2023-05-18 05:01:26 ET
Summary
- A less rosy outlook for base metals coupled with sluggish potash demand and the closure of a coal plant is unlikely to be positive for Altius Minerals Corporation in 2023.
- However, I suggest holding shares of this stock as the projected rise in metal prices in Q2 2023 should help Altius' stock trade significantly above current levels in Q2 2023.
- Then investors should probably consider a sell strategy for Altius.
2023 Will Be a Challenging Year for Altius Minerals Corporation
Lower near-term prospects for copper, nickel and iron ore income coupled with sluggish demand affecting potash prices and the closure of a coal-fired power plant are expected to bode ill for Altius Minerals Corporation ( OTCPK:ATUSF ) ( ALS:CA ) stock in 2023.
As such, I believe investors should avoid adding any more shares to their position in this diversified Canadian mining royalty and streaming company.
I am not suggesting selling Altius shares at this time either as the copper price, which analysts remain bullish on in the current quarter, could still act as a positive catalyst.
I'll open a parenthesis to clarify that Altius' business relies on royalties earned on the production and trade of other commodities, and not just copper. However, since the stock appears to be particularly sensitive to changes in the price of copper (as illustrated in a chart later in this analysis), the red metal serves actually as a good indicator of where Altius' stock price could go next.
And judging by the value of the 14-day RSI (49 at the time of writing), there is still room for Altius's price to continue rising from where it is today and, driven by the expected higher copper price in the current quarter, break through the 50-day and 100-day simple moving averages.
Then I foresee Altius shares to approach overbought levels sometime in June, i.e., when the copper price rally is about to die down.
After that, analysts estimate that the copper price will begin a downward phase. And since the latter could cause a significant pullback in Altius' stock price due to a significant positive correlation between the two securities, I think investors should already consider a sell strategy when the stock price breaks through 50 and 100 simple moving average lines.
But for the time being, I believe a Hold rating is the most appropriate recommendation for Altius stock.
Shares of Altius Minerals Corporation were trading at $15.89 apiece as of this writing, giving it a market cap of $763.99 million, and a 52-week range of $11.90 to $18.00.
Altius Minerals Corporation shares are also traded on the Toronto Stock Exchange under the symbol ((ALS:CA)). Shares traded at CA$21.56 apiece for a market capitalization of CA$1.03 billion as of this writing.
The stock has a 52-week range of CA$15.63 to CA$24.00. The shares are below the 50-day simple moving average line of CA$21.97, and below the 100-day simple moving average of CA$22.08 but above the 200-day simple moving average line of CA$21.06.
Copper is a Valid Indicator for Forecasting the Next Move in Altius Stock Price
Copper royalty income is a significant portion of Altius' base and battery metals business, and copper price (one of the two drivers of copper royalty income, the other being the level of copper production) is linked to Canadian mining royalties and streaming share price through a significant positive relationship.
The curve depicting the development of the correlation coefficient over the last 12 months shows that Altius and the copper price are moving in the same direction, as the "cc" curve has almost never been below zero.
Therefore, an analyst-expected copper price in the second quarter of 2023 ending at $3.79 per pound (up from $3.6754 at the time of writing) could serve as a good gauge for trying to spot the next trend in the Altius market. I forecast the latter to be bullish as well.
If a positive correlation means that a higher copper price causes Altius's stock price to rise, it also means that Altius' stock market valuation is likely to decline after Q2 2023 if bearish sentiment resumes.
Analysts estimate the copper price to fall a sharp 6.6% to $3.54 per pound later in 2023 from the expected price of $3.79 for the second quarter of 2023, and the same trend can reasonably influence Altius stock price.
Analysis of the past trajectory of the 14-day RSI suggests that as the value bottomed out in the 33-40 range, a sharp fall in the Altius share price coincided with a more than 5.5% downtrend in the copper price.
About Altius Minerals Corporation
Altius Minerals Corporation is a Canadian diversified mining royalty and streaming company, and its revenue-generating assets are located in North America and Brazil.
Altius owns royalty and streaming interests in 11 active mines where the miners produce base metals such as zinc, nickel, and cobalt in addition to the company's primary base metal of copper.
