Altius Minerals: Dalton's High Flying Royalty Machine
Issue 44, May 2013
Listed at the onset of the 1998 to 2002 mining bear market, Altius Minerals and its prospect generator model was borne of “abysmal” markets, chief executive Brian Dalton tells Global Mining Observer.
The company’s partnership model was an extension of Dalton’s university days, when he and co-founder Roland Butler funded their studies prospecting each summer in the Labrador Trough, “then hitting the conference circuits to find partners to option the properties.” With the discovery by Chris Verbiski of Voisey’s Bay in 1993 (the nickel deposit that shot Robert Friedland to acclaim), Dalton began optioning projects along the belt to the “hoard of juniors” that “wanted in.”
In 1997, Butler and Dalton listed Altius, only to see the mining markets buckle. “We were partly into our first exploration season. We had a board meeting and you could see that the writing was on the wall. You could see how much we were spending and whilst it was modest, we didn’t have confidence that there were any cheques out there at the price we’d pay for dilution.”
After a “momentous” meeting, the board struck on its partnership model, which minimised expenditure and dilution by optioning projects out, always retaining a royalty. “We really buckled down.” In six months, Altius found five joint-venture partners, including Teck and BHP. The model suited majors who had laid off exploration staff but were willing to fund third parties “on the ground,” Dalton says.
“The best thing that happened to us was that we started in such negative markets. What we’ve always found is that the deal you’ll attract from a major having spent $50,000 breaking some rocks and putting a model together will not be dramatically different from the deal you’ll attract having spent hundreds of thousands, or millions of dollars, so really what you’re doing is shrinking your returns.”
In the last 5 years, Altius has spent $12.8m on its properties, versus $91m funded by partners. In the same period it has received cash and share payments of $60m. “Exploration is supposed to be all about potential and big home runs, but run properly, exploration can be a profitable business. We’ve got a five-to-one return."
The figures do not account for capital gains from companies Altius has spun-out, which Dalton likens to using the stock market as a joint-venture partner. “What we like is to see all of the capital raised for these projects happen outside the Altius structure. In other words, to let the projects fund themselves.”
In 2005, Altius shunted a uranium joint-venture into Aurora Energy, in which it kept a 20 per cent interest; 2 years later Altius took capital gains of $208m. It has since injected properties into Century Iron Mines, Mamba Minerals and Alderon Iron Ore, in which it has a 25 per cent stake.
Nor does the profitability of Altius’ underlying exploration business, which can be likened to a land brokerage business with geological expertise, account for its retained royalty upside. “When we generate a project we automatically assume that we’re not going to have a controlling interest, we’re always going to be passive and that we’re probably going to be partnered with somebody with much deeper financial means, so a royalty is the natural backstop because it doesn’t require ongoing funding.”
Besides royalties over uranium and gold, Altius has a 3 per cent gross sales royalty over Alderon’s giant Kami project. Based on it’s feasibility study, the royalty is worth $167m and will generate $20m to $30m per annum for 30 years, with first production in 2015.
Altius also owns a 0.3 per cent royalty over Voisey’s Bay, bought off Dalton’s prospecting pal Chris Verbiski in 2003. “Back at the time (actually it's not that different now) I had all my assets running on this dream of Altius, so failure wasn’t really an option. The purchase price was almost our market cap at the time, but it was looked upon as the last financing we’d ever have to do.” The royalty paid off its purchase price of $13.6m by 2008.
Dalton plans to “dividend out” the bulk of Kami’s royalty income, putting the company’s C$278m ($269m) market cap, roughly equal to the company’s cash and equity holdings, at a generous prospective yield.
If the market values Altius as a frontier exploration stock, Dalton knows it as a royalty machine. “There are 10 to 15-year lead times from prospect generation to an operating mine,” he says, “so now we’re at the point where we’re starting to see the pipeline go into production. Once we get to a point where there’s substantial royalty income, I think we’ll be hard to ignore, but we’re content to just do it.”
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