ALS.TO - Altius Minerals

[Ross812]

 

First of all, let me say that I like the most conservative valuation metric that makes sense. What do I mean with “that makes sense”?

 

Usually, a company that doesn’t employ much capital to generate earnings cannot be looked at via price/NAV, instead should be looked at via price/fcf. Price/NAV for such a company would surely be too conservative and would lead to almost useless information.

Now, the fact that we can look at ALS via price/NAV, despite that ALS “generates future earnings through its expertise rather than capital”, and still come up with a reasonable valuation, is imo another, though not often appreciated, margin of safety: the use of a more conservative valuation metric, one that, if applied to most businesses which generate earnings through intangible assets (like expertise), is almost always conservative to the point of making no sense at all.

 

Gio

 

Gio,

 

This is what Dazel has been getting after in a lot of his posts. Right now Altius is valued via assets and whatever price the market is willing to assign their "call options - Kami, Uranium, PMRL, ect..". Once PMRL is completed, Altius will be bringing in ~30M in royalty revenue. This means the market can begin to assign a P/E more appropriate for a royalty company than an asset rich hedge fund with no (<4M) in revenue.

 

On some level we are going to have to trust that management knows what they are doing. There is a lot of discussion about JL (which is a proposal...) and Kami. No one knows what the price of iron ore will do, if Kami will be built, if the JL proposal will be accepted, built and what a potential final deal will look like. Projecting all these cash flows for assets that don't exist yet is just as crazy as the Fortress Paper post from 2 years ago. Why don't we focus on nailing down exactly what Altius is worth today without JL, without Alderon, without PMRL. Now add in PMRL, where are we? Alderon? JL? Everyone has glossed over 30% of Altius's value and is interested in speculating on Kami and JL (just like the Fortress Paper thread). Identifying and really knowing what they already own, what it is worth today, and understanding PMRL could set some minds at ease and allow us to talk about the iron ore projects as the call options they are.     

[giofranchi]

Projecting all these cash flows for assets that don't exist yet is just as crazy as the Fortress Paper post from 2 years ago. Why don't we focus on nailing down exactly what Altius is worth today   

 

Ross,

what do you think about my assessment of present NAV for ALS? The one without assigning any value to future projects (Kami included)? I arrived at $230 million. Do you have a different number? If so, could you please tell me what it is and how you got there?

Besides, if it is true, like Dazel says, that rights to Kami’s and JL’s future production could be sold today in the market, why not to add at least that value to my calculation of present NAV for ALS? $250 million???

Or am I completely missing the mark?!

Thank you,

 

Gio

 

[original mungerville]

 

First of all, let me say that I like the most conservative valuation metric that makes sense. What do I mean with “that makes sense”?

 

Usually, a company that doesn’t employ much capital to generate earnings cannot be looked at via price/NAV, instead should be looked at via price/fcf. Price/NAV for such a company would surely be too conservative and would lead to almost useless information.

Now, the fact that we can look at ALS via price/NAV, despite that ALS “generates future earnings through its expertise rather than capital”, and still come up with a reasonable valuation, is imo another, though not often appreciated, margin of safety: the use of a more conservative valuation metric, one that, if applied to most businesses which generate earnings through intangible assets (like expertise), is almost always conservative to the point of making no sense at all.

 

Gio

 

Gio,

 

This is what Dazel has been getting after in a lot of his posts. Right now Altius is valued via assets and whatever price the market is willing to assign their "call options - Kami, Uranium, PMRL, ect..". Once PMRL is completed, Altius will be bringing in ~30M in royalty revenue. This means the market can begin to assign a P/E more appropriate for a royalty company than an asset rich hedge fund with no (<4M) in revenue.

 

On some level we are going to have to trust that management knows what they are doing. There is a lot of discussion about JL (which is a proposal...) and Kami. No one knows what the price of iron ore will do, if Kami will be built, if the JL proposal will be accepted, built and what a potential final deal will look like. Projecting all these cash flows for assets that don't exist yet is just as crazy as the Fortress Paper post from 2 years ago. Why don't we focus on nailing down exactly what Altius is worth today without JL, without Alderon, without PMRL. Now add in PMRL, where are we? Alderon? JL? Everyone has glossed over 30% of Altius's value and is interested in speculating on Kami and JL (just like the Fortress Paper thread). Identifying and really knowing what they already own, what it is worth today, and understanding PMRL could set some minds at ease and allow us to talk about the iron ore projects as the call options they are.   

