I hate to continue to write about this small company with great frequency, since it smacks of “talking my book” (it’s a major personal holding), but we have received a lot of questions from readers today about Dan Ferris’ latest pitch, so we’re re-running our previous free article about this one.
Last time around, it was teased as a “Classic Extreme Value” and the “next great royalty company”, and a lot of that language is still in the ad, but they are also mailing it this week with the promise that it’s “A gold royalty with a 10% yield on deck” and a “low-risk double in resources.” It’s not really a gold royalty company, though they do own minority stakes in some gold royalty firms and might eventually earn some gold royalties themselves many years in the future, it’s primarily a thermal coal, potash, nickel and iron ore royalty company.
What follows is our article from April 30, it has not been updated or revised but the story is still much the same other than the fact that the deal to acquire their large royalty portfolio has closed, they have booked the first couple days of cash flow on those royalties, and next quarter will be dramatically different in terms of incoming cash as those royalties are on the books for the full quarter. It’s hard to judge reasons for movement in this stock, but it is somewhat depressed lately probably because their iron ore project and core future royalty, run by former subsidiary Alderon, has not yet completed project financing, and because potash prices continue to be soft. I continue to hold the stock and haven’t bought or sold any shares recently.
——from April 30, 2014——-
“One of the best resource companies I’ve ever found is about to close its most lucrative deal ever. This pending transaction could help you make the safest 400% of your lifetime
“A few years ago, this company turned a $650,000 investment into over $200 million. It spent $2 million on a project now worth over $50 million. And it’s about to close its biggest deal yet… boosting its cash stream 10x. Buy shares immediately.”
That’s the teaser pitch from Dan Ferris at Extreme Value — and I tend to like his stuff, so it caught my eye (and he’s got the mighty Stansberry email marketing machine behind him, so it caught a lot of your eyes, too).
Emailed marketing pitches like this are always pretty aggressive — they wouldn’t get your attention otherwise — but Dan Ferris is a value guy who usually couches his language at least a little bit, so you can really sense his love of this stock shining through … here’s some more from the intro:
“Something remarkable happened at the very end of last year.
“A company I’ve followed for years reached a deal that will boost its cash flow 10-fold… practically overnight.
“I’ve previously made gains of 44% with this company. I’ve toured their facilities. The CEO even gave me his personal cell phone number and told me to call anytime.
“And before this deal… It was already a “best-in-class” company – the only kind I like to recommend…
“This tiny stock is – by far – one of the best opportunities in the natural resource sector I’ve seen in my entire career.
“It’s a stock you absolutely must buy if you believe that all the money the Fed is printing is going to eventually lead to higher costs and inflation.”
Well, we’ve been expecting inflation to show up at some point — it sure ain’t here now, but we keep expecting it … so what is the stock Ferris is pitching?
He calls it the “Next Great Royalty Company” … which, combined with the fact that they made a recent deal to boost their cash flow 10-fold, means that I and most of the Irregulars will know who it is. Shall we drag out the suspense a little longer?
Ferris explains his take on royalty companies for us:
“I’m not sure how much you know about the precious metals business, but probably the best way to make money in this industry is not as an explorer… or producer.
“Instead, it’s to get a foothold on profitable mining royalties.
“The way it works is, several smart geologists and investors buy up the “royalty rights” to some of the world’s most productive and lucrative mines.
“And get this: These guys don’t do any digging, production, or actual mining… they simply get paid lucrative ‘royalties’ as the metals come out of the ground. It’s an incredibly simple and lucrative business.”
And I pretty much agree with that — mining is a lousy business, but if you can generate future royalties and keep your costs contained the little corner of the mining market that we call royalty or streaming companies can be plenty lucrative.
He gives a few examples of the huge returns this company has generated in the past decade or so:
- “A few years ago this company made a $2 million investment in iron ore. That investment is worth over $52 million today, a 2,500 % gain. And that doesn’t include an estimated $700 million in royalties over the life of the mine.
- “From 2003-2005, the company spent $650,000 on a uranium-producing site. In 2010 it sold the uranium asset for $210 million – a gain of 32,000%. And it still holds a royalty on every ounce of uranium produced at the site.
- “It paid $14 million for a Canadian property that has since paid out $20 million in cash – and will keep on paying $3 million a year or more for the next 15 years. All told, I estimate it will collect more than five times its original investment.”
And a few more clues:
“[Royalty] companies typically pay huge sums for royalties on mines that are already producing, or about to start.
“The next great royalty company usually pays next to nothing for its royalty stakes. Instead, it trades its knowledge to the big miners for a cut of their sales….
“… this company is not just interested in gold. Although it will profit tremendously from a gold rebound, it gets its royalty income from base metals like nickel and other natural resources.
