Transcript: Altius Minerals (ALS) - Cash is King and Organic Growth is the Focus

By
Morgan Leighton
·
June 9, 2021

Interview with Brian Dalton, President & CEO of Altius Minerals. Altius Minerals Corporation is a mining royalty and mineral project generation company. The Company is engaged in the generation and acquisition of mineral resource projects, royalties and investments. The royalty interests cover mining operations producing copper, zinc, nickel, cobalt, precious metals, potash, and thermal (electrical) and metallurgical coal.

Overall, the exposure of Altius Minerals is related to a number of broader thematics that are actively related to electrification and transportation. Altius Minerals is also a majority shareholder in a new company called Altius Renewable Royalties which invests directly in renewable energy projects. Underpinning the mineral side of the business, Altius has the Project Generation Group which identifies mineral prospects in exchange for equity positions and royalties.

We Discuss:

  • 1:59 - Company Overview
  • 3:27 - IPO Completed: A Process Review
  • 3:55 - The History of Altius & Breakdown of Constituent Parts
  • 8:26 - A Contrarian Approach to Timing: Business Model & Approach
  • 13:28 - The Portfolio: Asset Progression & Cash Flow Predictions
  • 17:40 - Understanding the Passive Approach to Growth & Influence on Companies
  • 22:26 - Attracting Institutional Investment & Demonstrating Sustainability
  • 26:58 - Organic VS M&A Growth & Their Control Over the Former
  • 30:19 - Trading VS Cash Flow
  • 31:16 - Message to Market: Bets are Placed, Time to Reap Rewards, But When?

Matthew Gordon: Brian, how are you, sir?

Brian Dalton: Fantastic, and yourself?

Matthew Gordon: All good. I haven't seen you since November. You look like you've been a little busy?

Brian Dalton: It's been very busy. November was the end of the hunting season, so it was time to really get to work again, and you got me now just before the fishing season opens up. Great timing.

Matthew Gordon: I don't know if you’re talking metaphorically or you're actually talking about hunting and fishing.

Brian Dalton: I'm very direct. I've got a lot of kids to feed, you know?

Matthew Gordon: This is true. I'm delighted to catch up with you. I really enjoyed the last session where we really dug down into the business plan, strategy and so forth. Given the timing and events in the market in terms of the EV thematic, Copper price, Nickel price, Gold price etc, it's a good time to catch up. But before we do, as there are lots of new entrants into this mining investment space, can you give me a 1-minute overview and I'll pick it up from there?

Brian Dalton: Sure. Altius is a Royalty-focussed business. Its overall exposures relate to a number of broader themes active in the world now, relating to electrification, transportation, etc, which goes to our exposure to Copper, Nickel, battery metals, Lithium and Cobalt. We also are the majority shareholders of a newly spun-out company called Altius Renewable Royalties, that invests directly in renewable energy projects. Underpinning the mineral side of the business we have what we call our project-generation group, which does its own work, identifying mineral prospects, vending them out in exchange for equity positions and Royalties. The key is that a differentiator for us is that our exposure is more on the industrial side than the precious metal side, so more industrial metals and commodities. 

Matthew Gordon: Since we last spoke, you've got an IPO out of the way. How was that for you?

Brian Dalton: It was fun but it was a lot of work. I’d forgotten how much work these things were. Altius will be 25-years old next year, Altius Minerals, the parent, so a spin-out of these renewable Royalties. It was a lot of work. It may be 25-years before we tackle it again.

Matthew Gordon: It's tough but it needed doing. In fact, what'd be really useful would be for you to break down the constituent parts; you've got Altius Minerals the parent company, you've also got Altius Resources and then the new spinner: Altius Renewable Royalties. Can you explain why each one of those is necessary? Why is it not all under one roof?

Brian Dalton: We started life as a project-generation business and we made an awful lot of money doing that. We then had to figure out a way to deploy that capital effectively that didn't involve us becoming a mining company. That's when we decided to begin investing in buying more advanced-stage mineral Royalties. We've been busy doing that for a number of years. 1 of the components that we acquired as part of a package deal brought us a thermal coal Royalty. That was a Potash-coal package deal. The coal side of things caused us some real grief pretty quickly, I’m sure most people know what's happened in terms of thermal coal and its overall trajectory, and from that we decided to pivot and take whatever revenues were going to come from those coal assets and begin building a new business to invest directly in renewable-energy projects. That's been underway for a few years. It's really been gaining traction, but the truth is that there is a difference between the natural investor base for people who would invest in the renewable energy sector and the minerals Royalty side of things. As that business grew, we made the decision that it should have its own listing, its own source and cost of capital, etc. That's the new spin out. 