 

Ross812,

 

I think this line of thinking is right and, as you say, it is what Dazel got at in his previous post using the 15x multiple on the PMLR and Voisey royalties. At this multiple, we get the Kami and JL options almost for free.

[original mungerville]

from the current presentation

 

Altius is acquiring on a 51% basis... the royalties

And on a 100% basis ... CDP

 

Seems they'll buy OTTP's 50% for $21M also...

 

No, I'm not sure. The 51% is in reference to Liberty and 2 other private partners. The 100% may therefore also be in reference to Liberty and the 2 other partners. Ie they are buying 100% of the 50% for $21M.

 

So, I am not sure there has been a change. Maybe...maybe not?

 

Sorry, it does look like they are buying the OTTP portion as well for a total of $42 million - wow, that's not very clear, you would have thought they would have put a footnote in there stating that that was a recent change relative to their first announcement.

[Guest Dazel]

Gio's NAV actually is below balance sheet NAV if nothing happened.

 

 

 

Actual Net asset value per balance sheet is above $250m...that gets rid of the PMRL deal and leaves out both Julienne Lake and the Kami royalty and assigns nothing to management. Go from there.

 

After the deal...15 x Voisey and PMRL=$450m + $45m paid for the full CDP $500m

The $37m net debt is covered off by 11 projects and the Kami royalty, possibility of Julienne Lake and management skill.

 

 

There is no other reason to do the PMRL deal without the multiple change and cash it will create...you can say 15x is too much (industry average) and you can also say that $37m is absurdly low for the assets we account for either way.

 

$500m for the company with the option of Kami and Julienne lake is a fair price...if the royalties go through it is a double or triple.

 

 

Dazel

[Williams406]

Some really good thoughts all around of late on this thread. Since my excellent 15-year Demerrara rum is gone (the evaporation rate was unreal...bad cork?), I can now engage in some sober-minded consideration of the posts...

 

The Genesee royalty right of first refusal remains up in the air and as that royalty generated 6.5 million in LTM EBITDA with a 43-year estimated life, it's significant. As has been noted on the thread, an exercise of that ROFR would lower the deal cost for Altius with concomitant balance sheet strength. I hope Altius gets Genesee, but as far as I know, it's not in the bag yet. Bear that in mind as you assign multiples to acquired PMRL royalty streams and assume future Altius debt levels...

 

Curious about the CDP portion of the transaction as the "transaction funding and conditions" page references the right of first refusal and tag along rights in the closing conditions section. Page 5, I think, of the PDAC presentation.

 

406

[original mungerville]

Ok guys, after all this, I bought more today ::) :o. I'll buy a bigger chunk if the price falls further.

[hohi]

I love it. If we drop to under $13.5 I'll be buying again.

 

Just added to my position as well. Praise the traders! ;)

[giofranchi]

$500m for the company with the option of Kami and Julienne lake is a fair price...if the royalties go through it is a double or triple.

 

 

Dazel

 

Dazel,

I am not sure I have understood well… NAV or equity is not fair value. If you foresee a CAGR in equity per share of 15% for the next 15 years, the discounted present value of equity (discount rate 9%), or what I call fair value, is little more than 2 x NAV.

Therefore, my question is: $500 million is fair value for ALS, or its present NAV?

If $500 million is fair value, I was not completely off the mark... If $500 million is present NAV, Mr. Market has gone totally crazy…!! ;)

 

Thank you,

 

Gio

 

[TwoCitiesCapital]

 

First of all, let me say that I like the most conservative valuation metric that makes sense. What do I mean with “that makes sense”?

 

Usually, a company that doesn’t employ much capital to generate earnings cannot be looked at via price/NAV, instead should be looked at via price/fcf. Price/NAV for such a company would surely be too conservative and would lead to almost useless information.

Now, the fact that we can look at ALS via price/NAV, despite that ALS “generates future earnings through its expertise rather than capital”, and still come up with a reasonable valuation, is imo another, though not often appreciated, margin of safety: the use of a more conservative valuation metric, one that, if applied to most businesses which generate earnings through intangible assets (like expertise), is almost always conservative to the point of making no sense at all.

 

Gio

 

Gio,

 

This is what Dazel has been getting after in a lot of his posts. Right now Altius is valued via assets and whatever price the market is willing to assign their "call options - Kami, Uranium, PMRL, ect..". Once PMRL is completed, Altius will be bringing in ~30M in royalty revenue. This means the market can begin to assign a P/E more appropriate for a royalty company than an asset rich hedge fund with no (<4M) in revenue.