“It also has investments in uranium, platinum, and palladium….
“… has just acquired some even more valuable royalty streams – royalties tied to the most basic components of modern society, like food and electricity.”
And yes, we then get to the “Christmas Eve Surprise” that brought this company to the attention of many investors, and drove the price up by about 50% in a matter of weeks (it has come down some since) …
“Five years ago, when the markets were crashing all around, this company was sitting on more than $100 million of cash in the bank. Plus it had millions of dollars of royalties coming in every year to pay its bills.
“Executives sat down and made a list of the assets they’d most like to own (at the right price).
“They’re about to get one of their top three in a single deal that could double this company’s share price (or more) in the next few years.
“They recently made an incredible deal. There were multiple parties involved, and it took months to pull together behind the scenes before an agreement was reached – just before everyone headed home for Christmas.”
OK, I won’t hold out any longer — and frankly, the clues kept rolling in, so I imagine most of you could have figured out this one without me (the ad is here if you want to go check the clues on your own or get more of Ferris’ take … it’s OK, we’ll wait).
Dan Ferris says they are turning their $5 per share in cash into new assets that he thinks will be worth more than $14 per share based on those new steady royalties they’re acquiring in coal and potash … so yes, this is our old friend Altius Minerals (ALS in Toronto, ATUSF on the pink sheets).
And as coincidence would have it, Ferris’ ad started circulating over the weekend … and I last wrote about Altius for the Irregulars in the Friday File on, well, Friday. Three days ago. So I’ll just share with you a piece of my commentary in that article.
The short version is that I own Altius, I first learned about it from a Dan Ferris teaser about five years ago and have held and bought several times since, and they did indeed make a transformative deal on Christmas Eve that’s expected to close next month.
That deal was largely for a large portfolio of currently producing royalties in coal and potash in Western Canada, all of which are on very long-lived mines with (usually) at least several decades of reserves, royalties that have generated close to $30 million a year in recent years… and those royalties mean that even though the company is taking on some debt (assuming the deal closes) and losing it’s big cash cushion with this deal, Altius can now for the first time be valued just on next year’s cash flow at pretty close to where it’s trading now, even without taking account of what I had previously considered their largest asset (the 3% gross royalty on the future Kami iron ore mine), and without really considering that this management team probably deserves a nice premium price for their long term success.
Here’s a taste of what I wrote to the Irregulars on Friday … I own the stock, I end up liking them more every time I look at them so I’ve been nibbling every few months for a while and bought a little more on Friday, and the value is still based to a large degree on commodity prices (and on the deal actually closing), but I was perhaps a bit more conservative in my comments than he was in the teaser pitch:
******Friday File excerpt from March 21******
And the reason Altius came up for reader questions, aside from the fact that the shares have been falling in the last few weeks, is that Altius just reported their quarterly results. Those quarterly results aren’t usually a reason for Altius to do much (another reason why I like it as a core investment), but it’s usually worth taking a look — and there was actually a bit of news hiding in there.
The news was relatively minor — aside from the fact that they still expect their new royalty acquisition deal (the one they announced on Christmas Eve) to close at the end of next month. There is no news yet as to whether the operator of the Genesee generating plants will exercise its right of first refusal on that particular royalty (that’s the biggest royalty in the deal), but an an Ontario pension fund has exercised its right to force Altius to buy all of the Carbon Development Portfolio assets, so instead of buying half for $21 million they’re buying the whole thing — primarily a growth platform for future potential coal and potash royalties — for $42 million. Assuming that the Genesee royalty stays in the deal, the total for everything is about $280 million. That makes the immediate deal look slightly less attractive, since the Carbon Development Portfolio is not a current cash flowing portfolio, but it does give more future potential in exploration projects that could be partnered or extensions to existing mines that could be sold in exchange for future royalties, exactly the kind of thing Altius is good at doing if you give them enough time.
And, still assuming that the Genesee royalty stays, the total average royalty cash flow for the new Altius should be in the neighborhood of $30 million (that’s the low end of average over the last four years, including Altius’ Voisey’s Bay royalty). If we assume that their corporate costs/overhead stay in the neighborhood of $3 million per year, which has been fairly consistent (not counting gains or losses on investments, just the actual cash flow that the company consumes to keep operating), then that means effectively $27 million in EBITDA per year at no cost.
Even if we assume no growth in production or in commodity prices, that royalty portfolio — which is all long-lived, most of the mines have at least 20 years and some up to 70 years of reserves — could reasonably be worth $380 million in a discounted cash flow model (10% discount rate). Remember, these are pretty stable royalties — the coal ones are tonnage based coal royalties for power plants that are at the mine mouth, the coal price doesn’t matter … and the potash royalties for mines run by the big three potash operators in Canada, and potash is showing some signs of bottoming out at $300 (it’s right around five year lows now, largely because of fears that the Eastern Europe potash cartel was breaking up and could crush prices by boosting production … that cartel, the Belarus/Uralkali group, shows some signs of getting back in sync). That doesn’t mean the royalties are guaranteed to stay in this range, but they’re a lot more stable than some.
