“You never see investment returns like this.
“32,000% on one deal. 900% on another.
“All told, these guys have made nearly $14 for every $1 they’ve ever invested.
“So who are they?
“It’s not Warren Buffett and his team at Berkshire Hathaway… or the exorbitantly paid investment team at any of the big New York hedge funds.
“This track record – stretching back nearly 15 years – belongs to a group of natural resource investors who’ve discovered a way to capture the upside of mineral prospecting while taking almost none of the risk.”
That’s the latest intro to a teaser pitch from Dan Ferris for his Extreme Value newsletter over at Stansberry & Associates, and I’ve gotten such a crazy number of questions about it I felt the need to share the solution to the tease again. I wrote a little bit about this teaser ad for the Irregulars about two weeks ago, when this version of the ad campaign really ramped up again, so I’ll re-share some of that and update my thoughts a little.
I won’t beat around the bush so much this time, since I’ve covered the stock so often, but yes, Dan Ferris’ pitch for Extreme Value over at Stansberry that’s headlined “If I had to pick one stock to put all my money in – this would be it” is indeed another pitch for Altius Minerals (ALS.TO, ATUSF).
Altius is one of my largest equity holdings personally, and I have no interest in selling it at these prices, so I understand the enthusiasm Dan has for the stock — but this particular paragraph is a bit much…
“I recently told readers to SELL Microsoft, Intel, even Berkshire Hathaway. They no longer meet my high standards.
“But I would bet my savings, my house, and my career on a single, cash-gushing company in the world’s most lucrative business.”
Now, I’m sure he sold those stocks for other reasons, having to do with perceived overvaluation or having met his “target price” criteria, he didn’t sell them just to plow all that money into Altius — but still, implying that you should sell several brand-name blue chips to put all your money into one commodity stock, even a great one like Altius, gives me a little bit of the heebie jeebies. He sold Berkshire last June, if you’re curious (he announced as much publicly, it was around $128 then), but the others were recent sells (Exxon Mobil, Wal-Mart, Procter and Gamble, Microsoft, and Intel were sold from his portfolio, he says).
All were likely sold at large gains, I suppose, since they fall in his “World Dominators” category of long-term dividend growers and some of them were probably bought near the trough of the financial crisis. I don’t think I would make that kind of a market call even with lots of big “blue chip” dividend payers being relatively expensive, so I guess we should give him some credit for being bold. And, to be fair, he does carefully say that although this would be the one stock he would buy if he was told he had to buy just one, it’s dumb to put all your money into just one stock.
It’s possible that he’s being terrifically prescient and that we’re at or near a peak for all these large cap dividend stocks, and I haven’t been terribly tempted to buy any of them recently (I don’t own any of those specific ones, aside from a teeny Intel position), but selling them all at once really means that you’re effectively timing that segment of the market — and for most people, it’s psychologically very hard to get back in once you’ve sold a “forever” stock like those.
Personally, I sold some of my lousier commodity stocks not that long ago in order to buy more Altius — and the jury’s out on that call as well (though it looks good thanks to Ferris driving the price up this week). It just seemed silly to hold a handful of speculative commodity price-driven companies when I knew that one of them, Altius, has a much better risk/reward tradeoff than the others. I still feel that way, this is certainly the first “mining” stock I’d buy, and it’s by far my largest position in the natural resources sector, but I’m not selling Berkshire Hathaway (or Apple, or Markel, or Facebook, or any other good companies who aren’t primarily commodity-driven) to buy more Altius.
Is there a reason for the big push for Altius as the “If I had to pick one stock to put all my money in” investment today? Anything other than the fact that Ferris is still calling it the “Next Great Royalty Company,” as he’s been doing for the past year or so?
Not particularly. Altius’ base case is still the same as it was when I wrote about it following the announcement of the Callinan acquisition back in March, and that deal has now closed so any uncertainty on that front is gone. Altius is repairing their balance sheet on an accelerated timetable, they have started to pay a tiny dividend (more of a signal of health and a kiss blown to patient shareholders than a meaningful payout), and they still have a base case expectation that their royalty revenue for 2015 will be in the neighborhood of C$1.