 

On some level we are going to have to trust that management knows what they are doing. There is a lot of discussion about JL (which is a proposal...) and Kami. No one knows what the price of iron ore will do, if Kami will be built, if the JL proposal will be accepted, built and what a potential final deal will look like. Projecting all these cash flows for assets that don't exist yet is just as crazy as the Fortress Paper post from 2 years ago. Why don't we focus on nailing down exactly what Altius is worth today without JL, without Alderon, without PMRL. Now add in PMRL, where are we? Alderon? JL? Everyone has glossed over 30% of Altius's value and is interested in speculating on Kami and JL (just like the Fortress Paper thread). Identifying and really knowing what they already own, what it is worth today, and understanding PMRL could set some minds at ease and allow us to talk about the iron ore projects as the call options they are.   

 

Thanks for this sobering reminder. I have largely been using Kami as my thesis in recent months when my original thesis was that Kami was free.

 

I used the below figures which I feel are conservative given iron ore pricing,  the long term nature of the assets, and current interest rates.

 

Voisey & PMRL - 230M

30M year @ 5% discount for 30 years

Assumes no increases in production, prices, and cuts off asset lives early.

 

Current Investments: 110M

 

Kami - 130M

Tonnage: 8M

Discount rate: 7%

Iron ore Price: 100

Production starts: 2016

 

JL - 200M

Tonnage: 21M

Discount rate: 10%

Iron ore Price: 100

Production starts: 2017

 

I believe these are conservative estimates. Kami and JL are free in current price and will be worth significantly more than the above values as project risk comes down (lowering discount rate).

 

On top of this, you have several free royalties in their smaller projects bot listed above. 

 

I already own a substantial amount of Altius mostly purchased around $10-11 USD so I'm waiting for a larger correction to risk even more. Might pick up some Alderon's though to goose some short term returns.

[Ross812]

Ross812,

 

I think this line of thinking is right and, as you say, it is what Dazel got at in his previous post using the 15x multiple on the PMLR and Voisey royalties. At this multiple, we get the Kami and JL options almost for free.

 

Gio's NAV actually is below balance sheet NAV if nothing happened.

 

Actual Net asset value per balance sheet is above $250m...that gets rid of the PMRL deal and leaves out both Julienne Lake and the Kami royalty and assigns nothing to management. Go from there.

 

After the deal...15 x Voisey and PMRL=$450m + $45m paid for the full CDP $500m

The $37m net debt is covered off by 11 projects and the Kami royalty, possibility of Julienne Lake and management skill.

 

There is no other reason to do the PMRL deal without the multiple change and cash it will create...you can say 15x is too much (industry average) and you can also say that $37m is absurdly low for the assets we account for either way.

 

$500m for the company with the option of Kami and Julienne lake is a fair price...if the royalties go through it is a double or triple.

 

Dazel

 

Dazel,

 

Off the top of my head, I would discount the value to the Alderon stake to the value of the shelved project with all regulatory hurtles done waiting for a higher iron ore price. Say 30c per share (US$) so their stake is worth 10M heavily discounted. So I'll say NAV:

 

$210M conservatively

 

now the 3% royalty call option is worth something...

 

8M tones x $30/t (assumes $85/t - 55/t costs) x 3% x 12 multiple = 86.4M

 

Then discount to a 10%. What they could fetch for a shelved project future royalty in the market. Say 8.5M.

 

So NAV of 218.5M

 

Mr. Market's valuation:

 

In the past Altius has traded between $9-$11 in the past (Altius bought their own shares in this band) when the companies only revenue stream was Voisey so the real NAV is probably somewhere in the 250M-310M.

 

Post PMRL:

 

After the PMRL deal, Altius should be revalued. Conservatively 12x. So we are still around 360M

 

Very conservatively 360M is the low end I see once PMRL closes. Add in Kami, JL, CDP, and Uranium royalty call options as you see fit.

 

 

 

 

 

 

[hohi]

 

now the 3% royalty call option is worth something...

 

8M tones x $30/t (assumes $85/t - 55/t costs) x 3% x 12 multiple = 86.4M

 

Could you please explain how you use $30/t if it's a GSR? You are calculating with a NPI as far as I can tell. Or am I wrong? ALS gets 3% of the revenue, not the profits. Big difference...

[ap1234]

Gio, you asked the following two (difficult) questions. Let me try and tackle them. I apologize in advance for a very long-winder response.

 

1. What is the appropriate price to tangible book multiple for a company like Altius?

 

Well that depends. Is Altius a holding company or a royalty company? In the former case, these businesses rarely trade at huge premiums to asset value. In the latter case, royalty companies are valued on cash flows and tend to trade at significant premiums to asset value. Let’s assume for now that the company is simply a holding company with a collection of liquid and illiquid assets.

