|Shares Out. (in M):||29||P/E||5.0x||0.0x|
|Market Cap (in $M):||346||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-189||EBIT||0||0|
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Altius Minerals is a natural resource project generation and royalty business based in the Canadian province of Newfoundland and Labrador. This part of the world has an extraordinary mineral endowment, the result of its diverse geologic and tectonic history. As a result, Labrador and Newfoundland has produced almost every type of mineral deposit known on earth, with giant deposits of zinc, gold, copper, silver, nickel, cobalt, and iron ore, as well as uranium, diamonds, and various industrial metals and minerals. And apparently very few companies in the world know the exploration prospects in Newfoundland and Labrador as well as Altius Minerals. The company has built a track record of exceptional value creation by the use of a prospect generation and royalty business model to limit capital costs and risks of exploration and maximize per-share intrinsic value.
The table below shows the historical shareholder equity and book value per share performance by Altius for the period from April 2003 to April 2011. As you can see, BV per share has grown from $0.17 per share to $10.25 per share over the past six years - an outstanding track record.
Year Ended Shareholder Equity Shares Out BV per Share
April 2003 $ 2,834 16,720 $0.17
April 2004 $ 13,986 24,411 $0.57
April 2005 $ 22,737 26,896 $0.85
April 2006 $ 61,072 28,723 $2.13
April 2007 $ 113,194 28,788 $3.93
April 2008 $ 206,301 30,926 $6.67
April 2009 $ 187,012 28,371 $6.59
April 2010 $ 216,082 28,551 $7.57
April 2011 $ 295,364 28,815 $10.25
Today, Altius is an intriguing combination of cash, ownership stakes in public mining and royalty companies, producing and non-producing royalties, and a diversified portfolio of both partnered projects as well as new exploration leads for which Altius is continually searching and looking for appropriate partnership opportunities.
Note: In my discussion below, I generally refer to fiscal year when talking about reported financials related to Altius. The company's fiscal 2011 ended on April 30, 2011.
Altius Minerals began its corporate life in 1997 with a tiny amount of start-up capital. From 1997 to 2000 Altius accumulated claims on mining properties at over 20 different exploration sites for a total cost of only a couple million dollars and began establishing partnerships with various mining companies to explore these properties. Under most of these arrangements, the miners would commit to a minimum amount of exploration spending in return for a percentage ownership in the property. By 2003, Altius had established 29 joint ventures to explore its various properties.
Also in 2003, Altius took a major swing at the opportunity to acquire a royalty on a world-class mineral discovery that would become known as the Voisey's Bay nickel/copper mine, which would come on line a couple of years later. Altius paid $9.75 million in cash and issued 750,000 warrants to the private company that originally discovered the deposit for a 7.5% interest in a limited partnership formed to hold a 3% net smelter royalty (NSR) on the property. Altius had to fund this investment by way of a $10 million private placement in which it issued shares at $1.60 and 50% warrant coverage, exercisable at $2. But it was worth it! Altius paid a price for the royalty based on a long-term $3.25 per pound nickel price, which would soon prove to be a home run when nickel prices reached highs of over $15 per pound in the commodity boom of 2007 and 2008. Altius also found a way to get some additional upside in the deal, receiving an option to increase its ownership in the royalty at a later date. Just one year later, Altius exercised its option, bringing its LP ownership to 10% and thereby increasing its effective royalty ownership at Voisey Bay to 0.3%.
Production at Voisey Bay started up in 2005 as expected, and Altius began receiving its initial royalties in early 2006. Altius received gross royalties of $4.3 million in 2007, $5.2 million in 2008, and $4.1 million in 2009. However, Voisey's Bay has been affected by a strike at the mine that lasted for more than eighteen months and which reduced royalty payments to $1.7 million in 2010 and $2.8 million in 2011. Altius should see a return to normalized royalty income from its Voisey's Bay royalty now that the strike with Vale has been resolved as of January 26, 2011 and full production is set to resume. Voisey Bay is now expected to produce for at least 25 years, and there is considerable exploration potential on the property covered by the royalty as well. Going forward, the royalty should provide consistent and reliable cash flow sufficient to cover corporate overhead and finance future investment opportunities for Altius.
