Business Breakdowns
· Luke Bridgeman
[00:00:00] S1: 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 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 Altius 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, in the early days, in nickel in the Voisey's Bay project in Canada. I mentioned uranium. It's gone 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 2.5% 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 on to talk to.
· Matt Reustle, Luke Bridgeman
[00:00:00] S0: 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? [00:00:00] S1: 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 Altius 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 begin.
· Luke Bridgeman, Matt Reustle
[00:00:00] S1: 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 Altius 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 begin. [00:00:00] S0: 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?
· Luke Bridgeman
[00:00:00] S1: 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 10 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, 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 concentrated an exposure. But unlike mines, which eventually deplete, a renewable project theoretically lasts forever. It's just another example of the sort of contrarian and creative application of the royalty approach, and reflecting Altius' ability to exploit the need for capital when capital is scarce.
· Matt Reustle, Luke Bridgeman
[00:00:00] S0: You mentioned they created another vehicle for the renewable financing. Was that a listed vehicle, like a separate security? [00:00:00] S1: Yeah. They floated a business called Altius Renewable Royalties. Altius 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 providing the royalty. [00:00:00] S0: 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 royalties. 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. [00:00:00] S1: 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. [00:00:00] S0: From an investor's perspective, do you view that renewables business as drastically different from the remainder of the – what I would call legacy traditional minerals business?
· Matt Reustle, Luke Bridgeman
[00:00:00] S0: From an investor's perspective, do you view that renewables business as drastically different from the remainder of the – what I would call legacy traditional minerals business? [00:00:00] S1: It's 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 there 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. [00:00:00] S0: 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 to 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? [00:00:00] S1: 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. So it is potentially forever.