 

Based upon your math, Altius is trading at 1.5-1.6x tangible asset value today. Your tangible asset value assigns no value to the company’s many call options (Kami, JL, CDP, etc.). There is no question that those call options could be extremely valuable in the future (hence why many of us own the stock). But if the commodity environment gets worse, it is possible that these call options could take a long time for the value to materialize. None of us really knows when any of these call options will materialize.

 

Why shouldn’t Altius trade at a significant premium to tangible BV? This is a VERY difficult question to answer. The reality is that in Canada, it is rare to find holding companies, conglomerates or closed end funds that trade at a significant premium to NAV. In fact, most of these businesses (including very high quality businesses like Power Corp.) trade at material discounts to NAV despite long track records of superior NAV/share growth.

 

In theory, a closed end fund or conglomerate is like any other business. If they can earn an above average return on equity, they are worth a material premium to their book value/NAV. If they earn subpar returns on equity, they are worth a discount to their book value/NAV.

 

But the reality is different from theory. Investors do NOT value conglomerates or holdcos the same way as they would value a normal operating business. They assign a discount for the illiquidity of the holdco’s assets and the lack of control (i.e. they can’t come in and liquidate the assets). As such, many high quality holdcos/conglomerates trade at discounts to NAV (and always have) when they probably should trade at a premium to NAV. If you buy these companies, you should buy them for their NAV/share growth and not require multiple expansion for the thesis to play out (because in some cases the multiple might never reflect the intrinsic value of the business).

 

It’s easiest to illustrate with an example – Onex Corp. You actually asked me about Onex when I first joined the board. I am a long-time shareholder in Onex. It is a world class private equity firm that has a great track record since inception (28% gross IRR for 3 decades!).

 

In effect, Onex is a ‘holding company’ that invests their own capital in private equity deals. They also have a small asset management business (which collects mgmt. fees & carry) that is becoming increasingly valuable but it is still a small % of their NAV. As such, the NAV of Onex is largely their underlying holdings (a collection of their private equity businesses).

 

For most of the company’s 30 year history, the company sold at 0.7-0.8x to NAV. There are both valid and invalid reasons why it traded at a discount (it’s not worth getting into here). More importantly, today the company is trading at 1.2x NAV. This is probably the most expensive valuation the company has traded at in 30 years (i.e. the high end of the historical valuation range)! And there are still many Canadian investors who think it is crazy for Onex to trade as high as 1.2x NAV.

 

My personal view is that over the next 5-10 years, Onex will grow their NAV/share at 12-15%/annum. This is a reasonably conservative estimate (it could turn out to be higher). What is a business worth that can compound capital at 12-15% (and re-invest almost 100% of their profits back in the business)? It should be worth a lot more than 1.2x NAV. But Onex is a conglomerate. Their holdings are illiquid and hard to value. And the company’s annual NAV/share growth is extremely lumpy (there is no visibility on returns in any given year similar to Fairfax).

 

Let’s contrast this with Canadian banks. They trade on average at 1.8-2x BV. And they will likely experience a similar ROE (say 15%) to Onex over the next 10 years. The Canadian banks ROE is likely worse than Onex over the long-term because they return 40% of the annual profits as dividends (i.e. they don’t re-invest 100% of the profits and earn incrementally high returns on capital).

 

So why do Canadian banks trade at 1.8-2x BV and Onex trades at 1.2x NAV yet their long-term ROE is similar? One business is valued like an operating company. The other is valued like a holding company. I happen to prefer Onex but most investors would rather own a Canadian bank!

 

Will Onex ever trade at 1.5x NAV? I won’t hold my breath.

 

How does all of this apply to Altius?

 

Well, it comes back to the original question. Is Altius a holding company or a royalty company?

 

As has been discussed at length on the thread, Altius could transform their business from a holding company with illiquid assets to a royalty business. If the Sherritt deal closes intact and they decide to return 90%+ of their annual cash flows as dividends, the business could be valued like more like a royalty. Royalties can often trade at significant premiums to NAV. In this scenario, the hold co discount does NOT apply.

 

As Dazel points out, as a ‘royalty’ business, Altius can somehow buy a private royalty in a competitive bidding process for 9-10x EBITDA, pay out 100% of the profits as dividends and public market investors will value the cash flow stream at 15x EBITDA!! If this happens, the earlier discussion on how to value a holding company is irrelevant.

