A Conversation with Chad Wells, VP Corporate Development of Altius Minerals
Everyone has different reasons for investing or speculating in the resource sector. I believe, for the majority of the participants, it's the allure of 10 baggers that attract them to the juniors.
While the appeal to windfall profits is attractive to almost anyone, I believe it's exactly this mindset that keeps many investors from actually realizing the gains they are given in the market.
Too many times, I have spoken to fellow investors who haven’t taken money off the table when it's there, and are left holding the bag until the market turns or the company successfully answers the next unanswered question.
First, if you are an investor who can stomach the ebb and flow of the market then taking a long-term position in juniors can work. Secondly, and key to the first point, it can only work if you are right about the junior company in which you are invested. Will they continue to get 'yes' answers as they pursue the development of their mineral deposit?
The juniors draw much of the attention in the resource market, however, I think that there are larger companies that have big upside potential, pay a dividend, and are actual investment-grade companies.
Let’s take a look at one of them!
Altius Minerals Corporation
I'm very bullish on both precious and base metals moving forward. However, the pragmatist in me is especially drawn to the base metals, as their value proposition in today’s society is so easily understood.
Today, I have for you an interview with Chad Wells, VP of Corporate Development of Altius Minerals Corporation (ALS:TSX). Altius is the sector’s only diversified base metal royalty and project generation company.
Currently, Altius has 15 producing royalties in copper, zinc, nickel, potash, iron, thermal and metallurgical coal. In addition, the project generation side of their business has drastically grown in overall equity value since 2016, moving from roughly $22 million to $68 million at September 30.
There are 54 new projects since Q1 2016 within Altius’ project generator portfolio and these will not only be the source of cash through equity sales in the future, but more importantly, will be the source of new cash flow by way of the royalties that are associated with most of the projects in their portfolio.
In my opinion, Altius is the best example of intellectual capital and how people are, by far, the most important commodity in any business.
As Wells mentions in our conversation,
“We're a group that sticks to our guns, and believes in our own reasoning and rationale. At the end of the day, it's about relying upon your own technical expertise and surrounding yourself with the right people that are willing to give you the right opinion that is unbiased, genuine and legit.”
I have long been an Altius shareholder and, in my opinion, would say that if I could only own one company in the sector, it would be Altius Minerals, hands down.
Altius Minerals (ALS:TSX)
MCAP - $556 M (at the time of writing)
Shares – 43.0 million
Annual Dividend - $0.16 / share
Outstanding Debt - $120 million
Cash and Public Equity Holdings - $180 million ($33.8 million cash)
2018 Royalty Revenue Guidance - $64M to $69M
Brian: In my conversation with Brian (referring to CEO Brian Dalton) last November, he was super bullish on iron ore and, over the course of the year, Altius has taken big steps to capitalize on the iron ore market. First in March, by increasing your position in Alderon Iron Ore and, most recently in Q3, increasing your position in Labrador Iron Ore Royalty Corporation.
Can you please explain the opportunity you see in the iron ore market?
Chad: We've been a mainstay player in the Labrador Trough since 2004 and 2005. Originally, it was from an exploration perspective where we generated projects and sold them on to third parties. Alderon Iron Ore was created during that time, as a part of that strategy, and lead to us becoming very intimate with the iron markets. The Labrador Trough iron ore fits a niche portion of the global marketplace.
Brian (referring to Altius CEO Brian Dalton) has an innate ability to see around corners so he’s been predicting a bifurcation happening in the broader iron ore market this past few years for high grade iron ore with low impurities, compared to the lower grade, higher impurity stock coming out of the Pilbara. A lot of it's being driven by Chinese pollution standards and emissions targets through their steel mills. You’ve seen the Chinese cut significant volumes of steel production last year because mills were burning lower purity met coal and iron ore.
That's led to a premium for the high grade, low impurity products. While the quoted price for iron ore, let’s say is at $70 per ton, the high grade Trough products are getting better than $100 per ton, while low grade is trading at a discount.
