be jeopardized?

 

Thank you,

 

Gio

 

I tend to agree with Dazel on Alderon being sold. You'll notice that Altius said they may sell some marketable securities to avoid issuing convertible debt. Alderon is the only sizable asset they have (and I believe they've been adding to the others so I dont think they're selling them). I took this as a hint that Altius thought it could get a decent price for its shares in in the next few months to cover the Sherritt royalties when that deal closes.

 

Selling Alderons, avoiding issuing debt, the promise of Kami coming online in two years, and having significant cash flows to reinvest/purchase shares would be an incredible outcome for anyone who has been buying over the last year.

[giofranchi]

Selling Alderons, avoiding issuing debt, the promise of Kami coming online in two years, and having significant cash flows to reinvest/purchase shares would be an incredible outcome for anyone who has been buying over the last year.

 

I agree. And I still have eventually much room to average down! ;)

 

Gio

[SharperDingaan]

We know ALS does not develop assets in house.

It was a given that JL, would be sold; the only question was whether it would be as a spin-off (in-house development), or as a sale to a major.

 

We know the ALS does take founding stakes (25% of ADV), they expected a min 50M from the asset sale, & there are 2 partners for JL. If JL (a lower quality, but bigger asset) was to follow the ADV model, the inference was a JL spin-out into a new venture worth around 150M with each partner holding a 1/3 stake worth 50M, & ALS receiving a minimum consideration of 100M for JL (50M cash + the 1/3 stake worth 50m). Virtually all the  consideration being a realized gain for ALS, & booked in Q1 2014 - hence the excitement.

 

We know it makes most sense to develop Kami, JL, & Wabush together. One way is via a JV with the Kami, JL, & Wabush stakes contributed as equity, & new partners contributing cash; minimum entry fee of 300M in equity, plus a 1B syndicated credit line. Another way is via direct sale to a major for equity & convertibles; & there is a lot less risk via a direct sale.

 

Obviously, with so much in the air, bumps can only be expected.

Let them get on with it.

 

SD

 

[Guest Dazel]

 

 

Gio,

 

All of what SD has talked about you valued at 0...other than the Alderon equity which you value at 70% of the value.

 

The investment Cranberry capital...$25 million...is not there...

 

The projects that are on the go right now...are worth something...and they are real...This would include NRCL which I believe they will take 100 percent ownership this spring.

 

The Aurora royalty and other uranium assets are worth something...the sector is on fire right now...they could spin out their uranium assets including the royalty Into one company...valuations are speculatively high right now.

 

You have not included CDP which is part of the purchase price...$45 for 12 billion tonnes of coal and other assets that are close to production...they have acknowledged unsolicited third party interest in projects at CDP already.

 

So you are light $70m (CDP and cranberry capital) both are liquid...off the top.

The other are "real assets" and they have prices...ie the Kami royalty could be sold right now...it will be worth a lot more when Kami production gets the go ahead for example but it has a value right now...that is how Altius bought the Voisey bay royalty.

 

Altius is one of the least understood companies I have seen...

 

Disclosure: just bought more

 

 

 

 

[giofranchi]

Disclosure: just bought more

 

Me too, Dazel, me too!

 

Cheers,

 

Gio

 

PS

You clearly think my valuation of ALS is lacking more than $70 million... Could you put an exact number on my deficiency? ;)

Thank you!

[Guest Dazel]

 

 

Gio,

 

I am going to keep quiet for awhile....and let Altius do the talking as well as Alderon which I also think is very much undervalued...in the next month we will have lot more clarity in both companies. Happy buying.

 

 

Dazel

[Guest Dazel]

 

 

This thread is real long so I will repost this...anyone can come up with their own value from it.

 

http://altiusminerals.com/uploads/PDAC-2014-cw.pdf

[giofranchi]

 

I am going to keep quiet for awhile....

 

 

Yeah! Much Buffett-like! ;)

 

Gio

[ap1234]

Gio, you mentioned my name so I will respond in case there was some confusion on my earlier posts! :-)

 

We both own ALS which suggests that we both think the business will be worth more in the future.

 

Where I disagreed with you is the downside potential. I am much more worried about a Chinese slowdown then you. I happen to think we experienced a secular (not cyclical) commodity market over the past decade and there is a non-zero probability that things could end badly for commodities. And I think Altius is a much more cyclical business then some people have suggested.