 

The other scenario is that investors got more visibility on some of their call options (Kami, Julienne Lake, etc.) and they are willing to ascribe a value for these assets. In this scenario, Altius’ tangible asset value is worth a lot more than the conservative marks you applied.

 

2. Altius has grown their NAV/share at 29% since inception. If I cut this in half, that is still 15%/annum growth. Is this not a reasonable expectation for the future?

 

I think I addressed this question in an earlier post so I will cut & paste my response (at the bottom of the post) in case it was missed in the long thread.

 

However, my short answer is…honestly I have NO idea if 15% is reasonable. Simply taking their long-term record and dividing it in half might or might not be conservative. I don’t think it’s that simple. Altius's historical record is NOT as easy to analyze as other companies you are familiar with like Fairfax, Berkshire, Markel, etc.

 

Let me summarize why it's very hard to know whether their historical record is good proxy for future returns:

 

1. Altius should be evaluated like any investment manager. Analyzing their historic track record is extremely important. But the real question to ask is WHY did they achieve 29%/annum returns? 

 

2. The problem in evaluating Altius’ record is that very few investments (Aurora, Alderon, etc.) explain almost 100% of their returns. This is VERY different than an investor (say Onex or Markel) that has made dozens of unique decisions that collectively account for their returns. I have a LOT more comfort figuring out the repeatability of Onex’s success than I do Altius. How do I know that Altius is going to find 1 or 2 more 100 baggers over the next 10 years? And if they don't find any 100 baggers, what does that mean to their future returns?

 

3. Altius started ‘investing’ at the bottom of a HUGE secular boom in commodities. I have no doubt that they are very talented prospectors. But if you don’t think we are going to have another secular boom in commodities over the next 5-10 years, how can you judge the historical results and extrapolate it in the future? I can point to many medicore fund managers  who bought natural resource stocks in the late 1990s/early 2000s who look brilliant based upon their performance record. Should I assume they will repeat that record in the future? Similarily, let me find you a bond manager who started buying bonds in 1985. His record will be phenomenal. How much of his record is his bond picking abilities or simply operating in a declining int. rate environment?

 

It is virtually impossible to know what Altius’ record would have been over the past 15 years if they didn’t start prospecting at the bottom of a huge commodity bull market. Would Aurora or Kami ever happen if the commodity price environment wasn’t as favorable? How do you separate the talents of Altius management team (and I think they are talented) from the favorable investment environment they operated in?

 

I will finish the (long winded) post with my original response to you from earlier in the thread:

 

“The historical track record (you mentioned 29% CAGR) is very impressive. Very few companies have that kind of record. But just to follow up on that, I’m curious to know whether anyone has done any attribution of the historical returns. If you EXCLUDE their Aurora investment, what is their historical track record? Similar to how Fairfax excludes their one-time CDS gains from their historical Hamblin Watsa results.

 

The reason I am asking this is that I read that the Aurora investment turned a $650,000 original investment into $200+ million. This is a 300 bagger! Today, Altius’ market cap is $380 million. This means that 1 investment accounted for over 50% of Altius’ current market cap. Presumably, this had a very large impact on the company’s historical track record (29% CAGR).

 

In my mind, Altius is an investment manager. They just happen to play in the minerals space. But they should be evaluated the same way as I would evaluate any external money manager. For example, let’s say I was thinking of hiring Hamblin Watsa as my money manager. They could show me a chart that says they delivered a 20% annualized return on their equity portfolio over the past 20 years while the S&P 500 delivered 8% annualized returns. If they then told me they have a couple of stocks that were 200-300 baggers I would be somewhat concerned. I know how rare it is find 200 baggers in the stock market. I would be much more comfortable knowing that their record was based upon NUMEROUS wins as opposed to a couple large winners that had a disproportionate impact on their historical returns.

 

To be clear, I do NOT think Fairfax’s record was simply based upon a couple home runs (they have had many fantastic investments over the past 30 years). I’m just using it as an illustrative example.”

 

[giofranchi]

Ap1234,

thank you very much for the time and work you devoted in answering my questions… Though, what I asked was:

1) Is your calculation of present NAV for ASL different from mine?

2) How are you acting? What’s your position in ALS, and are you going to average down?

 

I think what you say about their track record is not completely true… I agree they were helped by a secular bull in commodities taken at the start… but I don’t agree with the fact they are not proven, because they have encountered a 300x bagger… Imo this is not how their business model works… They are not fund managers… They are “project generators”… Like original mungerville has rightly said, their business model generates a lot of free cash, without the need of much capital. And when they find the right project, they obviously try to squeeze every penny possible out of it.

