Business Breakdowns
· Matt Reustle, Luke Bridgeman
[00:00:00] S0: 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 Altius? [00:00:00] S1: The company is conscious of the need for diversification, so it will 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 it actually seed funded back in 2017, 2018 as a very early strategic investor. This is a 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. [00:00:00] S0: Do they ever hedge commodity price exposure? [00:00:00] S1: Not as far as I'm aware. Investors want the exposure to the commodity price.
· Luke Bridgeman, Matt Reustle
[00:00:00] S1: Not as far as I'm aware. Investors want the exposure to the commodity price. [00:00:00] S0: 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? [00:00:00] S1: That's a great point because at the mine level, it's 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 5-man project generation team. It's a pretty lean operation. We're not paying for too many salaries.
· Luke Bridgeman, Matt Reustle
[00:00:00] S1: That's a great point because at the mine level, it's 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 5-man project generation team. It's a pretty lean operation. We're not paying for too many salaries. [00:00:00] S0: 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? 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?
· Luke Bridgeman
[00:00:00] S1: It might be 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 5-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. It's 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.
· Matt Reustle, Luke Bridgeman
[00:00:00] S0: 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? [00:00:00] S1: When they've done buybacks, they've talked about being at a discount to net asset value. I think really what's in their head is knowledge of the embedded optionality in the portfolio, which will materialize in the future. [00:00:00] S0: 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. [00:00:00] S1: It's been opportunistic, to fund acquisitions. Debt is not a way simply to juice returns. Given the position Altius 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.
· Luke Bridgeman, Matt Reustle
[00:00:00] S1: It's been opportunistic, to fund acquisitions. Debt is not a way simply to juice returns. Given the position Altius 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. [00:00:00] S0: And does the renewable financing business – I guess the way you described having the publicly listed entity for a period of time. But 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.