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- [00:00]
Matt Russell
This episode is brought to you by Portrait. It's the AI research system that I used to prepare for today's episode and for all business breakdowns episodes. Portrait was built by former buy side investors and they understand great Investing isn't just about having more information from low quality sources. It's about having the right information organized the right way. And if you listen to the show, you appreciate Diligence consists of many things Diving into the history of a business, framing the nuanced competitive dynamics, tracking key signposts around your thesis. And historically that would take up material time that you do not have. But Portrait is basically like adding an army of analysts to your team. It's powered by an AI system specifically designed for investment research workflows so you get nuanced idea generation. Portrait assesses the same types of qualitative attributes that we discuss on this show and that can help identify businesses which fit your frameworks. Portrait also customizes research report generation and I used Portrait to generate a primer and lay out bold bear cases ahead of today's episode to help frame the conversation. And third, there's intelligent thesis monitoring. And that's where Portrait assesses thousands of data points across value chains each day, extracting the insights driving the business again. All this work would typically take hours and hours and hours. It's at your fingertips now. Visit portraitresearch.com to start your free trial today.
- [01:46]
Podcast Narrator
This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from and we are here to bring them to you. To find more episodes of breakdowns, check out joincolas.com all opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
- [02:34]
Matt Russell
This is Matt Russell and today we are breaking down Altius Minerals. I love learning about royalty businesses, people, because ultimately royalties are all about underwriting and structuring risk and duration and thinking about the concepts of academic finance. And really, it feels much more relatable to investing than pure operating. I'm oversimplifying, but this is another great example of a unique royalty business. And my guest is Luke Bridgman, Portfolio Manager at Hosking Partners. And you may remember Luke from our episode on three I He's back to talk about Altius. Today we go through royalties one on one and in particular as it relates to Altius and how they've evolved over time with their exposure to different commodities within metals and how they've made a push into the renewable sector and all of the capital allocation considerations that come into play with this business. So as you can hear from my voice, this was a fun one. It's a fascinating business that is probably off the radar but very interesting to learn about. So please enjoy our conversation on Altous Minerals. All right, Luke, it is great to have you back on business breakdowns. Today we are talking Altius Minerals, which is a name I was unfamiliar with prior to our initial conversation and doing some research about it. It's one of these fascinating names that is kind of in the niche category, I think, for investors, but really, really interesting business and I'm excited to get into it today. Maybe we could just kick off with how you would describe it to those that aren't familiar with it, similar to myself, and that can give us a kickoff to the conversation.
- [04:29]
Luke Bridgman
Thanks, Matt. Altous Minerals is a royalty company and it's a royalty company which is focused on base metals, which makes it a little different from other royalty companies which tend to focus on precious metals or oil and gas. As well as doing base metals, it also has ventured into doing royalties on renewables, which makes it extremely different from other royalty companies.
- [04:53]
Matt Russell
What would you put into the category of base metals? I can kind of fill in the blanks on precious metals, but if there's a description that you would give to it or things that you would bucket into that category that would be helpful
- [05:03]
Luke Bridgman
as well is things like copper, which is obviously in demand in the energy transition, battery materials like nickel and lithium. And then it has minerals used for agriculture like potash, it has iron ore and it has some gold as well.
- [05:20]
Matt Russell
You mentioned it's a royalty business with oil and gas, with the minerals. You see these businesses in these industries, but can you talk about how they actually fit in to the capital markets dynamics, why they exist, what they represent? Just a little bit about the business model, which again I think is unique and it speaks to kind of the true finance angle of things and how people think about it from that side of the equation.