While the Voisey Bay royalty acquisition was a big winner for Altius, it pales in comparison to the massive home run the company would hit in an area soon to become a massive bull market - uranium. Altius had begun building a portfolio of uranium exploration projects in 2001 after a period of low uranium prices created an opportunity to acquire projects. Many of these mining stakes were located in the Central Mineral Belt (CMB) of Labrador, which has historically been Canada's second most important uranium district after the Athabasca Basin. For nearly 20 years, the area had seen virtually no uranium exploration activity due to low commodity prices. In 2002 and 2003, Altius began acquiring properties in the area and in 2003 formed an alliance with Fronteer (now Fronteer Gold) that would ultimately result in the formation of a new company called Aurora Energy. Aurora went public in 2005, at which point Altius owned a 37% stake in the company. Altius sold its stake down to 19.9% as part of a secondary offering later in the year for $38.5 million. As the great uranium bull market wore on, Aurora's stock price soared higher and higher. Altius sold additional shares in 2007 and 2008, ultimately realizing gross sales proceeds of over $205 million on a $650K original investment!
This huge windfall came at the perfect time, as commodity markets crashed in 2008 and 2009. Altius discovered its next great mineral investment on the Toronto Stock Exchange by buying shares of International Royalty, a small publicly traded royalty company that had incidentally purchased a significant ownership in the Voisey Bay royalty partnership. Altius ultimately purchased a 9.4% stake in International Royalty for approximately $35 million. On February 16, 2010, Altius sold this investment to Royal Gold as part of Royal Gold's acquisition of IRC. Altius received a total value of $63 million from Royal Gold, which included cash and 529,297 shares of RG Exchange Company which are convertible into common shares of Royal Gold. At the recent C$58.50 per share stock price, the value of these shares would be about C$26.3 million.
The company managed another big victory in fiscal 2011 with the monetization of its Kamistiatusset ("Kami") iron ore project in western Labrador. This prospect was staked by Altius in 2004 on the basis of known iron ore prospects discovered by Labrador Mining and Exploration Company in the late 1940's and 1950's. The agreement was later transferred to Alderon Resources, a junior mining company traded on the TSX Venture Exchange (ticker ADV). Under the agreement Alderon was required to spend $5 million to develop the properties within two years and meet various financing conditions to earn 100% of the iron ore property, upon which Alderon would earn 100% interest in the property but would issue over 32 million shares of stock to Altius. On December 8, 2010, Altius announced that Alderon had met the requirements of the agreement, which triggered the transfer of 32.285 million shares of Alderon to Altius. At a recent stock price of $3.15 per share, this stake is now worth more than $100 million. Altius will also retain a 3% gross sales royalty on the project once Alderon starts producing iron ore from the property, which should of course be an ongoing source of revenue.
On July 7, 2011, Altius reported its full year results for its fiscal year ended April 30, 2011. Altius reported net income of $70.2 million, or $2.42 per share. The year's results were obviously driven by the big home run for the year, which was the transfer of its "Kami" iron ore property to Alderon in return for shares of Alderon worth approximately $86 million at the time of the transfer. This transaction boosted reported book-value per share at Altius by nearly 35% for the year, as ending reported BVPS was $10.25.
While Altius will become more of a classical cash-flow generation business over time as its royalty model matures, today the company looks much more like an investment holding company and must be viewed like one in order to determine valuation. The company's assets include 1) cash and equivalents 2) equity investments, 3) one producing and a number of non-producing royalties, and 4) a portfolio of exploration projects. While reported book value of $10.25 is one potential marker of value, this figure represents accounting values, not economic value. The Voisey's Bay royalty, for example, is listed on the balance sheet at only $10.4 million.
The major assets that can be valued are as follows (based on April 30, 2011 statements)
Add all this up, and it comes to $371.1 million. With 28.8 million shares outstanding, that would equal about $12.89 per share. One note regarding the figure above is that it is not adjusted for capital gains taxes. It is my assumption that ALS is likely to hold its remaining Royal Gold position for a while. However, I suspect that they will look to reduce their Alderon stake at the first good opportunity. Therefore, if we wanted to be extra conservative we might mark that down even further. I would think that a $10-15 million hit would be plenty sufficient. If we used $15 million, that would reduce the value to $12.36 per ALS share. In any event, with the recent stock price of $12, I would say we are getting a pretty fair deal. What we aren't paying for is a basket of call options which includes a bunch of royalties that are not yet producing, a portfolio of early stage exploration projects, and a few other odds and ends.