Altius Minerals, the original business, that's where all the mineral Royalties are housed. It's where the project-generation business continues, and it's growing our portfolio of mineral Royalties, but Altius Renewable Royalties is now a separate public company that has Altius Minerals Corporation as its major shareholder.

Matthew Gordon: Right, and the basic thematic is set up for this green future that lots of people are now talking about. When you started doing that, they weren't talking about it so much. 

Brian Dalton: No, we've been aligning ourselves with what we felt were major themes, macro trends, that ultimately had a growing sustainability route to them. Potash is necessary for global food security and increasing yields from agricultural land as populations grow. Copper for broad electrification themes, including renewable energy and transportation shifts, Nickel and Lithium are for transportation electrification in particular. Even iron ore, which people wouldn't equate automatically with sustainability trends, you hear a lot about green steel these days. After transportation is solved, the big issues going forward are CO2 and other pollutants that come from what people call these hard-to-fix industries like steel making, concrete or cement-making. On the iron ore side, we have focused on iron ore types that are ultra-low impurity, so those naturally get used in the steel making and result in lower emissions. As the world starts to price in the cost of emissions for steel making, you're seeing the structural shift emerge now, and this new pricing environment for high-quality, low-impurity forms of steel. Again, iron ore might not jump to people's minds in terms of sustainability, but within the overall iron ore complex there are some really powerful structural bifurcation trends emerging and we're right in the middle of it. We're sitting on Royalties on the absolute top-quality iron ore deposits in the world.

Matthew Gordon: What interests me is the timing of all this. You are something of a contrarian, is that what you are saying? Or are you counter cyclical? I don't know how you want to position yourself but you were doing it when people didn't think it was fashionable. It was hard to raise money, not many people were interested in it. That seems to have changed in the market. Are you going to continue doing deals and M&A? 

Brian Dalton: Our bets are in. The window has essentially closed. Let's go to the top of the last market cycle, 2012 or so: we were flush with cash. We made so much money through the last market cycle and we made the decision that we would buy up cash-flowing Royalties to augment the ones that we were creating with our generation business. Even then it wasn't the right time, there were other sources of capital around, but give it a few years and everything comes around in our business, and all of a sudden the whole mining industry looked like it was on credit watch by 2016. Not only was capital becoming very expensive because sentiment was absolutely horrific, everything was going to 0, but at that point, it wasn't just expensive capital, we weren't even competing with other forms of capital, it just wasn't there. So we got really busy in that period of time and that's when we added 14-15 new Royalties.

We picked Royalties that we felt that in the fullness of cycles, would ultimately get invested in and grow when conditions presented again. Guess what? That's happened, and we're at the point where we look forward to our growth coming from, obviously, just the better prices multiplying across these assets, better volume times price, that's the easy bit. Also, the operators of the projects that we hold Royalties on have better prices now, they've got incentivisation in price and investor appetite. The industry is about to collectively embark on a new wave of building. We think we have assets that are going to get an outside share of that investment and will ultimately grow production volumes because we're at that point.

Do we buy at this point? On the M&A side, no. Now is the point where we let the work we did when things were opportune play out and create value for our shareholders. This is key: all of these investments that are going to come to grow up capacities in order to meet demand, they'll be invested in by our partners. We will have no share of that capital cost. It all comes for free at this point in the cycle. It's the work you do in the down market that sets you up for the up market. We're not dollar-cost averagers, we're not going to chase the market and be buyers right through, we've got lots of growth already built into our business for this part of the cycle. We're already starting to think about the next 10-years, when we’re on a down cycle again and where the next M&A opportunities are, but that's not now for us. 

Matthew Gordon: That's what you mean by, our bets are in. I understand that, but what I'm trying to understand, as a new investor looking at you and thinking of coming in, you are at USD$17 today, you were at $10.89 when we spoke in November. Most of last year the price was quite volatile, moving between $10-$15. Looking back over the last 3-4 years, it has been fairly flat. Is the inflection point now because you've placed your bets, because you are going to reap what you've sown. Is that what I should be thinking? 

Brian Dalton: I think so. Rather than just thinking about a company or the market being hot, let's get some assets and ride the story, but it's already too late. Sure, you can get a momentum short-term trade, but your buy price is going to be high. Our bets are in. They are very long term, on very expandable assets. Great cost-curve positions. We just let that play out. That’s the easy bit, as I said, and this is what's happened since November, across-the-board high-quality Iron ore, Potash, Copper - you name it, if you did a percentage increase in the underlying commodities that we have exposure to relative to our share price, we are probably lagging that growth, but all that catches up and it will start to flow through into our revenues now, just on higher prices. It's really simple. 

