Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle, and today we are breaking down Altius Minerals. I love learning about royalty businesses 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 Bridgeman, portfolio manager at Hosking Partners. And you may remember Luke from our episode on 3i. He's back to talk about Altius today. We go through royalties 101, 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 Altius 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 kick-off to the conversation.
· Luke Bridgeman, Matt Reustle
[00:00:00] S1: Thanks, Matt. Altius 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. [00:00:00] S0: 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 as well. [00:00:00] S1: It's 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. [00:00:00] S0: 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.
· Luke Bridgeman
[00:00:00] S1: 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 are talking about something which really comes off the top line rather than the bottom line. So they're getting a share of revenue rather than a share of profits, and that makes it more difficult to interfere with. So when we are 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 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 Altius has done and which makes it almost unique is it has a project generation business.
· Luke Bridgeman
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 onto the royalty for much longer. So in the last mining cycle, Altius invested – this is the period up to 2011 – Altius invested about $30 million in project generation deals. So a rate of $2 or $3 million 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.
· Matt Reustle, Luke Bridgeman
[00:00:00] S0: 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 in terms of where Altius is buying these royalties or entering into these contracts – is it usually in the build-out 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 derisked. [00:00:00] S1: Once the 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 a very early stage, often before mine development, for example. They come in all shapes and sizes, and Altius has acquired existing royalties off other owners as well. A very big theme of Altius is just counter-cyclicality. So when capital is scarce, there's the opportunity to get involved and structure something which is really interesting.
· Luke Bridgeman, Matt Reustle
[00:00:00] S1: Once the 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 a very early stage, often before mine development, for example. They come in all shapes and sizes, and Altius has acquired existing royalties off other owners as well. A very big theme of Altius is just counter-cyclicality. So when capital is scarce, there's the opportunity to get involved and structure something which is really interesting. [00:00:00] S0: 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 can find them across industries. What is the backstory with Altius? [00:00:00] S1: Despite 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. Altius' 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. They IPO'd a few years later in 1997, raising less than $1 million. The story since then is deploying capital counter-cyclically, and it's now a $2 billion company.