Adrian Day - Sat, Sep 24, 2016

Contrarian Royalty Company Positioned for the Next Bull Market

Adrian DayMoney manager Adrian Day discusses Altius Minerals, a resource royalty company that he believes has positioned itself well for a rising resource market.

Altius Minerals Corp. (ALS:TSX.V 9.70) is a core holding in the resource space, a company that generates and acquires royalties, run by one of the shrewdest people in the business. It has long taken a contrarian stance, acquiring land during bear markets and harvesting in strong ones. Over the last few years, the company has purchased several royalties on various commodities, resulting in a fairly diversified package of royalties with exposure to many commodities. It has also been busy acquiring large land packages around the world, particularly in Chile, Finland and Ireland, as well as in Michigan and across Canada, which it hopes to turn into joint ventures with exploration companies and eventually additional royalties (as it has done so successfully in the past).

One last new royalty
CEO Brian Dalton thinks the market has turned, reducing opportunities to acquire cash-flowing royalties. (The copper royalty on Chapada—see below—"came just under wire," he says.) Now the company is looking at realizing value from the exploration package accumulated during the bear market. And Altius is in a great position to harvest gains and future revenue from this land in the stronger market ahead.

Indeed, we have two examples of the strategy at work in just the last couple of weeks. First, a private-company optionee on a B.C. coal mine is to be acquired by an Australian public company; Altius retains its shareholding as well as a royalty. Then, just in the past week, Altius reported new gold discoveries on a property in Newfoundland (Wilding Lake), and an agreement to option the project to a new public company in return for shares and a royalty.

Revenue up again, despite difficulty at one royalty
In the last year, Altius received revenue of $33 million (or 83 cents per share), from the royalties it acquired on coal and potash (from Sherritt) and the Triple Seven base metals mine (through the acquisition of Callinan). The base metals royalties—despite low prices for many metals—now represent almost two-thirds of the big coal revenue, and Altius aims to further add to base metals royalties to further diversify its royalty base. In May, it purchased a copper royalty on Yamana's Chapada gold-copper mine, which will increase base metals revenues for the year ahead. Chapada is the third major cash-flowing royalty acquired in the past three years. It is a long-life, low-cost mine, while Altius believes there is a lot of upside in the mine, beyond the reasonably modest pro-forma returns and commodity price upside.

Unfortunately, the Voisey's Bay nickel royalty is currently not paying due to operator Vale's rather—shall we say?—aggressive method of accounting; Altius (and Royal Gold, which also holds part of the royalty) are suing Vale currently.

Opportunistically using its balance sheet
Altius also maintains a good balance sheet. It aggressively paid down its first-ever debt, taken on to acquire the coal and potash royalties from Sherritt in early 2014. It took on additional debt to buy the Chapada royalty (though it also restructured its debt into a better-term facility), and once again is bringing down that debt through repayments from royalty revenue as well as from the proceeds from the well-timed sale of shares in various junior companies. Total debt now stands at $87 million, with cash of over $13 million and remaining shareholdings in various companies of almost $30 million. The company has total liquidity of around $60 million, which could be used for another deal.

In addition to 14 producing royalties, Altius now has 31 non-producing royalties, mostly in iron ore, nickel, copper, zinc and gold. The major generative program over the last couple of years will add royalties for years to come.

Why is the stock down?
There is concern about the exposure to coal, particularly given the attitude of the new provincial and federal governments. It should be noted however that Altius' coal royalties are based on volume not price; that there are long-term contracts with local power generators; and that, in the worst case, there would be compensation from the government for any takings.

This poor sentiment towards coal has hurt Altius's stock, down from over $15 a share last year. Following the sharp drop in the stock price, Altius reinstituted a buy-back program, with authorization to buy up to 5% of its outstanding shares over the next year. Altius is a core holding for us; if you do not own, you should use the weakness to buy.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Altius Minerals Corp. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: None. The companies mentioned in this article were not involved in any aspect of the article preparation. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
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