This Canadian mining stock doesn’t own a single mine, relying instead on royalty interests in other mining firms for its revenue.
The company has stakes in 15 different mines producing precious and base metals. This lets the company avoid the operational risks and expenses involved in developing mines. But it also makes the stock dependent on a range of commodity prices, and on the ability of mining companies to meet their production targets.
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ALTIUS MINERALS CORP. (symbol ALS on Toronto; www.altiusminerals.com) owns royalty interests in 15 operating mines that produce both precious and base metals, including copper, zinc, potash, and both thermal and steelmaking coal. Of these mining operations, 14 are located in Canada; one is in Brazil. The company also holds a portfolio of exploration-stage projects.
Currently, base metals generate 47% of Altius’s royalty revenue; thermal coal contributes 21%; iron ore, 14%; potash, 11%; steelmaking coal, 3%; and other minerals and investment revenue, 4%.
In 2003, the company acquired 10% interest in the Labrador Nickel Royalty Limited Partnership for $13.6 million. That partnership, in turn, has 3% royalty interest in the nickel-copper-cobalt mine operated by Vale in Voisey’s Bay, Labrador. Currently, Altius is in a legal dispute with Vale over the deduction of Voisey Bay expenses from Altius’s royalty payments. As a result, Altius is not currently generating revenue from its stake. The litigation is expected to reach the trial stage in mid-2018.
In April 2014, Sherritt International (symbol S on Toronto) sold Altius its 51% interest in 11 coal and potash royalties from Alberta and Saskatchewan operations. Altius paid $233.0 million for that stake.
In May 2015, the company also acquired Callinan Royalties Corporation for $112.7 million in cash and shares. The purchase gave the company a 4% royalty on the base metals produced at HudBay Mineral’s 777 mine in Flin Flon, Manitoba.
In May 2016, Altius purchased the right to buy 3.7% of the copper produced by Yamana Gold (symbol YRI on Toronto) at its Chapada mine in Brazil at a 30% discount. Yamana received $75.8 million; Altius also issued Yamana 400,000 of its common shares. (Yamana Gold, Toronto symbol YRI is also a recommendation of our Stock Pickers Digest newsletter.)
Mining Stocks: Investment from Fairfax Holdings could fund new acquisitions
Mainly as a result of these acquisitions, the company’s revenue grew from $11.0 million in 2012 to $25.2 million in 2017.
Over this same time period, Altius’s reported losses worsened from $0.17 a share (or a total of $4.6 million) in 2012 to $1.50 a share (or $65.0 million) in 2017. These losses reflect accounting rules that require the company to recognize its share of writedowns at the firms it invests in. In 2017, Altius recorded an impairment charge of $72.0 million against its Genesee coal royalties.
(As of December 31, 2017, Altius converted its fiscal year-end from April 30 to December 31 to align with industry standards.)
In July 2017, the company issued a $10 million, 8% debenture to Champion Iron Ltd. (symbol CIA on Toronto). That debt is convertible into Altius common shares at $1 per share or, if not repaid after two years, into a royalty on the Bloom Lake iron ore mine. That mine is scheduled to start up again in the first half of 2018.
For the three months ended October 31, 2017, Altius generated revenue of $12.2 million. That 122.8% jump from $5.5 million a year earlier was due to commodity price and production volume increases. Earnings in the quarter rose to $6.7 million, or $0.16 a share, from $287,000, or $0.01 per share.
As of October 31, 2017, the company held cash of $29.0 million. Its long-term debt of $56.2 million represents a low 9.6% of its market cap.
With the January 2018 payment, Altius raised its quarterly dividend by 33.3%, to $0.04 from $0.03. The shares now yield 1.1%.
In late February 2017, Fairfax Financial Holdings Ltd. (symbol FFH on Toronto) agreed to invest up to $100 million in the company through preferred shares and warrants. Altius will use the cash to fund new acquisitions.
Fairfax has a reputation for making savvy investments. It invested in Altius preferreds and warrants, not common stock. That likely gave Fairfax a better deal than what is available to outside investors.
Altius’s royalties provide steady cash flow from a diversified range of commodities, unlike most royalty firms that focus on precious metals. Investing in royalties rather than mines allows the company to avoid the operational risks, capital and environmental requirements that go along with owning mines.
The company’s fortunes are tied to the price of commodities, and this saddles the stock with added volatility and risk. In addition, the company depends on mining companies to achieve their production targets. However, even established mines can run into unforeseeable problems.
TSI Network recommendation: We don’t recommend shares of Altius Minerals Corp.
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