The company also receives royalties from operating potash, coal and precious metals mines and receives the dividend payment from Labrador Iron Ore Royalty Corporation ( OTCPK:LIFZF ) ( LIF:CA ).
The Labrador Iron Ore Royalty Corporation, based in Toronto, Canada, owns a 15.10% interest in the Iron Ore Company of Canada, which produces and processes iron ores at its Canadian facilities in Labrador City, Newfoundland and Labrador.
On March 30 the company paid a variable quarterly dividend of $0.369 per common share leading to a forward dividend yield of 10.44% on the over-the-counter US stock market and of 10.33% on the Toronto stock exchange.
Altius is also active in the renewable energy space, but it still covers a marginal portion of its total revenue from managing royalty and streaming assets.
Company Performance in Q1 2023 and What to Expect in the Near Future
Altius Minerals Corporation's total revenue for the first quarter of 2023 was CA$ 22.7 million, down 16.2% year over year.
Adjusted net earnings were CA$0.07 per share in Q1 2023 versus adjusted net earnings of CA$0.21 per share in the prior-year quarter.
While attributable royalty revenue for the quarter was CA$21.4 million (or CA$0.45 per share). Also, following the liquidation of Alderon Iron Ore Corp.'s ( OTC:AXXDF ) assets, Altius added CA$ 2.8 million in recognized revenue.
A revenue breakdown revealed that in the first quarter of 2023, the base and battery metals segment accounted for 22.8% of total revenue, the potash segment 42.2%, iron ore (the dividend paid by Labrador Iron Ore Royalty Corporation) 8.7%, the coal segment 14% while the share of renewable energy is 6.3%. Additionally, there was also revenue from other smaller assets, which accounted for 6% of total revenue for the quarter.
Potash royalty revenue declined 9% year-on-year to CA$9 million in the first quarter of 2023, due to a drop in average realized prices while production volumes were flat year over year.
While Altius is investing to increase the production capacity of its Canadian potash operations, as there seems to be a need to address a global supply shortage, the recovery in demand for potash fertilizers is still seen as sluggish, with prices likely to remain significantly subdued in 2023 compared to the highs recorded in the first half of 2022.
Base and battery metals revenue fell 51% year over year to CA$ 4.9 million due to the closure of the 777 Zinc-Copper Mine in Flin Flon, Manitoba as metal reserves ran out after reaching 18 years of continuous mining and exploration activities.
Lower revenue from the Chapada mine in Brazil also did not contribute positively to segment performance.
Chapada mine's operator Lundin Mining Corporation ( OTCPK:LUNMF ) ( LUN:CA ) is expanding mineral resources at the new discovery of the Saúva copper-gold deposit just 15 kilometers away from the Chapada mine, which are estimated to be 1.3 pounds of copper and 1.1 million ounces of gold.
However, currently, Chapada is not experiencing one of his most successful phases.
The asset is selling significantly less copper in concentrate (9,072 tonnes in Q1 2023 vs . 12,804 tonnes in Q1 2022) as operations struggle with lower recoveries, while an unfavorable mix of lower sales volume and higher input costs continue to drive the increase in copper cash cost ($2.37/lb increase in Q1 2023 versus $1.82/lb in Q1 2022).
Royalties from the Voisey's Bay Nickel-Copper-Cobalt Mine were lower year-on-year, as the mine operator Vale S.A. ( VALE ) is shifting mining and exploration activities to the underground deposits, implying lower production and the impact of the deployment of more production inputs and consumables which is being exacerbated by ongoing inflationary pressures. Voisey's Bay Nickel-Copper-Cobalt Mine reported a nearly 43% cut in production for Q1 2023.
Nickel futures are trading below the $22,000 per tonne level as of this writing. They are forecasted to rise to $23,476.69 by the end of this quarter and then decline to $20,789.94 by the end of Q1 2024. Trading Economics reports that nickel futures prices are being impacted by fears of a global economic slowdown and the largest supply-demand excess in a decade as production in Indonesia and the Philippines grows like crazy, while the slow recovery of the Chinese economy weighs on demand for nickel.