- [05:48]
Luke Bridgman
When we think about royalties, we often think about things like music royalties. So it's like a perpetual interest in a revenue stream. A more formal definition might be a passive interest on future cash flows from what will be an extractive operation in the future. I think what's key here is we're talking about something which really comes off the top line rather than the bottom line. So we're getting a share of revenue rather than a share of profits and that makes it more difficult to interfere with. So when we're talking about very long dated assets or projects, the provider of the royalty can be fairly confident that whatever happens to markets, whatever happens to businesses, whatever financing is required, nevertheless they will continue to have a claim which will have some value in the future. Mines tend to be relatively long lived assets and therefore having a simple structure like that which is more difficult to interfere with is important. And so it compensates for the geological risk which, which a miner is undertaking by taking that revenue share. But every royalty is different. Some royalties have costs taken out in terms of insurance or transport or the cost of smelting before, and some don't. Some royalties are in fact stream. So it's more of a sort of contractual financing arrangement rather than an actual interest in land which could be registered. They come in all shapes and sizes and I think one of the key features of Altius, it has a huge amount of experience in terms of structuring and putting together these royalties so that you can maximize value into the future. Another way of approaching what a royalty is is really to think about how they came about. When you think about the Canadian Railways, they were actually funded by the sale by the Canadian government of mineral royalty interests on the land which the railways would go through to connect east and west. And those royalties still exist. Funnily enough, they are perpetual. They're mostly to be found in a company called Prairie Sky Royalty. Altius royalties have come about through two ways. One, Altius has simply acquired them from owners of mines or mining companies which have needed to raise capital in order to fund development. But the other thing which LTS has done and which makes it almost unique is it has a project generation business. So it goes out, it has a team of geologists and it's real bootstrapping. They do the geological work, stake a claim, structure a royalty into that claim, and then over time they might sell that claim to another company or they might list it. So they end up with a royalty and potentially an ownership interest in a company which is exploiting that mineral interest. And over time they can hold onto or sell that equity interest, that ownership interest, but it will tend to hold on to the royalty for much longer. So in the last mining cycle, Altius invested, this is the period up to 2011, Altius invested about $13 million in project generation deals. So rate of two or three million dollars a year, small amounts of money, but it monetized $200 million from selling the equity proceeds from those while holding onto the associated royalties. So that's how royalties come into being for owners of mines to raise capital for a project generation company like Altius to actually create the thing in the first place, or for governments to sell the mineral interests which they have in land in order for other projects to be accomplished.
- [09:37]
Matt Russell
It's a concept that I think really gets to the academic theory of finance and thinking about these extended periods of cash flows. To your point, you mentioned a lot of the interesting dynamics about it being at the top line versus at the bottom line and why you would consider different things here. I think you answered this in the last part of that answer. But. But in terms of where Altius is buying these royalties or entering into these contracts, is it usually in the buildout stage of a mine where there's still a lot of risk that exists? I'm just wondering where in the spectrum of a mine and its production that royalties will typically be sold. You can imagine the price of that royalty will differ based on how much the mine is de risked.
- [10:24]
Luke Bridgman
Once a mine is up and running, then the owner of the mine is going to be reluctant to sell any sort of equity interest in that project. So it tends to be a lot earlier. And Altius has that geological expertise, which means it's comfortable transacting and structuring deals at very early stage, often before mine development, for example. They come in all shapes and sizes and ALTS has acquired existing royalties off other owners as well. A very big theme of Altius is just countercyclicality. So when capital is scarce, there's the opportunity to get involved and structure something which is really interesting.
- [11:04]
Matt Russell
Can you tell me the origin story of Altius? I think there's other mineral companies that exist, or, excuse me, mineral royalty companies that exist. You could find them across industries. What is the backstory with Altius, despite
- [11:18]
Luke Bridgman
being quite an international company today? And it's got interest in mines in Canada and Brazil, Argentina, even Mali in Africa, as well as even more pre production projects in other countries. Altia's story really begins 29 years ago in a university dormitory room where a geology student called Brian Dalton and a few fellow students earned some money for themselves to fund their way through college, stalking and then reselling projects. IPO'd a few years later in 1997, raising less than a million dollars. The story since then is deploying capital countercyclically and it's now a $2 billion company.
- [12:03]
Matt Russell
You make it sound awfully simple in terms of the way that they approached it. I know it's not the case. In terms of what they did to differentiate themselves, it sounds like they have geologists. I don't know how much of a differentiator that actually is that feels like it could or couldn't be the thoughtful capital allocation, which seems incredibly important in this business. But what did they do to stand out from a peer group that existed or from anyone who might be competing over these same deals?
