Relative to its peer group, Altius Minerals (NASDAQOTH:ATUSF) is one of the strongest performers, but outside of mining circles very few investors know about it.
Before I discuss two of Altius' royalties, I want to first highlight two examples of how the company is bettering its community.
Recently, Altius was recognized in the St. John's Telegram for cleaning up old exploration and mine sites where other prospectors have left waste behind. Those clean-up efforts didn't grab any headlines or media attention, but could lead to future wins for Altius on the exploration, revenue, and goodwill front. In addition, its Twitter page acknowledges staff for volunteering time at a local outreach.
Would you agree that both of those stories are helpful in terms of getting to know Altius better? Unfortunately, neither of them were considered worthy of a press release, so most people never heard about it.
Geology is not an exact science. As a rule of thumb, less than 1 of 1,000 occurrences or discoveries of minerals will ever become a producing mine. Somewhat of a pioneer, Altius has eighteen years of experience in the "project generation" business, a model that many have since replicated.
Unlike the vast majority of metals companies, project generators have no interest in developing and operating mines. Taking a more conservative approach, project generators prefer using other people's money. After identifying and claiming land, Altius looks for a partner. When the project generated is good enough, the partner may even find it. From there, Altius negotiates to retain a minority equity interest or a royalty, sometimes both, for all the hard work on the front end (grassroots exploration).
With approximately 20 projects in its portfolio, Altius' partners will spend around five times more (roughly $10 million) on exploration and drilling than Altius does in 2013.
Altius likes Altius
With roughly $130 million in the bank, Altius (still just a small-cap) has enough weight to splash around the micro-cap Canadian venture exchange. It's a big question for the company right now: How aggressive will it be (and should it be) with the money? Timing can be everything. Through a joint venture called Cranberry Capital, Paul van Eeden, a notable name in the metals and mining investment world, helps Altius think and funnel through the opportunities that arise within the equities markets.
Compared to the metals and mining sector as a whole, its stock has outperformed significantly (without much volatility). Altius repurchased 780,000 shares over the past year. I agree with Altius buying back shares, there is a lot to like about its future potential for generating new projects, advancing existing ones, and increasing cash flows.
In late 2010 Altius staked a commanding (1,685 km2) land position covering a significant portion of the indicated iron formation within Newfoundland and Labrador portion of the Labrador Trough. So what? The Labrador Trough is set to become a major global iron ore basin. The existing infrastructure (port, rail, road, electric transmission) is under-appreciated.
I mentioned the $130 million in Altius' bank account; it also owns 32 million shares of Alderon Iron Ore Corp. (UNKNOWN:AXX.DL). Alderon has financial backing from one of China's largest steel companies, Hebei Iron and Steel. It has already committed $180 million for a 20% stake in Alderon (Liberty Mutual owns 15%). Major players like Rio Tinto, Cliffs Natural Resources, and ArcelorMittal are all heavily invested in the Labrador Trough. With its advanced stage Kami project, Alderon is the new guy in town. If all goes well, Altius' 3% gross sales royalty (GSR) on Kami could start cash flowing by late 2015 (but if recent mining history is any guide, add one or two years).
At $115/tonne iron ore, this royalty could generate approximately $27 million per year in pre-tax revenues for Altius, assuming production of 8 million tonnes per annum. As Alderon's largest shareholder, Altius offers exposure to Kami, iron ore, and exploration upside in the Labrador Trough – all for little to no cost going forward.
Back in 2003, Altius acquired a royalty interest (0.3% NSR) in Voisey's Bay for $13.6 million. So what? Altius recouped more than its initial investment within three years. Voisey's Bay is now owned and operated by the $75 billion conglomerate Vale (NYSE:VALE).
Voisey's Bay is still very young compared to other world-renowned nickel districts such as Sudbury and Norilsk. Each of those resources continued growing in size for decades after initial mining began. The exploration potential and upside at Voisey's Bay is large (nickel production costs are relatively low); that's why it attracted such a large player as Vale. At Vale's current nickel production and pricing, Altius expects the royalty to generate between three and four million in revenues per year. Also, it's important you know this particular royalty doesn't only apply to today's known mines and reserves; it applies to the entire Voisey's Bay district into the future.
Location, location, location...
Relative to its market valuation (just under $300 million) and cash burn rate, Altius doesn't have to worry about surviving this down cycle. The only question is how strong it comes out the other end. Altius is positioned right where investors in metals and mining stand to make the most money in exchange for the risks taken -- at the corner of exploration and royalty.
Daniel Cook has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. mini-Mutual Funds are offered through Daniel T. Cook & Partners, LLC, registered with the State of Florida as a (RIA) Registered Investment Advisor. Office hours M-F 8am to 8pm. Telephone: (561) 596-5067. Custodial and clearing services are provided through Scottrade Advisor Services, member. SIPC.