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A Core Holding Keeps Getting Better
Contributed Opinion

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Adrian Day Fund manager Adrian Day reviews one of his favorite resource companies and updates a few others.

Altius Minerals Corp. (ALS:TSX.V, 13.07) is one of our "core" resource companies. It has tremendous expertise in grass roots exploration and has leveraged that skill into a portfolio of royalties. CEO Brian Dalton has also demonstrated—more than most in this sector—the patience and discipline needed to take advantage of the inevitable cycles.

Altius has used the downturn of the last few years to accumulate a large package—over 2 million hectares in nine different locations—of prospective ground. Now with the resource sector coming back, they are seeing it as a time to harvest. Some of this is traditional joint ventures, and some the sponsorship of new public vehicles in which Altius has specialized.

New zinc company
Last month, Altius announced the IPO of Adventus Zinc Corp. (ADZN:TSX.V), with exploration land in Eastern Canada and Ireland, and $10 million from the offering. In addition to a 27% share interest, Altius maintains a royalty of the land. Altius has employed this strategy before, with varying degrees of success. Even with Alderon, where the collapse in the iron-ore price stymied the plans for bringing the Kami project into production, Altius has more than regained its original investment, and still holds shares and a royalty.

We expect to see more such transactions in the period ahead, with perhaps a copper company (to include many properties in Chile) the next.

Starting to work joint venture properties recently acquired
In addition to these transactions, Altius is attracting the interest of many companies who want traditional joint ventures. Although senior companies are not yet showing great interest, junior companies are. These companies want projects. "The interest in our projects has never been stronger in the history of our company," Dalton said.

One such agreement is between Altius and Midland Exploration to explore for metals in the James Bay area of northern Quebec. Two well-funded and well-respected exploration teams coming together provide intriguing potential.

A counter-cyclical approach yields results
This is a clear indication of Altius' counter-cyclical approach, building assets in the downturn, and dealing them as the markets come back. Another indication is its approach to the balance sheet. By nature, debt-adverse, Altius took on debt at the end of 2013—when the markets and their outlook appeared pretty bleak—to purchase a package of royalties.

Since then, it has paid down that debt from cash flow, with currently $80 million of debt, $20 million in cash, and about $80 million in equities. The equity portfolio has gained significantly over the past 15 months from the recovery in the market. Selling down the equities (while always keeping its royalty interests) to pay down its debt would, Dalton suggested, be a good use of the equity gains.

Resources are extremely cyclical, while most miners are notoriously pro-cyclical, taking on debt and over-paying for large marginal projects at the top, and subsequently selling the projects for losses and issuing new shares to pay off the debt at the bottom.

Brian Dalton and Altius (and only a few others) in this stand apart from the industry, with the desire and ability to take advantage of the cycles. Significantly, when I asked him recently about the company's debt, he said the company would pay down debt from the sale of its portfolio of shares and from cash flow. "At the bottom of the next cycle, we want to be in a strong financial position with lots of cash" to take advantage of the assets available. Few in the industry are looking ahead and planning for that next bottom.

Higher resource prices and new funding
Two other significant developments have helped and will continue to help Altius. First, of course, is the general rally in most commodity prices, so that its revenues have increased over expectations. For 2017, the company had been expecting about $40 million in revenue, while at today's commodity prices, revenue from the same assets would be well over $50 million.

Second, last month, Fairfax Financial, led by Prem Watsa (who has been called Canada's answer to Warren Buffett), made a strategic investment in Altius of up to $100 million. So far $25 million has been issued, and Altius has the option of drawing down the additional $75 million by the end of the year. The investment is in preferred securities, which can be redeemed by Altius after five years, with warrants, exercisable at $15 per share.

Access to capital, if needed
The deal is very positive for Altius, providing it with attractive long-term capital, which it can draw on at its option, and equally important perhaps providing access to Fairfax's strength and experience.

Characteristically—at a time when most junior resource companies are raising money and increasing the size of the raises "because the money was offered"—Altius emphasized that it would draw down more funds only if they were needed.

A volatile stock
Altius is a core holding, but the stock can be volatile. One example is in early February when the stock fell to just north of $11 after Altius announced a write down on one of the coal royalties it acquired in 2013. This came in response to Alberta's plan to phase out coal by 2030, and was triggered by a compensation agreement reached between a power plant (Altius' customer) and the government. The reality is that the royalty's value had already been adjusted by analysts who follow the company. In addition, the royalty will continue to pay for the next 14 years. In actuality the write down could be viewed as positive, since it opens the possibility of Altius receiving compensation for loss of value to its royalty.

Given the recent recovery from $11 to $13, we would wait for better opportunities to add to positions. But on any weakness, we will be strong buyers of this top-quality resource company.

New joint venture for Miranda
No sooner had we written our brief overview on Miranda Gold Corp. (MAD:TSX.V, 0.095 x 0.10), in which we expressed the hope we would "see the fruits of Miranda's work in Colombia" in coming months, than the company announced a joint venture with IAMGOLD Corp. (IMG:TSX; IAG:NYSE) on its prospective Antares property. IAMGOLD will commence work shortly—with a guaranteed 2017 spend of $100,000; in the first year after the government grants Miranda's application, IAMGOLD must spent $750,000 to maintain its option, a total $5 million spend required to earn 51%.

This is a good agreement and good partner for Miranda. IAM is well funded and already active in Colombia (signing another joint venture in Colombia the next day). In announcing the agreement, Miranda said it intends to "maintain the momentum" of acquiring and joint-venturing additional projects in Colombia. Miranda firmed on the announcement, but did not move much, providing a good opportunity to buy the stock.

Stock portfolio up
After our recent comments, Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, 10.97) reported year-end financials, generally in line with expectations. One notable fact: the share portfolio, with a cost basis of $155 million, is now valued at over $255 million. The market does not reward Osisko much for its stock buying, but the strategic positions allow the company to acquire royalties. Also the company emphasized its commitment to the dividend. Last year, it paid out a little under 30% of cash flow, for a yield of just over 1%. It has targeted around 25% of cash flow to be paid out. Buy on any additional weakness.

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."

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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Altius and Osisko Gold Royalties. 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, Miranda and Osisko Gold Royalties. 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. 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.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
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