- [12:32]
Luke Bridgman
The key is to be countercyclical. Mining is inherently a cyclical business. And I think Altier's success has been to deploy capital ahead of cycles and to harvest capital as those cycles peak. So way back, the uranium cycle in the first decade of this century was a key part of Altius development, which it successfully exited selling its uranium exposure in around 08 and 09. And this is testament to the very strong management at Altius, its long term approach and its countercyclical mindset. It really sat on its hands until around 2013, 2014 when it started looking for cash flowing royalties and deployed into a few big deals in the middle of that decade, 2015, 2016, when they were really the only game in town when it came to providing capital to mining projects after the super cycle had come to an end.
- [13:31]
Matt Russell
You touched on uranium exposure that they then sold. How have they approached just the diversification of mineral exposure? And you went through a long list at the beginning of this conversation. But what is the general thought process in terms of are they making a call on these cycles in some way or another based on their exposure?
- [13:53]
Luke Bridgman
They are first and foremost geologists, royalty experts, but mineral agnostic. The aim is to invest at cyclical lows when prices are low and capital is therefore too expensive for the developers of these projects and the operators. And then as the cycle turns, the projects tend to get developed when capital becomes available and that's when prices are higher. From a royalty point of view, that means that Altius is benefiting not only from higher prices, but but also it's more likely that that's going to see an expansion in the project size, brownfield opportunities, all sorts of exciting things happen and the capital to make those things happen is provided by somebody else. So Altias sits there owning the royalty and the operator of the mine, or someone like that is the one writing the check to fund the capex to see the project scope enlarge or whatever happens. So in terms of minerals, it's been involved, you know, in the early days in nickel. In the Voyses Bay project in Canada. I mentioned uranium. It's got into thermal coal in Canada. And potash. It has royalties over most of Nutrien's and Mosaic's Canadian potash assets, which represent 25% of global potash production. And these mines supply 90% of the potash used in the US. Those were royalties they acquired in 2014 and they have a remaining life of at least 50 years. And production has grown about two and a half percent annually over the last few decades. That's potash supporting the world's growing need for agriculture. There's gold, there's lithium, and then there's also renewable energy, which we can come and talk to.
- [15:49]
Matt Russell
One more question on the diversification geographies. They're everywhere. That also just happens to do with where these minerals can be mined. When you think about their expansion abroad, is that a natural thing in terms of they're working with companies that are generally based in regions that they're familiar with. You can obviously paint the picture of there being more risk once you move out into certain developing countries, emerging market countries, and just how the operations might work there. But how has that gone and is it very similar story to how they think about the mineral exposure?
- [16:25]
Luke Bridgman
Because a royalty owner is a little more passive than a mining operator, I think they are more alert to political risk, for example, and their ability to enforce this contractual interest or this interest in land. So it does make it more likely that their royalties are going to be found in developed world jurisdictions starting in Canada and then going south from there. They do have a lithium royalty in Mali, which is hugely exciting through a company which they've recently acquired. But most of their royalties would tend to be in developed world jurisdictions. And then there's obviously diversification between jurisdictions within the LTS portfolio and diversification also in terms of counterparties and minerals themselves. So diversification is a key feature of Altius and makes it a relatively attractive one stop shop for investors who want some simple exposure to mining and mining companies, but don't really know where to
- [17:29]
Matt Russell
begin to get to the renewable business, which I also understand there's a financing arm that's attached to this. Can you walk through what the strategy there is in renewables and how it may differ from what they've historically done?