Brian recognized the separation that was coming in the market between high and low grade long before the broader market did. For us, it spawned an investment thesis to buy a substantial share position in Labrador Iron Ore Royalty Company (LIORC) mainly accumulated with the Fairfax preferred money starting in early 2017. LIORC has a 7% gross revenue royalty on Iron Ore Company of Canada’s (IOC) Carol Lake operations, as well as a 15% equity stake. LIORC is a passive type issuer, taking the money that they get from the royalty and then dividending most of it straight to shareholders.
For us it was the opportunity to have exposure to a royalty on a premier iron asset in Labrador, at a time when we thought the market was going to start to take recognition of that.
Over the last year, we increased our Labrador Iron Ore Royalty Corporation holdings substantially. If you look at our average price, which was around $17 a share before we bought the most recent addition of another .4%, LIORC stock traded last week as high as $31. At the same time, the yield of the dividends that we've realized off the asset are quite pronounced. And of course, we treat it as royalty income, effectively, in our per annum royalty revenue. So it fills out some of that diversified commodity exposure. So it's been really good.
Alderon was much more strategic. We were a founder, having discovered the underlying Kami deposit way back in 2005-06. Our recent doubling up, if you will, on Alderon, goes back to this bifurcation in the iron ore market thesis, which we believe is a real thing and that's going to last. It’s also worth mentioning that we bought the additional $5 million stake from Liberty when we agreed to a friendly transaction buying out the balance of the potash royalties that we’d held together in a JV.
With that comes the reality that you're playing Carol Lake, through LIORC. Also, we have a convertible debenture with Champion Iron. Champion is the company that bought the Bloom Lake assets for $10 million in cash plus assumed liabilities of around $43 million from Cliffs, who had sunk nearly US$3 billion of capital into the project during the last iron bull.
The way we see things playing out in the Trough, we believe IOC brings a lot of transparency and reality to the broader marketplace, of the niche, that Labrador iron fits. We think that spills over into Champion, which is a very high margin operation right now, but is flying under the radar. We think the market will take credence and recognition there.
And as this market continues to want more high grade, low impurity iron ore, the next shovel ready project in that district is Kami. For us to buy that stake, on favourable terms, in Alderon from Liberty, brings us back to being that major shareholder with a big stick , it makes a lot of sense for us strategically.
If you reflect back to the last cycle, it was the asset that would have tore the lid off the can for Altius as a royalty generative business. The thing that most of the marketplace doesn't realize today is that Altius is a different type of royalty company. It's not a Franco or a Wheaton, who grows through acquisition. We actually grow our royalty portfolio organically and Alderon is one example of that.
In the past bull market in iron, around 2011, when we thought that Kami was going to get built, Alderon raised a bunch of money with the Chinese partner, Hebei Group. It almost got through the window in the sense of raising the capital to build a new mine. If that had to have happened, not only would we made a couple hundred million on the equity, but we would have had an underlying royalty on that asset at 3% gross royalty that based on the feasibility numbers of the assessment at the time, it would have generated about $25 million per year of royalty revenue for Altius for 20+ years. The reason it didn’t happen is because the iron ore bull market ended so quickly when prices dropped from around $130 per tonne to levels less than half that. If you add the premiums to the current spot, we’re edging closer to $100+ again.
Alderon is an extraordinary opportunity of optionality and because of what's happened in the bigger iron ore market and because of the strategic significance of Labrador iron product in general, I think it happens this cycle.
Kami still needs a billion dollars in capital to get it done, but consider what's going on with Rio Tinto and IOC and the rumors of them IPO-ing their IOC stake, and, again, the success of Champion in restarting Bloom, and it seems a reasonable bet that Alderon will raise the capital this time around. It might get built. If it does, it will differentiate Altius from all of the others because the net asset value just from the royalty aspect that gets created from nothing, is profound.
Brian: That leads into my next question, generally speaking, in your opinion, how difficult is it to raise $1 billion to develop a mine, today?
Chad: Very difficult and, in saying that, today’s market is probably not the one to do it in. Will that market come? Of course it will. One thing that's going to be very apparent in what I'll call the pending bull cycle in commodities, is that the story is going to be about supply this time around, not demand.
What we've seen happen is the world has not developed enough copper, nickel and high grade iron ore mines to sustain just the static needs of society. So ultimately, it's going to be a supply crunch and there's just not going to be enough supply out there.
