Following the strong rally in gold and gold stocks since the March low, we expect a pullback over coming weeks. It is already underway. We do not expect it to be particularly long or deep, and will present opportunities to buy. For now, however, patience is the best course.
Altius Minerals Corp. (ALS:TSX.V, 10.44) reported royalty revenue down on a year ago, with thermal coal and iron ore down while potash was up. Overall, COVID-related shutdowns also contributed to lower revenues. For the quarter, revenue was $16.3 million, down from $21.9 million. The company has withdrawn its full-year guidance because of the shutdowns, with analysts looking for around $65 million in revenue this year (down from $78 million for 2019).
One major negative this quarter was the bankruptcy of Alderon Iron Ore Corp. (IRON:TSX), in which Altius held equity and debt. It owned the Kami iron ore deposit, which has been seized by its major creditor. Altius took a write-off of $0.08 per share, and wrote down its debt to CA$1 million. The royalty on the project remains, however.
The company has a deep pipeline of projects, some in development and others very early stage. But it said it was not seeing many opportunities in the current environment. Balance sheets at base metals companies were not as stretched as they had been, while in the current environment, companies wanting or needing to do a royalty would prefer to do it on any gold by-product rather than on the base metals.
New projects coming on stream
Altius will experience sharply falling revenues from the 777 Mine in 2022, ahead of mine closure; this was previously one of its largest earners. It has four projects in the development phase that are scheduled to replace this revenue.
Most important is the Gunnison copper project, in which Altius has both equity and a royalty; it was expected to produce its first copper this quarter but commissioning is currently suspended. Starting small, the operator, Excelsior Mining Corp. (MIN:TSX; EXMGF:OTCQB), plans to expand production from the initial 25 Mlb/year up to 125 Mlb/year over the next seven years.
Other near-term growth will come from the underground expansion of the Voisey's Bay project, in which Altius has an effective 0.3% royalty. This expansion will extend the mine life to 2034. Mining at Voisey's Bay is also suspended. Both these projects will resume shortly, it is expected.
Major new division in renewables, generating revenue
In addition, Altius has recently made large investments in renewable projects, totaling about CA$100 million, including:
· Last year, a $30 million investment, to be paid over three years, in Texas-based wind and solar energy concern Tri Global Energy LLC; to date, three royalties have come from this investment.
· In March, a CA$47 million investment in Apex Clean Energy for future royalties on North American wind and solar projects in development.
Altius' renewal energy unit already has a management team in place. The plan is to raise additional equity from a major investor by the end of the year and then spin it out as a separate public company, perhaps as early as Q1/2021. Multiples on stand-alone renewal companies are about twice what Altius is receiving in the market, so that should boost Altius' stock price, as well as provide ongoing revenues. The expectation is that Altius will be receiving full royalty revenue on these investments by the end of 2023.
Strong balance sheet with several potential revenue sources
Currently, Altius has $32 million in cash and net debt of CA$122 million. It also owns a very liquid $50 million in Labrador Iron Ore Royalty Corp. (LIF.UN:TSX) shares, as well as a portfolio of junior resource companies, currently valued at CA$34 million, with the write-off of Alderon offset by generally improving prices. This consists for the most part companies with which Altius has joint ventures, or has royalties on a property owned by the companies. It has done a very good job of managing its junior equity portfolio, generating almost CA$1 million from sales at the end of 2019, for example.
There are future sources of revenue outside of the royalties. Major holder and famed Canadian investor Prem Watsa is expected to exercise his warrants in the company by the end of 2022, helping to pay off its debt by mid-2023. There is a partially undrawn line of credit for major new investments. And there is a potential payoff from ongoing litigation against Alberta in a "takings" lawsuit over its coal royalties, but it is not expecting a resolution until the end of 2022. General and administrative (G&A) expenses are low, at CA$6 million a year, of which about $1.5 million is for the renewable energy business, which will go away for Altius when the renewables unit is spun out.
Core holding in resource sector
Altius remains one of our favorite resource companies and a core holding: disciplined and innovative management, a good balance sheet, and diversified assets and deep pipeline. The stock is now back at its February highs, and given our concern about a pullback in the resource sector, we would hold and wait for better prices to buy. If you do not own it already, however, it is good value and can be bought as a long-term holding.
Midland Moves Ahead on Many Fronts
Midland Exploration Inc. (MD:TSX.V, 0.85) continues to move ahead on its existing projects, as well as generating new projects. Last month, it generated over 170 claims in the northern Abitibi region, along the Casa Berardi zone, adding to other claims acquired in recent months along the Detour trend, near to new discoveries by other companies, including the Area 51 discovery of Wallbridge Mining Co. Ltd. (WM:TSX), and in James Bay. Most of this ground has had minimal, if any, exploration, and Midland will likely undertake initial work before readying properties for joint venture partners.
Exploring its projects and seeking partners
The provincial government in Quebec last month announced companies could resume exploration, and Midland is planning extensive work at several of its properties. These include a new drill campaign now underway by Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) on the Cadillac joint venture; and on two 100% projects, its large Mythril project, and Vortex, which saw some very exciting results initially. Midland regained the property from partner Soquem Inc., whose mandate does not include gold, in exchange for regional alliance in the north.
After large spending programs at Mythril, Midland is returning to its prospect-generator roots, seeking more partners for many of its properties. But it will also continue its own exploration on 100%-owned properties. Last week, it commenced exploration at two properties close to Wallbridge's recent discoveries (Area 51 and Reaper) on the Detour Belt. With recent property acquisitions, Midland has several properties along the belt, strategically located. We would expect some drilling this summer.
The company has a strong balance sheet, with over CA$13 million in cash. Again, because of our concern about a gold pullback, we are holding Midland, but would buy on any pullback, perhaps to the mid-70s.
As mentioned above, we think we are likely to see a pullback in gold and resources in coming weeks, so would hold off most buying. Best buys this week would be Lara Exploration Ltd. (LRA:TSX.V, 0.69) and Kingsmen Creatives Ltd. (KMEN:SI, 0.22). We fully expect that in the next week or two, we shall start to see more good buys.
Two of my favorite conferences are coming up next month, one virtual and one live. The Sprott Resource Symposium is going virtual this year, July 22–25, with many of the top names in the resource investing world, and several companies having "virtual exhibits." For details or to register, click here.
Meanwhile, FreedomFest will be live in Las Vegas, July 13–16, the first major in-person conference since early March. For details and to register, click here.
Originally posted on June 7, 2020.
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."[NLINSERT]
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Midland Exploration, Altius Minerals, Lara Exploration. 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: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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Adrian Day's Global Analyst disclosures: Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor's opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2020.