We don’t have one big story that’s catching my eye today, so I’ll do some catching up and musing for you. We’re heading into a slow week, so it’s likely there won’t be many new articles during Thanksgiving week — other than our annual “Turkey of the Year” reveal, of course.
I often get asked what my biggest worry is… and that’s probably inflation, if only because the Fed has been trying to manufacture it for soooo long now. I worry about inflation sneaking in, causing interest rates to rise faster, and destroying over-levered sectors of the economy like real estate.
But there’s really no sign of that actually happening in the US, and everything seems quite copacetic with the slow pace of interest rate increases and the flattening yield curve… the bigger risk immediately, I suppose, is that China might again try to slow its overheated and debt-fueled real estate market — they didn’t do anything super-restrictive heading into the Party Congress, because that’s the time when they want to emphasize sunshine and rainbows, but now that Xi is essentially set as “beloved ruler for life” if he so chooses, they could start to poke some holes in the debt-fueled excess. That would be good for the economy in the long run, I expect, but bad for the global markets in the near term — you can sometimes see a pretty good reflection of those shifting sentiments about “what’s China gonna do next?” in the copper price, and thats been pretty bouncy of late but I have absolutely no idea which direction it will turn.
As I wrote this week, Marin Katusa’s betting big on copper — I haven’t been tempted to go big into any primary copper producers yet personally, but I do note that the counter-cyclical investors in my portfolio have also gone into copper over the past couple years in anticipation of this recovery… primarily Altius Minerals (ALS.TO, ATUSF), which now gets more royalty revenue from copper than from any other commodity.
Altius made its largest copper royalty deal, with Yamana’s large, low cost and well-established Chapada Mine, back in March of 2016 when copper prices were around $2 a pound… when the deal was signed for roughly C$60 million, it made sense given the projected C$8-9 million in EBITDA that Altius expected from the mine for at least 17 years (and likely 30+, given the mine’s continuing expansion potential). As of the last quarter, with prices only averaging $2.70 or so, that was already up to what would be an annualized royalty of something like C$14 million.
So a year and a half in, we already see the benefits of being a counter-cyclical investor — commit money to projects when they are not popular, and reap the rewards for perhaps decades if the cycle turns (as they almost always have, at least over the past 15 years or so). That certainly doesn’t always work — the Alberta coal royalties Altius bought, for example, experienced a big writedown because those mines won’t produce for as long as anticipated thanks to new regulatory restrictions (though that royalty acquisition will likely still pay for itself eventually, particularly because of the 100+ year mine life of some of the included potash royalties, the regulatory crackdown means Altius significantly overpaid). That’s a risk I’m willing to take with these folks, which is why I keep adding small bits to my Altius position every now and then, and why I like it as my portfolio’s lower-risk exposure to base metals and other less glamorous commodities — copper, potash, iron ore, and whatever else they find with their prospect generation businesses. If China’s industrialization surges and copper and iron ore recover, Altius will be a huge beneficiary over a long per