They also have just over $100 million in outside investments (primarily in Alderon Iron Ore, the Kami mine developer they spun off, and in Virginia Mines), so we can guess at a pretty conservative value of $480 million for the company based just on the producing royalties and publicly traded investments. They’ll have about $150 million in debt when this deal closes, so I think that would leave $330 million as a pretty conservative value for the equity. Right now the equity is at $370 million, so it’s not a deep value conservative bargain. (Those numbers are Canadian dollars, though for my long-term purposes the difference isn’t enough to be of concern.)
But wait — I didn’t mention the one asset that we had previously been thinking of as their primary and most valuable asset: The royalty on that Kami mine that will be built by Alderon. So that’s the wild card.
The Kami mine is going to be built, I’m pretty certain — they’ve ordered their long-lead-time equipment, they’ve made their long-term power purchase deal and the government is committed to building the transmission lines, the government is generally lining up behind the project (partly because of the closing of the Wabush mine in the same area by Cliffs, which lost them 400 jobs — Alderon could hire twice that many workers to build the mine), and they’ve gotten close to $200 million of committed funding from their partner Hebei.
There are still steps to take before construction, including additional off-take deals and project financing, but those are expected fairly soon and it’s possible they could be producing iron ore in as little as two years. At current projections and recent iron ore prices, the royalty if they don’t expand the mine (there are plans to double production a few years after they start) would be in the neighborhood of $25 million a year. Iron ore prices are down a bit, and there is great fear about what Chinese demand might be in the coming years, but as long as prices don’t fall below $80 the economics of the mine still look pretty good to me. The mine hasn’t been built so this is risky, of course, but I expect this to be Altius’ largest royalty in three or four years — and even if it is half of what is projected that puts Altius over the edge to be a very easy buy for me here in the low teens. Adding another $12 million in EBITDA should add another $100 million to Altius’ valuation even if you’re being pretty conservative.
It will be an interesting few years for Altius, but I think there’s a very good chance that the reliable nature of their new core royalties is being quite undervalued — probably in part because they’re more economically sensitive and China-sensitive and are for non-scarce commodities (or disliked commodities, like coal), but the modern world is going to need iron, potash and coal for the foreseeable future. Not as sexy as gold or silver royalties, but coal, potash and nickel are all at relatively low prices and could grow in value — which would substantially increase Altius’ cash flow at no additional cost. They could also fall in value, or the mines these royalties are based on could be shut in for low prices, nothing is guaranteed — but I think it’s pretty rare to find a company with this level of certainty in their cash flow, and margins this spectacularly good (they could feasibly be generating pre-tax earnings of $50 million in three years) … and as soon as they’ve paid down a bit of the debt from this new transformational deal and as soon as the Kami mine starts up, Altius is very likely to become a substantial dividend payer as well.
I think we have to use a little bit of optimism to be confident that the stock is worth C$14 today … but not a lot, just enough to accept that the Kami mine will be built and iron ore prices won’t fall more than 25% from here, that Western Canada will still require coal-fired electricity, and that Canadian potash is not too far from bottoming out in price and won’t fall another 50% in a price war with Belarus. If those three things are true, Altius could easily be worth $20 if it got a similar valuation to some of its royalty-owning peers (and Altius is, I think, a much more shareholder-friendly and more conservatively-run company than its peers).
Pretty much every time I write about Altius I end up wanting to own a larger position … so I’ll continue to put my money where my mouth is and I’ve added a small bit to my holdings today, I wouldn’t want to be an aggressive acquirer at these prices because Altius is quite volatile and the stock could easily fluctuate quite a bit and provide some bargain purchase opportunities in the future, but I plan to hold the shares for many years and I like it very much at this price. If Altius earned a similar valuation to Franco Nevada (FNV), the (mostly gold) royalty company, they could be trading at 30X 2015 earnings … I expect Altius to have earnings of about $20 million in 2015 (the possible range is pretty big, depending on their interest costs and commodity prices), which means there’s potential for Altius to be bid up to a $600 million market cap, which would be a gain of about 60%. That’s far from guaranteed, of course, and there’s plenty of uncertainty — but it’s a valuation that could be justified. Altius remains one of my top three holdings, along with Berkshire Hathaway and Apple.
[this article was originally published on March 24, it has not been revised or updated — though the Altius deal to acquire new royalties has now closed, and they have announced a secondary offering that could, in part, help ameliorate the need for debt for the deal]