- [17:46]
Luke Bridgman
Generally a royalty is an interest in land and renewables are obviously to do with the sun and the wind, which are difficult to claim ownership of Altius has been fairly innovative devising the intellectual property to allow it to take some sort of contractual interest which is not an interest in land. It did this almost ten years ago now. And what it's done is it's effectively turned itself into or has created a financing product which is a little like a mezzanine product, which provides capital to renewable developers to fund that stage in their life cycle where they are assembling the land rights and the permits and the contracts to put together a project which they then go out and raise financing for. But that sort of earlier stage is something where there's very little to show and more difficult to finance. But because Altius is able to retain an interest in the project which is subsequently developed, it's able to take a royalty interest in these pre production projects. So now it has royalties over power generation projects in the US totaling 2.9 gigawatts, with a further 1.7 gigawatts under construction and 14 gigawatts in development stage projects. And it's done this in a way where it initially listed a business called Altius Renewable Royalties to bring in a little more capital to diversify its risk and to make sure it didn't have too concentration exposure. But unlike mines which eventually deplete a renewable project, theoretically last forever, it's just another example of the sort of contrarian and creative application of the royalty approach and reflecting LTS's ability to exploit the need for capital when capital is scarce.
- [19:45]
Matt Russell
You mentioned they created another vehicle for the renewable financing. Was that a listed vehicle, like a separate security?
- [19:55]
Luke Bridgman
Yeah, they floated a business called Altius Renewable Royalties. Altias retained a majority stake in that listed company and then that company had a 50% stake in a joint venture with a private equity firm. It was that vehicle which was ultimately
- [20:11]
Matt Russell
providing the royalty to frame this business. I assume it's similar where the financing is provided upfront. That initial financing would be taken out at some stage when the capital is gathered to build out construction, but they maintain the royalty. Is it similar to one of the earlier examples you described about the equity plus royalty? Except in this case it's in the form of essentially mezzanine plus royalty.
- [20:40]
Luke Bridgman
It's similar. They don't actually end up with an equity interest in the generation project. They only have the royalty itself. But there is an intermediate stage where they've provided the capital, the project doesn't yet exist. And so they will actually have a claim over a range of different projects. And then royalties are put in place until they've achieved some minimum IRR hurdle. And that's what crystallizes Things from an
- [21:07]
Matt Russell
investor's perspective, do you view that renewables business drastically different from. From the remainder of the. What I would call legacy traditional minerals
- [21:17]
Luke Bridgman
business is less diversified. You are relying there on a single structure. But it has been hugely successful since establishment. The listed vehicle has actually been taken private. Altius has found a partner to delist the company, while Altius has held onto its own stake in order to make sure that is sufficient capital available to fund the growing pipeline of opportunities which are in front of it. So I think that's a measure of the success it's had.
- [21:50]
Matt Russell
I was wondering when we were talking about that previously listed vehicle, felt like there was something else there. But I think that may have finished the story for me there just a transition into the business model. I think it's fairly straightforward in my mind. But I think of this, once we're producing and we're getting that royalty, it is essentially a volume times price equation. Both of those things can swing. But is that the right way to think about the business?
- [22:21]
Luke Bridgman
I think that's fair. It's pretty simple from that point. And then of course, if the wind turbine is replaced or the solar panels are succeeded by some new, more efficient technology, then Altius would continue to have a royalty over those new facilities.
- [22:36]
Matt Russell
So it is potentially forever at a high level today. If you look at Altius broadly, how do you think about the diversification across commodities revenue streams, whatever it might be, you have all of these different royalty streams, price times volume. Do you think about very extreme exposure in one category versus the other? How would you just simplify that? In terms of the revenue exposure for
- [23:03]
Luke Bridgman
Altius, the company is conscious of the need for diversification, so we'll bring in external capital in order to avoid excessive concentration, simply because it has particularly attractive opportunities in front of it. So it's been very good at maintaining the mineral diversification, most recently with the acquisition of a company which had actually seed funded back in 272018 as a very early strategic investor, this business called Lithium Royalty Corporation, at the end of last year it acquired the rest of that company and delisted it at a great time in terms of the lithium price, which is now double what it was then. So again, great countercyclical investing. But in terms of diversification, commodities are cyclical and volatile. So if you're trying to be countercyclical, you should at least be diversifying away against commodities or jurisdictions or counterparties or whatever.