That means, with the price at C$14, that you’re paying about 14X sales for Altius — they’re going to grow earnings pretty meaningfully and rapidly if their revenues stay steady over the next several quarters, largely because they don’t have any more big writedowns to do on their Alderon shares and their debt service will be much lower as they repaid a large chunk of their borrowings, but that’s a fairly rich valuation on par with the precious metals royalty companies. There is substantial upside in their many other development projects, and they don’t have to spend much on those (though they do have to be patient as their partners explore and make development decisions), but prospects and potential projects aren’t worth much in the commodities market at this particular moment so any value from those could be a long time in coming as well.
I agree that there’s a good reason for “base metals” and potash, iron, copper royalties to be as valuable or more valuable than gold royalties over time, but that’s not been the stance of the market so the fact that I think it doesn’t make it so — gold royalties have for many years traded at much more expensive valuations than any other mining royalties.
I think the best case this year is a possible 40-50% gain to near C$20 if the market suddenly realizes, over these next couple quarters, that Altius is actually making money now and has meaningful cash flow without much in the way of expenses, and prices in some potential for revenue growth… but that’s probably optimistic — I love holding Altius, I think it will do very well as a steady royalty owner and it might do spectacularly well if we are lucky enough to see another iron/copper/potash bull market in the next few years, or if they make another accretive deal, but it’s really at a pretty reasonable price now, neither expensive nor dirt cheap in my book. Ferris indicates in the ad that it was trading right around his maximum price on May 18, so I’d imagine that he probably has a “buy up to” price of about C$14 on the stock. I consider this a “buy and hold” core position, but if I were more nimble (and weren’t writing about the stock so frequently), I’d think about trying to “trade around” my position because the stock sometimes reacts strongly to deals and to touting by Ferris, who has pitched the stock off and on for six years or so.
The potential catalyst that could change things quickly for Altius — and it probably won’t in the near future, given the state of the (very oversupplied) iron ore market — is Alderon (AXX). Alderon is the iron ore miner that they spun out a couple years ago to develop the Kami mine — the mine had been the major driver of Altius shares until a little over a year ago, when they acquired the huge Sherritt royalty portfolio and became a company with positive cash flow… but after iron collapsed dramatically on oversupply and Chinese demand concerns that project is on mothballs waiting for better iron prices that will presumably, eventually, lead to getting actual construction financing.
I consider that a “maybe someday” bonus now, at C$14 I think Altius shares are priced as if Kami won’t be built in the next five years, and they’re probably right, the equity value of Alderon has now been written down to near zero on Altius’ books, and presumably investors are also no longer giving Altius any credit for the royalty they’ll receive if that mine is ever built — Ferris seems to feel a lot more optimism about the Kami mine’s future than I do, and if he’s right and iron recovers quickly and the mine progresses that would probably be the single largest possible catalyst for Altius shares. I’m just not counting on that over the next five years — but the nice thing about Altius is that their CEO Brian Dalton has proven he can wait out commodity cycles without spending much money, letting projects reach better valuations over long periods of time.
So yes, I still like the Callinan deal, I still like Altius and it’s my only large commodity position, and I think the downside risk is probably not much worse than C$11 unless the world really falls apart and all markets crash, but I wouldn’t necessarily sell a lot of good blue chips to buy Altius unless you’ve got a real crystal ball that tells you iron ore will be at $140 in two years and potash above $500.
At this point, if I were making big portfolio moves (I’m not, really) my impulse would be to shave 20% off of most of my positions, raise cash, and cross my fingers hoping for a market correction… but there’s no reason for me to think that I’m good at predicting where the broader market will be in six months, so I’m not acting on that impulse in any large way (though I am letting cash balances build up to a bit higher than normal, just in case I get lucky).
There you go, then — Altius Minerals is a small royalty company with royalties on coal (thankfully on tonnage, not price), potash, copper, zinc, nickel and gold, and they have a dozen or so reasonably attractive prospects that could be developed, with partners’ money, and, if developed, would generate more royalties in the future. They’re patient, they try to be contrarian and buy assets and royalties in down cycles, and I like their recent deals… but though I hold a lot of shares, I don’t think they’re particularly cheap at the moment… especially with Ferris’ promotional blitz driving a lot more attention to this little company recently.
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