When I look at the longer-term, more embedded growth that comes, it is what those higher prices do to motivate the operators of the assets we hold interest in to grow out the production volumes. This is Royalties - it is volume times price. Price is already there. Volume is coming. 

Matthew Gordon: Let's talk about a few of those things. If we look at your portfolio, how many assets are material? I know you have cashflows, but how many assets are materially advanced, i.e., will add to the current cash flows over the next 2 years?

Brian Dalton: I'd put that into 2 buckets: expansion from existing cash-flowing assets, and there are a few that are coming there. Lundin owns the Chapada mine. We have a stream there and right now they're drilling a lot of holes to define a resource and they've got an expansion study underway so we'll hear shortly to what extent that line is likely to expand. Rio Tinto owns the IOC Mine, where we have an indirect Royalty interest. They announced last quarter some new investments to grow their production volumes. In the fullness of the cycle I expect they may make deeper announcements around expansions on the Potash side, there's already embedded growth potential there, it's already been paid for. 

There is a long lead time on Potash from investment to when you bring it on, so you tend to pre-invest. From last year's production levels, our volumes of Potash can grow by 50%, just to reach what's already been invested in, but here's the better part: at current growth rates, that would probably fill out the extra capacity that they have in the next 8-10 years, but it takes 7-10 years to build new capacity. Thus, not only are we going to look forward to that current extra capacity getting filled out, somewhere in the reasonably near term we think we will also hear about new investments, the pre-invest in the next growth that will be needed. 

As far as new developments go, Royalties that we might have created and generated more than a decade ago in some cases, because that's how long it takes, some of the ones that we’re really excited about include a Royalty on the Kami iron ore mine in Labrador. That's just been acquired by Champion Iron Ore, a very successful adjacent producer. They're updating Scoping Studies with plans within the next year as to whether or not they're going to develop that. That could be so material to our business. That's a big Royalty on a big project if it goes ahead.

We have a Royalty on Adventus Mining's Curipamba’s project in Ecuador, it’s a super-high-grade Copper project. They've got a Feasibility Study coming out at the end of this year, and if the PEA results hold up it’s a wildly economic project.

We're at that point in the cycle where incentivization is there. Operators and new developers, this is when they make these investments and make those decisions. That's the beauty of this part of the cycle for us, and we've got so much potential growth for free. 

Matthew Gordon: There is the organic growth from existing Royalty streams and then there's the potential from these Royalties that may come on. We've had Adventus on and they have a good, interesting story. They are a public company, which is great so there's a free flow of information there, but in terms of the way that you forecast and project out cashflows and when those cashflows are coming in, you base that on how many metres they're planning, the timings that they indicate. The potential is one thing, but have you got a real sense of the proximity of that incremental revenue that you're looking for from them?

Brian Dalton: Potash is the easiest one because it's already built and there is a demand surge for Potash right now because of agricultural prices taking off.

Matthew Gordon: You do, but you've also got a lot of competition and some big players that control pricing and ability for companies to get into the market, so it's a question of, if there's a route to market and contracts to be signed, it will drive their decision-making in terms of how quickly they ramp this up and how much money they spend doing it. Do you just sit back and wait for information to come or are you in dialogue with these companies?

Brian Dalton: As we are a Royalty holder, we are passive. Our job is to just lay our bets in assets that we believe will play out logically in the fullness of time. Potash is a great example: will competitive threats emerge that make these operators of the mines that we have not ramp up their production rates? Will something more competitive come along? If there's a more competitive source of Potash and already build capacity in Saskatchewan, that can out-compete, I'd like to know what planet it’s coming from. 

Matthew Gordon: But it’s about sales and route to market, isn't it? There are some big players in there, they may have all those things but they’ve got to sell the stuff. I'm trying to understand if you know what the timing of that is, what the scale of the opportunity is?

Brian Dalton: It's a function of demand growth, but the assets that we have Royalties on have such competitive positions that they can at least hold market share by feeding into it. In fact, they're positioned to take market share here. That's the long-term bet we made; our operators and our assets will out-compete other assets. We bought them when you could pick and choose.

Matthew Gordon: Yes, you got in early. Things like Altius, hunting Copper: it’s about timing, do you lie in bed and wait for it to happen? You don't really mind. You've got enough options on the table, is that what you are saying?