You wouldn’t say KO is not proven, because the great majority of its business is based on selling one kind of soda… Or that Apple is not proven, because the great majority of its revenues is tied to the i-phone and the i-pad… right?!

ALS business is based much more on an intangible asset, that is their skillfulness in projects generating, than on the tangible equity or funds they manage. In other words, what they do is to try different projects at almost no cost, let’s say 20 different projects, out of which only 1 gets the green light… Then they spend years developing that single greatly successful project and reaping the rewards.

If you need to wait for 10 or 15 such outcomes, to finally declare they are a proven team, you might risk waiting for decades…

 

As far as the secular bear in commodities is concerned, you already know what I think: that’s the true reason why I assumed a slower growth for the next 15 years… Even if I think men will go consuming more and more minerals and I don’t think Mr. Grantham’s thesis could be easily dismissed…

 

Gio

 

[Guest Dazel]

Gio,

 

 

 

I  am looking at it as a business owner...when PMRL is done...Dalton could sell the royalties individually if he wanted to raise cash...pick and choose  the best ones and sell them off to recoup his purchase price if he wanted and I trust him to be opportunistic as he has been in the past. He sold out IRC at 37x. He knows the value of the royalties.

 

Therefore each royalty has a value and we have an idea what that value is because there is a market place for them...including Kami now.

 

I see your surprise in how valuable the market prices are for royalties and yes the average multiple of a royalty company's royalty receipts is 15x...this is not high historically. They need no management or costs...the Potash royalties which I love are 70 years..So if your view was long enough..what is that worth? Potash Corp would do an NAV. However, if I put that in trust for a kid (what Berkshire does basically)...what's it worth after 70 years...no one has to touch it except a

lawyer to check very couple of years. That is why they are so valuable.

 

 

The average purchase price of royalties in the marketplace is much higher than 15x... see page 4 of

Altius presentation below...

 

AP1234,

 

I agree with your thoughts and we have been owners of Onex for over a decade...they are similar to

Altius other than Onex used other people's money and leverage to achieve 28%. Celestica is a large portion of that gain that is on par with Aurora at Altius...they both sold out synthetically at the top. Onex buys out of favor assets and sells them when the market improves with leverage. Sound familiar?

 

After the PMRL deal Altius will be afforded the leverage option as the royalty assets hold a great deal of collateral...because of predictable cashflow and sales value in the marketplace.

I also agree with AP1234.... I see Alitus as Onex, Leucadia, Fairfax etc...I also view them as investment managers...that is why I see every asset on the balance sheet differently. Altius decided

to  go Mr. Buffett's route by buying quality (royalties)...so Altius will move up the value chain...however, it will still have assets that they will monetize similar to Leucadia. CDP is likely to be classic Leucadia like deal.

 

It is certainly possible that Altius will enter other sectors outside the resource sector after the PMRL deal...Whatever, is the best value.

 

 

http://altiusminerals.com/uploads/Altius-Investor-Presentation-2014-01-07.pdf

[ItsAValueTrap]

1a- The whole concept of valuing royalties based on some type of multiple is silly.  Clearly you should value them based on discounted cash flow because some royalties will last longer than others.

 

Altius has a number of mining assets that are difficult to value.  To value the Kami/Alderon assets properly, you'd need:

(A) A team of specialized engineers

(B) Access to data

 

Then you have to figure out the value of the prospect generation business.  That part is tricky.  The prospect generation side will only generate high returns when Altius can get good land at a low price.  As well, determining the ex ante returns are difficult.  Is Altius skilled or lucky?  Technically, Altius hasn't discovered a single deposit that has turned into a (profitable) mine.  They've managed to make a lot of money regardless.

 

1b- Altius has a good management team.  So you could make the argument that Altius might deserve to trade at a slight premium to what its assets are worth (or... Altius shouldn't trade at a discount).

 

1c- Just because other people overpay for royalties doesn't mean that you need to overpay for royalties.  If mining assets are overpriced, you don't have to buy them.  If dotcoms are overpriced, you don't have to buy them.

 

2- The easy way of approaching Altius is to buy when Altius is buying back shares.  They have a track record of selling shares when they are expensive and buying them back when they are cheap.

[Guest Dazel]

Trap,

 

Agreed.

The quality of royalties is the "most" important factor. Mr. Buffett has stated that there is "no" better business than a royalty stream that adjusts up for inflation.

 

There is a very big difference in royalties and the multiples are real and they should be in according to the asset...Altius will not over pay for royalties which they have proven...but they can sell anytime they want...so if the market will pay 20x they could sell.