So that will incentivize commodity pricing, and incentivize capital, and more mines will get built. So will it happen? It will. The iron ore business is a bit different, because there is a lot of iron ore that came on through the last cycle through investment. But most of it is in this low grade or medium grade stuff. So it doesn’t have the strategic niche of this high grade, low impurity ore, which quite frankly, the Chinese need.
So is the capital there today? Probably not. Will it come? It will. Also, I'd say you don’t necessarily have to think that these things are going to be built by the market. There's a lot of diversified miners out there that have good balance sheets, have made a lot of money here in the last few years, again, and are going to be looking for shovel-ready assets to acquire to develop themselves. Maybe some of these things get built in different ways, not necessarily going to be through the capital market conventions of a bull market, if you will.
Brian: Earlier this year, Altius entered the lithium market with the investment in a closed end limited partnership with Lithium Royalties Corporation. The deal gives Altius the rights to buy up to 10% of selected royalty direct investments.
Generally speaking, what criteria is Altius looking for in terms of the ideal investment in the lithium space? For example, does the lithium deposit type or jurisdiction matter?
Chad: We've always been a group that has focused on exploration and investment in bread and butter commodities, which lithium would not fit. We've seen a lot of these specialty themes over the years and we haven't invested in them because their supply and demand fundamentals have been so wonky that we just weren't comfortable with the volatility.
In the case of lithium and the battery metal craze in general, I'd say we missed it with lithium. We didn't necessarily believe that it was going to be one of these bread and butter commodities. I think we've come to realize that it is something that we should have spent more time investing in earlier through our exploration business, but we didn't. Because regardless of how much we try to minimize the forecasts of different battery chemistries in the EV build-out scenario, you just can’t ignore lithium. And the big correction in the pricing this year gives us a more comfortable entry point to be buying when prices are not so near the top. So it is a bit of a catch up game.
What we did do this year is we partnered with expertise. The guys at Lithium Royalty Corp., especially Ernie Ortiz, the CEO of that ship, he's a specialist in the lithium world. He's been an authority in lithium for many years starting as one of the first sell side analysts to take apart the EV forecasts as the story was unfolding for the future demand of lithium.
So, again, what Altius decided, in this case, is to partner with some really smart people who had the groundwork laid and had the best-in-class assets sized up and deals templated. We are investing basically side by side with them through an equity position into that company and our royalty co-vestment rights are pro rata with our equity ownership. But we can pick and choose which ones we actually fund – we don’t have to participate in every one of them, and in fact, haven’t participated in every one so far.It is a different way for us to do it, as typically we've always been the front men running our own ship, whether it's a particular jurisdiction or a particular commodity or a particular idea. In this case, we weren't the first men running, so we partnered with the first man running.
Brian: Warren Buffett is famous for saying, "You must learn from mistakes, but they don't have to be your own." I was wondering if you could parlay that into the 20-year history of Altius.
Are there any lessons in particular that stand out to you?
Chad: Absolutely. It's all lessons. I'll focus on my side of the business, exploration and project generation. In the last bull cycle, we made $200 million plus through our project generation efforts. How did we do that?
We took geological real estate that we had generated with boot and hammer prospecting and came up with big context and big ideas. Then, we effectively sold it on to a third party. In the case of where we made the money selling on to a third party, it was a market participant. What we did is we exchanged geological real estate which is generally illiquid for shares in a fairly liquid company on a stock exchange, versus up until that point in time, let’s say the first 10 years of Altius, we spent a lot of our time doing exploration deals with major miners.
Though that gave us a lot of technical credibility in the product that we generated and we were able to attract those third party endorsements, it was an illiquid business. What I mean is that even though you did a deal, you weren't able to monetize your minority residual stake in the assets.
So the big learning experiment that we had when we look back at the last bull cycle is related to the way that we made money, it was actually trading geological real estate for shares. So when we enter this bull cycle, I don't know that I'd call it a bull cycle yet, the phone started to ring. All of a sudden, here we were as an exploration group, we had assembled projects in nine jurisdictions globally from 2012 to 2016, when nobody gave a crap about the mining resources business, and certainly weren't doing exploration. We were able to waltz into world-class jurisdictions, build meaningful land positions, generated a lot of geological real estate, and basically we sat on it and waited for the market to turn.