- [23:59]
Matt Russell
Do they ever hedge commodity price exposure?
- [24:02]
Luke Bridgman
Not as far as I'm aware. Investors want the exposure to the commodity price.
- [24:06]
Matt Russell
That makes sense. The beauty of these businesses is that you don't have the heavy operating expenses associated with the mine itself. What does go into any overhead expenses or what gets between revenue and profit or earnings? At the end of the day, what are the major expenses that actually exist in Altius?
- [24:27]
Luke Bridgman
That's a great point because at the mine level is somebody else writing the checks, both for capex but also opex. So there really is a free ride and all you're left with is the embedded optionality from these royalties which you've paid for. These mine lives are very long, so the value of that optionality is very high. In terms of Altius itself, it has a headcount of just 17 people. Half of those are finance administration and half of them are technical and that would include the five man project generation team. It's a pretty lean operation. We're not paying for too many salaries.
- [25:03]
Matt Russell
It is truly a beautiful business model, particularly once you have some scale to it in terms of what can be done. Does not make it easy, but it is a beautiful business model. On capital allocation and cash flow you've referenced, it seems like they're very thoughtful about not just what they acquire and when they acquire it, but what they monetize and when they monetize it in terms of shareholders, do they step in with buybacks, dividends, anything along those lines? Like is that a piece of the equation as well when it comes to capital allocation? And what is the history there in terms of their framework for thinking about acquiring new assets versus buying back shares at moments in time it might be
- [25:47]
Luke Bridgman
worth just saying a few words about the founder. So I mentioned Brian Dalton. Founding the business 29 years ago in his college dormitory. He remains the chief executive. He's 53 years old today, just signed a new five year contract. He is key to the business, owns 2% of the equity at least based in Newfoundland, which is as far from Toronto as it is close to London, give or take. So really a sign of the independent thinking which Brian brings with him and which defines Altius. Brian is a geologist, very long term thinker, real skin in the game and has demonstrated an innovative approach to deploying capital and a real countercyclical mindset. So over the history of the company, it has issued equity to fund certain acquisitions. It's also bought back shares when they're cheap. It's had quite a lot of debt at certain moments and less debt at other moments. Is currently net cash, having sold a couple of very large equity interests which arose out of the project generation business, there isn't a rigid capital allocation framework. This is really a management team which has earned the right to take those decisions and to do that in an intelligent and countercyclical way.
- [27:13]
Matt Russell
In terms of the buybacks, was there any reference to what made them decide? Obviously there's some valuation or opportunity relative to what's available in the market and why it might be accretive. But did they reference anything price to book or any type of valuation metric that would make them consider the buyback opportunity relative to other investments in the marketplace?
- [27:37]
Luke Bridgman
When they've done buybacks, they've talked about being a discount to net asset value. I think really what's in their head is is knowledge of the embedded optionality in the portfolio which will materialize in the future.
- [27:51]
Matt Russell
And your point on debt? I mean royalty streams are very advantageous for raising debt capital because of the visibility and why a credit investor would love to lend against those. You mentioned it's net cash today. When they're seeing those debt levels rise, is it typically associated with acquisitions or anything else they use debt for? I think sometimes it can be really tempting to bring in leverage to a business where creditors are happy to provide that leverage.
- [28:24]
Luke Bridgman
It's been opportunistic to fund acquisitions. Debt is not a way simply to juice returns. Given the position LTS has as the first port of call for anyone who's looking to raise royalty capital, they need to be opportunistic to be able to take advantage of these incredible opportunities as they arise and does.
- [28:42]
Matt Russell
The renewable financing business, I guess the way you described having the publicly listed entity for a period of time, but you know, having that vehicle in terms of attracting capital to finance the financing business, is there anything else that it does to the balance sheet or cash flows that are unique in terms of tying up a lot of cash? Maybe because it's earlier stage or anything along those lines which change the profile of the business in any material way.