 

FYI- they have done this before when they bought IRC  in an attempted merger during distressed times and sold it at 37x. This is "real" not dot com stuff where there are no incomes and there never will be...Potash Corp will pay out cash for 70 years...no other costs all profit.

 

Multiples are different by industry.

 

Streaming vs. Royalties etc...what royalty is it? Where is it? Who are the counter parties etc.

 

Type of royalty? Is on revenues or profits?

Music and publishing  royalties, oil and gas royalties, resources etc... take Alaris royalty Corp that

gives loans and equity for royalty payments...levered etc.

 

 

 

 

 

Normally value investors dismiss the sector because we are too cheap so we do not look at...We would not pay too much and Dalton is the same....there is reason he deploying cash here.

[Guest Dazel]

 

 

Looks like I should keep posting! Bought more cheaper shares today!

 

Dazel.

[abyli]

To me, ALS works more like a call option. They do not spend much money every year, but once every few years, they found something big and can turn that $2M expense into $100M, $200M, etc. At this price, we do not have much to lose, but the CALL part is pretty big. Royalty $30M for now, $55M in two years, $125M maybe in 2017. If you subtract 20% royalty tax on $125M, that is $100M pure revenue (or income?) with zero cost. Of course, each royalty stream have different life, some 30 years, some 70 years. If we multiple that $100 M by 20, that is $2 Billion, if multiple by 15, that is $1.5 Billion. Of course, we need to subtract the net debt too. I would say by 2017, the debt should be gone, either paid off from royalty or from for-sale assets. So if everything work out, by 2017, we will see a $50-$65 stock from current $12 minus. That is 4-5 bagger in 4-5 years.

 

 

[TwoCitiesCapital]

1a- The whole concept of valuing royalties based on some type of multiple is silly.  Clearly you should value them based on discounted cash flow because some royalties will last longer than others.

 

I'm glad you mentioned this. I tried to make this point a few weeks back but it largely fell on deaf ears because a multiple of 15 got you near the same result as the DCF analysis (depending on your discount rate). However, that's one DCF at one rate for a specified period of time. 15x multiple wouldn't matter at all for the same economics on a 70 year mine like they did for a 30 year mine.

 

Applying multiples to a depreciating asset like a mine is totally idiotic. The only way it should matter to us what the relative valuation (or multiples) of other royalties are is if Altius plans to sell the royalty. Let's assume the market as a whole, is over paying for royalties due to reaching for yield. Does it really make us feel better if Altius' are valued at a slightly less high premium? Are we really going to use inflated multiples to justify why Altius should go higher? The only way multiples matter to us if Altius is able to sell its royalties at that multiple. As for now, Altius has already said they'd likely spin Kami off so we don't need to worry about multiples on potential sales for a few years and even then DCF is still a better approach....

 

2- The easy way of approaching Altius is to buy when Altius is buying back shares.  They have a track record of selling shares when they are expensive and buying them back when they are cheap.

 

Altius was buying shares back at these prices just a few months back. The only reason they stopped is because they used their cash to purchase the royalties. Also, they discussed selling assets to avoid issuing convertible debt....this would be another form of "repurchasing" by avoiding the issuance that everyone was expecting and goes to show would rather not issue converts partly valued with under priced shares.

 

Based on my estimates, if you buy Altius at any price below 400M, you're getting Kami and Julienne Lakes for free. This is significant because Kami has come a long way to being mostly de-risked and Julienne Lakes would be HUGE! Potentially twice the size of the current PMRL royalty. I know this a few years off, and should be discounted for the delay and risk, but if it gets built, JL alone will be worth more significantly more than the Altius is currently trading for right now.

 

I'm looking at a company that could consistently produce $2-3 per fully diluted share in after tax FCF with little to no maintenance CAPEX by 2018ish and would still have several smaller projects that could come to fruition to build that.

 

 

[ItsAValueTrap]

Altius was buying at much lower prices a few months back.  I don't see them buying back shares above $13/14 (which would be consistent with what they did in the past).

 

http://www.canadianinsider.com/node/7?menu_tickersearch=als

[TwoCitiesCapital]

Altius was buying at much lower prices a few months back.  I don't see them buying back shares above $13/14 (which would be consistent with what they did in the past).

 

http://www.canadianinsider.com/node/7?menu_tickersearch=als

 

I guess there might be some currency fluctuations involved. The price now in USD is lower then when I started buying a close to a year ago when they were actively acquiring. Canadian prices are still about 10% higher then they were at that time suggesting CND weakness that I wasn't considering.