The Call Options
Assuming the $12+ per share value for the company's major assets is within the ballpark of reasonableness, investors are now paying nothing at all for the portfolio of non-producing royalties and the various mineral exploration rights. The table below shows the portfolio of non-producing royalties. (Please excuse the formatting difficulties)
ALTIUS MINERALS ROYALTY PORTFOLIO - JANUARY 2011
PROPERTY OPERATOR ROYALTY STATUS
Kamistiatusset (iron ore) Alderon 3% GSR Initial resource estimate expected
Labrador West (iron ore) Rio Tinto 3% GSR 2011 field program in planning
Revelation(gold) Millrock 2% NSR gold / 1% NSR base 2010 development completed
Monte Cristo / Eugene (gold) Millrock / Brixton 2% NSR gold / 1% NSR base Exploration of $5M required by Dec 2013
Topsails (copper / moly) JNR Resources 2% GSR uranium / 2% NSR Seeking senior partner
Viking (gold) Northern Abitibi 2-4% sliding scale NSR Resource statement expected in early 2011
CMB (uranium) Paladin 3% GSR Purchased by Paladin from Fronteer Gold
Nuiklavik (rare earth) Rare Element Res. 2% GOR (1% buyback $2.5M) REE seeking a partner
Humble (copper/gold) Millrock / Kinross 2% NSR gold / 1% NSR other Drilling program planned for 2011
An updated list of mineral properties and projects is below. Hopefully 2011 and 2012 will see a couple more projects mature in a way that Altius can monetize. Given the company's history of turning these little projects into huge winners, I would be willing to bet that there is some considerable potential value here.
ALTIUS MINERALS LIST OF EXPLORATION PROJECTS - JANUARY 2011
PROPERTY PARTNER AGREEMENT TYPE STATUS
Alexis River (uranium) Kirrin Resources Earn-In Drilling program being planned for 2011
Snelgrove Lake (iron) None Altius seeking partner.
Labrador West (iron) Rio Tinto Earn-In Completed 2010 program, planning for 2011
Moosehead (gold) Agnico Eagle JV (46%) Searching for third JV partner
Newfoundland (iron) Cliffs Natural Res Alliance 2011 drilling underway in May
Notakwanon (uranium) None Golden Cross withdrew in 2010; Seeking new partner
Rocky Brook (uranium) JNR Resources JV (26.58%) 2011 program planned
Saglek - Iron None In discussions with potential partner
Taylor Brook (nickel) None Seeking new partner
Topsails (uran/copper) JNR Resources Alliance 2010 program completed / seeking senior partner
Trough iron ore None Seeking partner
Wing Pond (gold) None Seeking partner
Wager Bay (gold) None Seeking partner
There is one final call option to consider. Altius owns a 39.6% interest in Newfoundland and Labrador Refining Corporation (NLRC), of which the company is a founding shareholder. NLRC is also currently in bankruptcy, which makes it one of the few very poor outcomes Altius has suffered in its history. NLRC is a private company that hoped to build a 300,000 barrel per day crude refinery at Southern Head, Placentia Bay. Founded in February 2006, Altius took an initial 37.5% stake with investors from the UK and Ireland buying in for the remaining interests under a deal in which Altius would also provide local and administrative services to support the initial project feasibility study period. During 2007, NLRC received the various federal and provincial environmental permits necessary to construct and operate the proposed refinery. In December 2007, Altius invested another $15.552 million to increase its ownership in the NLRC to 39.6%. In addition, Altius loaned NLRC $30.09 million in the form of a convertible demand loan secured by the assets in place. Altius needed to tap the capital markets for this investment, and did so by selling 1.9 million shares in 2008 for $28 per share - not bad compared to today's quote of under $10. Unfortunately, they invested the entire amount in NLRC, which they currently have marked on their books at zero.