Brian Dalton: We're passive. We just picked them up when it was opportune for things to play out near term. Obviously, year-over-year we can multiply our volumes by twice the Copper price – it’s not hard to do the math on that. But again, where we get excited and where this bet really works out, we didn't just buy because the price was low and when the price got higher we made more money. Obviously, there are timing issues related to that because if you're buying at the bottom of the cycle and you go into a wave of upcycled prices, it's going to have huge implications to your IRR. Again the key here is to see those top-quality assets, once the operators get incentive conditions around them, once their investors start screaming at them saying: you're making this much money per unit of production. Double up your production. That's where we're at right now, and that's the exciting part: to see how many of these existing assets in 10-years’ time have a 2X volume component to them, or an idea that we had as an exploration project 10-years ago that in 5-10-years from now is now a major Royalty that has a negative cost base in our structure. 

It’s a long game: this isn't about, the cycle is on, let's do a bunch of stuff. You have to think about this business. The last cycle from bottom to bottom took 16-years. That's the investment timeframe you're dealing with per cycle. It's not for everybody. I know how short term a lot of investing is these days, but fundamentally we know that's the only route forward that works long haul. Also, you don't dollar cost average, you take advantage of conditions when the market wants to sell assets at discounted prices, when operators want to sell product at below the price of the cost of operating and replacing for periods of time, then make your moves. When the market has to pay up, like right now, I got a kick out of some of the stuff coming out of China last week about all these prices being too high, actually, this is the price to actually bring on replaced production. The truth is, you just had 10-years where you bought it at a heavy discount to its real replacement cost. 

Matthew Gordon: You are up USD$7 from when we last spoke in November. I’m sure your current shareholders are very happy about that, but you must be attracting a different type of investor now. This is the point where institutions get interested in you - over $USD700M market cap, and that's quite appealing for you, but they will be asking the same questions as I am, which is: let's look at your cash profile and a sustained cashflow profile going forward. What are you saying to them? What are you telling them?

Brian Dalton: That on average, our assets have a longer duration attached to them than pretty much any other Royalty company. Hence, there is that annuity element to the bottom paid for the base of Royalties that we hold. We've been very focused over the years on growth coming on a per share basis. 25-year anniversary coming up next year, 42M shares outstanding, no rollbacks, lots of buy-backs. Whenever the market wants to serve it up right for us we will buy it back, so it is translating. You can see the per share growth that's happening in the business. For a period of time it's reasonable to expect that again, just to multiply it by the price moves we’ve already had, never mind what might be ahead. The numbers should be really strong, but again, volumes across existing assets will be here, in some cases for 1,000 years within the structure. That's the simple story here: per share, long-term, counter-cyclical growth.

Matthew Gordon: That will appeal to some, but not all. Royalties have generally seen high demand recently, such high demand that 2 things are happening: small new entrants are coming into this space, predominantly going after precious metals, but a few of them are talking your language, using your phrasing: the EV thematic is here to stay. We're going to see what we can do about that, and see how we can create value by jumping on that bandwagon. What is the chance of success?

Brian Dalton: Some will make it work, some will build up assets and projects that will get funded and built because the broader forces are there to make these projects happen. We won't own it ourselves. Most of our history, we were told by investors and other Royalty companies that the Royalty model doesn't work for the non-precious metal space. I don't know if it was just stubbornness but we've obviously stuck with it and I believe that the portfolio that we have now, I wouldn't trade it for any Gold Royalty portfolios. These mines have much longer resource lives. They are more fundamental; they provide real things that our world needs, they will grow, and they need to keep going, and more of them need to be brought on. Those more that need to be brought on for those new entrants - great. We're probably not a big competitor for you for the next little bit, but look out when things get right again, we will be there again.

Matthew Gordon: By right again do you mean cheap again?

Brian Dalton: When the market undervalues assets, at that part of the cycle when the market says, the mining industry is a horrible place where capital gets destroyed and companies are on credit watch again, we'll be taking a different view and stepping in. It's not opportunistic; there's a place for people like us when the time comes.

Matthew Gordon: You have cash for when the time comes? 

Brian Dalton: We have cash for when the time comes. We're going to build it up for a while. That's our job. 

Matthew Gordon: I understand that, that makes a lot of sense: get focused. That brings us neatly onto the difference between M&A growth, which you've been doing a lot of, and organic growth. I'm keen to understand how you influence organic growth, because you've told me you’re going to just sit back and wait and see. So organic growth is at the behest of the companies that you've got Royalties on. Can you influence it in any way, do you want to? 