Since that time, we've sold 54 (working on 57!) projects and 17 different agreements in less than 24 months. It's been extraordinary. I didn't think it could get so good for us. Every deal we've done, except for one that we haven't announced yet, is that we took our geological real estate, we'd trade it for shares in a third party junior company, or in special circumstances, we even facilitated the IPO of new entities.
Where at the same time, though, where did we end up? We ended up with a big share position in a company that now held the assets that we generated, while at the same time we retained blanket royalties to the underlying projects. Long term sewed up in terms of the mining operations, we get kicked back on our royalties, while at the same time, we're so early into the cycle we're effectively getting seed stock in juniors that go to explore our projects.
So these positions expose us to discovery opportunity off of our balance sheet, on somebody else's balance sheet, at the seed level. It's beautiful! So if you look at our juniors portfolio today, we're sitting on 27 juniors with a value of about $65 million at the end of September.
I can’t make a promise, but I'll say to you I have extraordinary belief that that $65 million will be worth the market capitalization value of the entirety of Altius, roughly $600 million, through the cycle.
We're seeded up on the right deals, at the right time, in the right commodities and right projects that those things are going to deliver value.
It's a cyclical business, you need to be able to, to some degree, trade those cycles. We've been able to create fundamentally long-term royalties that punch through the cycles, that we can realize on over 10, 20, 30 year increments. At the same time, we're getting seeded up on equity that we can monetize and put a big surplus of cash into the bank, so when the market rolls over again, we can put it to work.
So, really, it was about realizing it's all about liquidity and timing.
Brian: That’s a great answer.
The ramifications of confirmation bias should be a major concern for all investors, as human nature dictates that we love to reaffirm our beliefs with confirming evidence. As a manager, the same concern can be said for “yes” men; people who continually support the boss regardless of whether they think they are right.
Personally, in my career as a manager in steel manufacturing, I quickly learned how important it was to surround myself with people who weren’t afraid to tell me what they thought about the projects that were being proposed or the direction that I wanted to take.
In your experience, how important is it to find or listen to disconfirming information?
Chad: The resources sector more than in any other, you shouldn’t run with the herd. You have to go against it. The reality is that this business in general - exploring, mine development, mine construction, mine production - is extremely tough and tedious.
Additionally, you've got to realize that there's a lot of different tiers and categories of humans that benefit from a story advancing versus not advancing. So, a lot of times, you're always encouraged to keep spending and spending and spending, because to some degree it's the mentality to keep things going.
We don't get into that type of philosophy. We're a group that sticks to our guns, and believes in our own reasoning and rational. At the end of the day, it's about relying upon your own technical expertise and surrounding yourself with the right people that are willing to give you the right opinion that is unbiased, genuine and legit.
The resource sector is like no other, it is feast or famine, it's a herd mentality. To succeed you have to genuinely and truly be a contrarian. You have to be a no man versus a yes man.
Altius Minerals is the cornerstone of my personal portfolio and will remain that way for the foreseeable future. In Altius, I see minimal downside risk outside of a broader market crash, which, in reality, would negatively affect just about every company’s share price.
Further, the upside potential from their project generation business looks very promising. First, looking at their development stage royalties projects: Excelsior Mining’s Gunnison copper project, Alderon Iron Ore’s Kami project or Evrim’s Cuale project, there is a lot of potential cash flow that could be soon flowing in Altius’ direction.
On the exploration side of their equity portfolio, you have Adventus Zinc Corporation (ADZN:TSXV), Aethon Minerals (AET:TSXV), Antler Gold (ANTL:TSXV), and Sokomon Iron (SIC:TSXV) to name just a few. Additionally, you have their latest spin out, Adia Resources, which is partnered with De Beers in the exploration for diamonds in Manitoba.
There are no guarantees in life, however, I believe that if you look at the short and long-term prospects of Altius, I think you will agree that they look tremendously bright.
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Until next time,
Brian Leni P.Eng
Founder – Junior Stock Review
Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in Altius Minerals, Adventus Zinc Corporation, Aethon Minerals, and LIORC. All Altius Minerals analytics were taken from their website and press releases. I have NO business relationship with Altius Minerals or any of the other companies mentioned in this article.