NLRC used the funds from Altius to begin purchasing steel and other long lead-time items required for the refinery project. However, in mid-2008 the market decline and credit crunch caused NLRC to re-evaluate its financing needs, given that it was counting on raising the money for construction through the public debt and equity markets. NLRC determined that the public markets wouldn't finance the project and looked for money from sources such as sovereign wealth funds, large oil companies, or simply to sell the project outright. The company also advised its contractors and suppliers that there would be a delay in the project until financing could be found. One of the suppliers, a company called SNC Lavalin, served a notice to NLRC of a suit in Newfoundland and Labrador to have NLRC adjudged bankrupt. In reaction, NLRC filed for bankruptcy on June 24, 2008. Altius was forced to write down its entire investment in NLRC of $22.1 million for the equity and $30.09 million for the debt. In November 2009, NLRC emerged from bankruptcy under a plan that allows NLRC to resume efforts to attract a financing either through debt or equity sales, a partner, or a buyer for the assets.
The project is the only permitted Greenfield refinery site in North America and would be the first permitted new refinery in North America in a generation. The remaining life of the permits, assuming they cannot be extended, run through the end of 2011. Altius carries its investments in NLRC at zero, but it bears noting that the debt investment makes Altius the only secured creditor in NLRC, thereby leaving some possibility of a recovery. I'm not sure what the chances are that Altius can find a buyer for this asset, but in any case Altius has nothing much to lose and any recovery would be fabulous. The most recent annual report only stated that the company "continues to seek a strategic partner or buyer for its refinery project. Efforts of late have focused mainly on Asian based state interests."
Based on the impressive history, it would appear that Altius management is both very smart and very savvy. They've managed to create significant value off a very small base, and to this point the only major bad outcome they've had has been the bad outcome at the NLRC refinery project, where the company uncharacteristically put a significant amount of capital at risk (though their ability to raise the money at a very high valuation to fund the investment does present something of an offsetting penalty). Directors, officers, and members of the company's advisory board own a high-teen percentage of the stock.
The company has also shown considerable flexibility in capital allocation. In addition to proving smart in their specialty area of mineral and mining, they've also picked very astute times to raise capital (the secondary at $28 per share in 2008 being a good example) and buying back shares (ALS repurchased 2.659 million shares in FY 2009 at an average price of $5.72 per share.) Finally, their identification of an excellent investment opportunity in 2009 with the purchase of International Royalty proves that they are also open to exploiting value on the public markets when opportunities arise as well. Overall, this management team has proven itself over a 15 year period to be highly adept at building shareholder value.
Other than the general exposure to the price of various commodities, most particularly nickel, Altius appears to be relatively low risk as far as commodity plays go. Given that the company has a significant amount of money now sitting in cash and investments, this risk is lowered even further, as Altius would be in great position to exploit any reversal in the recent commodity rally.
About the only other risk factor that I can see is the lawsuit filed by the contractor at the NLRC refinery project back in October 2008 seeking $20 million or so in contractor fees related to the refinery. However, given that this same company forced NLRC into bankruptcy and also considering this claim should have no recourse to Altius; as such it would not seem to be a major risk. Altius does have some market risk relative to its ownership of the 32.285 million shares of Alderon, which represents a large but unrealized gain. In order to protect this gain, Altius will need to sell some or all of its shares. Of course, the management team is very much aware of this. On its most recent MD&A, the company states that "a primary objective of the Corporation in the near term is to manage its investments in Alderon Resources in a manner that maximizes the potential return for shareholders." These guys know what they're doing. The final risk worth mentioning is that the stock isn't terribly liquid, with an average volume of a little over 30K shares per day.
Overall, Altius appears to offer a relatively low-risk, potentially very high reward way to play rising commodity prices as well as the simple maturation of the company's growing portfolio of royalties and commodity exploration projects. Obviously, the value of this basket of assets could range from very little at the extreme negative end of the spectrum to a whole bunch in the best case scenario. I like the opportunity to own a call option on a basket of these properties, plus whatever opportunities Altius may uncover in the future. As far as intrinsic value is concerned, however, it is clear that these additional assets are hard to value and therefore represent a speculative element to the thesis. Forced to name a price, I'd have to say that the itemized assets are easily worth today's $12 stock price, and the portfolio of royalties and exploration properties might be worth anywhere from $50-100 million, or $1.75 to $3.50 per share, which gets us a value of $14.00 to $15.50 without much trouble. The stock reached an all-time high in the summer of 2008 at $30, so that is one indicator of how much investors wanted to own it back in the height of the commodity bubble of 2008.
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