Brian Dalton: We’re pretty passive in this. The job is to choose well. When you buy you want to pick for a couple of things: you want to buy Royalties on projects that have big resource lives. Whether that's already identified and articulated at the time or whatever, because we're a very technical group we can just see it. We know that there will be plenty of resource here so that when the time comes, this is a mine that can have its life extended. Or the production rate can be expanded because it has enough resource. It's always easier and cheaper to do brownfield expansion.

The other predictor is what is its competitive position? How does it stack up against other assets and the world leaders, based on today's cash-cost profile, or what you think that overall cash-cost profile will be. If you have big resources, super competitive operations, quality operators, predict for that and let it play. You just let it play at that point. There will be massive amounts of capital invested going forward. We're in incentivised conditions again. This is when it happens, and we believe an outsized amount of that's going to come from assets that we hold Royalties on. The beauty of it is that we have no share of that capital as a Royalty holder, but we're full beneficiaries.

To the extent that inflation which everybody is talking about right now, really does rare itself. Whether it's in the form of lower-grade Copper deposits getting built, which is basically geological inflation, and it comes with a higher capital and operating cost. Whether it's governments wanting a bigger stake. Those are inflationary forces. Unions – they’ve had 10-years of falling prices and not much leverage. It's here now. Look out if you don't think all these forces are about to come to bear, it’s not what I remember over the last 25-30 years in the business, this is when all that stuff comes. All of that ultimately builds into the cost of winning different metals, which has to translate into higher prices ultimately. If it’s a higher cost, it's a higher price. 

Some of this price move you're seeing won't really matter all that much. There won't be much marginal impact. Costs have gone up as much, or more in some cases, than the price moves have. Perfect protection is the Royalty, where you get the benefits of the higher price that inflation causes with no share of the cost itself. This is a model for inflation protection.

Matthew Gordon: Yes, we've talked about that with a few other Royalty companies. It's one of the things we're looking at. I keep mentioning cash and cash-on-cash, what are you trading at versus your cash flow thing? That's always a nice indicator of where you're at.

Brian Dalton: In 2016, our cashflow per share would have been sub USD$0.40c. Last year, 2020, that would have been close to $1.20. There's been some really good per share accretion on a cashflow basis, revenue basis, however you want to look at that. In the near term at these prices, that was 2020; we're probably 50% higher than that in terms of commodity prices across the board. Cashflow per share is definitely growing. We’re very disciplined about our number of shares outstanding. We protect our denominator fiercely and let the numerator take care of itself through the cycle.

Matthew Gordon: I appreciate the catch up today. It is nice to see how you've been developing things. You're very clear on your message: no more M&A, bets are placed and you’re now looking to reap the rewards. In terms of that value, you think that will continue to grow, especially in this market.  

Brian Dalton: Yes, it’s the natural rhythm. Things are just playing out the way they always have. 1 comment I will make about these cycles is that they do feel like they're getting longer. 3 Cycles ago, when I was starting out, people talked about a 7-0-year cycle. Well, the last one was 16-years. I think it has to do with the fact that once you reach this point in the cycle, the incentivisation point when prices reach that point where it's permissible to build again, from that point to when you actually get the supply coming into the market, which is what unravels everything. It's that supply response ultimately, that puts you back to the other side of the cycle, it's not easy anymore, it's not quick. So you get incentivisation conditions, but you might be 10-years out before it actually hits the market. These are the things that change. The more things change, the more they stay the same, but there are definitely some nuances and differences to bear in mind. 

Matthew Gordon: You said that given these prices, it could be as much as 50% you are looking at. Is that because you don't really have a line of sight as to how quickly the current companies you’re working with are able to advance their projects? They're just not forthcoming with information? You are taking a passive role in this and you will sit back and see. So pricing this year will be your definition of success, rather than any of this organic growth from existing Royalties - is that what you are saying?

Brian Dalton: Yes, we've crossed that incentive line within the past few months, so the first leg of that is that we will get the benefits of those higher prices. Now you're looking for signals from the operators about investments in assets that we hold, that will ultimately lead to volume growth through the duration of this upcycle period. Everything in its time.

Matthew Gordon: I agree. I also like the inflation-proof investment. I’ve always really enjoyed that. I suspect we'll see you in about 6-months’ time. 

Brian Dalton: Probably somewhere between the end of fishing season and the beginning of hunting.

Matthew Gordon: Now we know how to track you down. Good.  Thank you very much for today, it was really interesting.

To find out more, go to the Altius Minerals Website

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