[giofranchi]

I also agree with AP1234.... I see Alitus as Onex, Leucadia, Fairfax etc...I also view them as investment managers...

 

Ok then, let’s say they are investment managers… Yet, they themselves describe their business as composed by two parts:

 

1) Mineral Exploration Project Generator

 

2) Royalty creation and investment

 

Therefore, if we agree on the fact they are investment manager, we should at least recognize that the first part of their business is much more similar to what venture capitalists do, rather than to what Onex, Leucadia, Fairfax, etc. do… Am I completely wrong here? And venture capitalists usually invest small amount of capital, in ALS case it is intellectual capital and the cost of explorations, in many different “ventures”, which have the possibility to become multi-baggers. Most of them go nowhere in the end… a few, if they know their job well, actually become multi-baggers!

 

What’s clear imo is that also in many years of doing business their track-record will continue to be tied to just a few very successful ideas… It is just the nature of the first part of their business… Therefore, if we require to see many successful investment ideas, we might never be able to invest in ALS.

 

The second part of their business is more similar to what Onex, Leucadia, Fairfax, etc. do, and is what I call the “new” part. It is this new part that prompted me to take a closer look at ALS, and finally to invest in the company. Why? Because, although it is not where the big winners will reside (to borrow from Mr. Buffett), it is the part that keeps giving free cash and therefore stability and predictability to the whole business.

 

To summarize: ALS starts as a project generator, employing little capital in opportunities that might become big winners. Then it keeps the proceeds from those very few opportunities, which actually have become big winners, invested in a royalty portfolio that generates a significant amount of free cash flow. The fist part is where juicy gains will be achieved, the second part is where stability and predictability of results will be attained. A business model I like a lot! :)

 

Dazel, ap1234, am I understanding ALS correctly?

 

Thank you,

 

Gio

 

[Guest Dazel]

Yes Gio.

And agreed on the home runs.

 

Mr. Buffett hit a home run with Coke which was a large part of Berkshire's equity when he bought it in 1988. Berkshire's results in the 70's were pretty dismal....the insurance model bit him and  Berkshire Hathaway itself was a disaster. It was See's Candy that had Munger change his thinking and convince Buffett to buy great businesses.  Coke's growth took Berkshire's book value with it when it went up 10 times in 10 years. Altius has recognized the value of a great business...royalties.

 

Fairfax, Markel, Berkshire all used insurance float (leverage) to achieve above average returns...they also used debt on top of this for serious leverage. Mr. Buffett called it "rocket fuel". Insurance is

tricky...ask Prem Watsa about the 7 lean years...And ask AIG and all of the other insurance

companies that blew them selves up by reinvesting premiums into disastrous investments.

 

Onex is hedge fund-private equity company with the longest running best track record around...again all leverage...they sold the positions when they were fully valued and compounded their growth in

equity with more leverage. Leverage is tricky.

 

Altius will have a royalty float...recurring cashflow without the need for additional capital or

intellectual capital being used to produce it. In order to truly value a royalty you have to do the math on the reinvestment of the royalty cashflow. If you return high amounts on capital which we know Altius has done in the past...the compounding is magical. And unlike writing insurance premiums Altius does not have tail risks of big losses...the money is theirs to reinvest or pay dividends. They could in the future use leverage for other high return royalties.

 

The second part of their business is project generation which is truly entrepreneurial involving

intellectual capital. However, they have the advantage of intellectual capital already on their balance

sheet that was created a decade ago. Land claims...they are the largest holder of land claims in Newfoundland Labrador. This is an asset that is unrecognized because the majority of the claims will

be worthless. However, there are home runs among them with little or no further capital needed for development..only intellectual capital. (Julienne Lake is on the balance sheet as a $1.5m asset.) CDP will add greatly to this business.

This is a low cost high return business for Altius....earnings can be lumpy because the float will keep coming in without it.

 

 

A better term for all the above are "capital allocators"  instead of "investment managers" which Mr.

Buffett calls himself. They are all businesses that have many decisions to make that involve complex

business decisions...capital structure, leverage, share buybacks, payrolls, the right businesses to buy

or put time into.

 

I would argue that Altius will have the easiest business decisions of the bunch as they could literally

go to sleep and royalty cashflow will come in. That is why the multiples are so high...there is no better business. However, to achieve greatness Altius will have to skillfully reinvest that capital and hit the odd single or home run in their project generation business.

 

 

Dazel.

 

 

 

 

 

 

 

 

 

[giofranchi]

Thank you, Dazel!

Very useful. :)

 

Gio