- [29:14]
Luke Bridgman
What's quite interesting is over the last couple of years Altous has monetized its equity interest in a gold project in Nevada. It's pre development, but it's owned by Anglo Gold. This is an interest which it originally acquired in its project generation business for $400,000 and it's recently sold part of its exposure to that to Franco Nevada for $250 million while retaining a significant royalty interest for itself. And it's also sold a separate royalty to Triple Flag, which is another Precious Metals Royals Company for about $200 million. A phenomenal return on the original investment while retaining continuing exposure to it and really strengthening its balance sheet. So the risk of future dilution from other opportunities to deploy capital is reduced. So a really good example of the project generation business working and the royalties have not yet even started paying out. So that's very exciting.
- [30:23]
Matt Russell
The fact that they retained an interest after realizing those sales at those prices makes it hurt a little bit more for me. But I'm sure as an investor it's quite interesting and really speaks to the thesis behind that opportunity. Really interesting. Something I need to read a bit more about after our conversation. When you think about risks with this business, you're going to have cyclicality on commodity prices, which we've talked about. Capital allocation feels like the most important thing. Is there anything else you would point to just in terms of risks that you think about as an investor?
- [30:57]
Luke Bridgman
You might add expropriation to that list you just gave. But I think that's mitigated by being mainly in developed world jurisdictions. So less of a risk there than we've seen with some mining companies. I think for me one of the biggest risks is that it gets bid for by a precious metal royalty company. Altius trades at around 1.4 times net asset value. And you can justify that premium because of the embedded optionality in projects which are visible but are not yet producing precious metal royalty companies trade over two times net asset value. So they have much lower cost capital. They might take advantage of that to potentially acquire Altius. Remember, Altius has some sort of gold exposure. If they could acquire Altius and apply their own multiple to Altius, then that would be an opportunity for them. And that would be a risk as far as I'm concerned. Because it would be a real pity to see this countercyclical value creator acquired by someone who's just playing a dollar cost averaging game.
- [31:59]
Matt Russell
What explains the premium for the precious metals businesses in terms of the 2 times nav?
- [32:07]
Luke Bridgman
It's a bit of a head scratcher. I think if you were to ask them, they would justify it by saying that all always end up having a much longer life and a greater scope than is reflected in the net asset value. But they are also a means for investors to get exposure to the underlying precious metal.
- [32:24]
Matt Russell
That also makes sense. Fascinating. Very interesting business and one that I think any which angle that we took it at. We could talk for extremely extended periods of time. But I think you've done a great job covering everything. When we close up these conversations, we always like to hit on the lessons that you could potentially take away and apply elsewhere. What would you say about Altius that stands out in terms of applicable lessons that you might be able to use elsewhere?
- [32:55]
Luke Bridgman
Strong managers like Brian Dalton are difficult to come across, almost unique. Number two, taking a long term approach as they have and do is really important and I think that surfaces opportunities which other people wouldn't be able to surface and I think the project generation business exemplifies that. Countercyclicality is written throughout Altias playbook and that's really what it's all about. Embedded optionality when you have exposure to very long lived mining projects there is so much which can happen in the future and the company talks about tripling its royalty revenue from about 60 last year to $200 million by 2030 on the basis of projects which are already in hand. And then beyond that there are even bigger projects. So there is a lot of upside there. Altius is also an example of the alpha that exists between silos, between asset classes. It's neither a mining company nor a conglomerate. It's one of a kind and therefore overlooked by a lot of investors. Maybe not so well understood and that's a real opportunity for anyone who can do the work. Those would be the key points to hit on.
- [34:09]
Matt Russell
I love it, particularly that last lesson where this doesn't fit cleanly into a specific bucket. It combines a lot of different aspects but at the end of the day I go back to the academic approach to investing and thinking about this very clearly in terms of what a royalty represents and embedded optionality and a lot of these concepts that you see pretty cleanly in this one. So thank you Luke. It has been a fascinating conversation. Again, really appreciate you joining us.
- [34:36]
Luke Bridgman
It's been a treat. Thanks Matt.
- [34:38]
Podcast Narrator
To find more episodes of breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out joincolasis.com that's J-O-I-N C O L O-S S U S dot com.