 

To be clear. I like the business otherwise I wouldn’t own it. And there is no question that Altius is a high quality company that is likely misunderstood by the market. But my worry was at some point the thread had become a cheerleading session where everyone was focused only on the upside from the transformation to a royalty company. Few people were talking about what could go wrong.

 

I agree with everyone’s upside case. In that scenario, the business is worth a lot more than the current price. But I think the downside scenario is worth discussing as well. Especially because Altius has used up all of their cash (assuming the Sherritt deal closes). They are effectively a talented fund manager who specializes in commodities and is fully invested. There is nothing wrong with this. But it's important to understand the implications.

 

So what does not get captured in the back-of-the envelop calculation of Altius’ NAV?

 

When you do a sum of the parts value on Altius, you have to appreciate that a LOT of the company’s current value comes from one asset (Alderon’s Kami iron ore mine). It’s not enough to add up the individual assets as if they are uncorrelated. This isn’t Berkshire Hathaway. This is a company with a lot of their asset value in very few assets which are correlated. As such, if you are wrong on the value of one asset you could potentially be wrong on the value of several of their assets. This has an impact on the NAV of the business.

 

I don’t think it as simple as saying that Altius is a high quality company therefore all of their assets are high quality therefore nothing can go wrong. 

 

For example, as of yesterday, Altius owned a $60 million equity stake in Alderon (on a $400 million market cap company). Altius also owned a pre-production royalty on Kami. Both of those assets are very much intertwined. If you think Alderon will be successful with the large debt/equity financing and the project which come online as scheduled, this is a home run for Altius (and it is not priced into the stock). 

 

BUT what happens if iron ore prices stay lower for longer than people think? The project could be delayed (and not just for a few months). This has a real impact. Alderon stock would likely take a haircut. At the same time the value of the Kami royalty would be diminished.

 

This is not simply uncertainty or volatility. This is a real risk. What is the value of a pre-production junior mining company in an environment where their underlying commodity is depressed in price? What is the value of a royalty when you don’t receive the cash flows for many years? Is the royalty worth  the same as a royalty that is already producing cash flows today? 

 

Given that Altius was trading at a premium to its tangible asset value, the market was assigning a positive value on Kami (they were not paying 100 cents on the dollar but they weren’t paying zero cents either). As such, if something happened to the commodity environment and Kami was delayed, this has a material impact on Kami (both Alderon stock and the Kami royalty would likely be valued lower).

 

Gio, I am going to take a crack at pre-empting your response! :-) You are going to say that you have dry powder and a long time horizon so there is nothing wrong this scenario. And I will response by saying I AGREE. I also have dry powder and hope to buy more at lower prices. But I just wanted to put my earlier comments into context. I was simply trying to highlight that back-of-the envelope math is useful but there are two sides (upside/downside) to the Altius investment.

 

If I didn't think the upside today outweighed the downside, I would not own the stock. So we both agree on the big picture!

 

[hohi]

Great post ap1234!

 

As we are all shareholders already and look forward to a bright future it is very constructive to concentrate on the risks. As with any stock I invest in I play devils advocate... here are some of my thoughts from hell:

too much focus on iron ore

iron ore prices are in a bubble

no more cash

got into debt ($ 130 M) to buy the Sherritt royalties

CDP properties probably worthless

CMB too low-grade for profitable production → royalty probably worthless

ALS just got lucky with Aurora → plus they got extra lucky to sell just before the crash of '08

too good to be true

resource business is ultra risky

Canada may not be as politically stable as most people think

equity investments might just vanish over night

Kami feasability study is probably way off with regards to capex and opex

[hohi]

That being said - I am looking forward to buying a lot more of ALS, hopefully at lower prices!

[original mungerville]

I agree with AP1234. I think this will be a very volatile 2-3 years as we get deflationary forces countered by inflationary forces. What are Kami and Julienne really worth if iron ore and other commodities are in a bubble? What's Altius' equity portfolio worth? What's Altius' market cap in that scenario?

 

If it was not for these questions, I might have had 30% of my portfolio in Altius because I really like the management and the business model. Because of these questions, my stake is less.

 

I could see the stock go down to $11, even less potentially, if iron ore prices continue to decline significantly as Julienne and Kami would probably not be worth much in the medium term, and the market will not look out to the long term in such a scenario.

 

I won't add until we have a material decline in the stock from here.

[rpadebet]

I have been waiting since I first bought late last year for the price to fall below 10. Hopefully it happens again soon. Incidentally that is price around which Gio's valuation ties with Market cap roughly and I don't pay for the embedded options or the management skill.