Cobalt is down nearly 33% year-to-date, according to Trading Economics . This is evident from trading on a Contract for Difference [CFD], which replicates the benchmark market for the commodity. From the current price of 34,930 per ton (as of this writing), cobalt is expected to go down to $34,102.16 per ton by the end of Q2 2023 and continue to decline to $31,733.91 per ton by the end of Q1 2024.
Iron ore royalty revenue increased 35.7% year-on-year to CA$1.9 million in the first quarter of 2023. However, the positive development was due to increased ownership rather than an increase in funds set aside by Labrador Iron Ore Royalty to pay dividends.
Instead, Labrador Iron Ore Royalty Corporation's 15.10 percent stake in the Iron Ore Company of Canada Limited will provide less cash to pay dividends for the foreseeable future as it focuses more on financing mine maintenance and growth projects.
Regarding the current and possible future market valuation of iron ore, the prices for iron ore shipments with an iron ore grade of 63.5% for shipment in Tianjin currently hover at $107 per ton. They are projected to decline to $96.76 per ton by the end of Q2 2013 and then to $89.00 by the end of Q1 2024.
These estimates are probably based on unencouraging data on China's economic recovery, forcing the People's Bank of China to continue sending accommodative monetary policy signals (Trading Economics reports), to cope with the fall in real estate investment, the slowdown in industrial production and the out of the blue drop in manufacturing activity.
Thermal coal royalty revenue for the first quarter of 2023 decreased 3.2% year-on-year to CA$ 3 million due to lower attributable production volumes at the Genesee Mine near Warburg, Alberta, Canada. The segment is on track to report progressively lower royalty revenue as the Genesee power plant plans to move from coal to natural gas by the end of 2023.
Newcastle coal futures, a valid coal price indicator for our analysis as they serve as a benchmark for China/India, the world's two largest coal consumers, are trading at $163.80 per ton at the time of writing. According to Trading Economics, the price should increase to $176.15 per ton by the end of Q2 2023. Trading Economics also estimates that the price of coal will rise to $197.17 per ton in 12 months. Despite good intentions to invest more in renewable energy, there is still a lot of coal being burned around the world, not just in China and India.
This is a pity for Altius because the ongoing conversion of the Genesee power plant means that the company cannot benefit from the continued use of coal, despite climate protection and the like.
The company's 58% interest in Altius Renewable Royalties ( ARR:CA ) recorded attributable royalty income of CA$1 million from the company's 50% joint venture interest in Great Bay Renewables, targeting revenues of CA$11.5 to CA$13.5 million in 2023. There are growth plans going on for this segment, but renewables still account for a very small percentage of the company's total sales.
The Financial Condition
As of March 30, 2023, Altius' balance sheet showed a net debt of $31.43 million as Seeking Alpha reports total debt of $87.96 million, while the company's cash and cash equivalents as of March 31, 2023, were CA$76.8 million (approx. $56.53 million), of which it must also be said that 85.6% was held by the company's 58% stake in Altius Renewable Royalties.
The debt resulted in financial expenses of $5.8 million for the 12-month period ending Q1 2023, and this compared to the 12-month EBITDA of $57.5 million, leads to an interest coverage ratio of 9.9x results.
The latter indicator of financial leverage means that Altius is able to pay the interest expense incurred on the outstanding debt even though the profitability of the overall operation is deteriorating, as shown in further comparisons below.
The Adjusted EBITDA margin was 79% in Q1 2023 versus the Adjusted EBITDA margin of 83% in Q1 2022. The Mineral Royalties segment had an EBITDA margin of 86% in Q1 2023 and remained unchanged compared to the previous year.
But looking at the Altman Z-score of 3.76 (on this page , scroll down to the 'Risk' section), which means the company has no chance of going bankrupt, Altius isn't in financial trouble.
Overall, Altius' financial position is stable as long as the company can pay its debts but needs improvement. Altius needs to reverse the trend that is currently causing EBITDA to decline since 2022, and that's not going to be easy at all given that behind the scenes, we have the year 2023, which will be anything but easy.
In addition to concerns about the stability of the US regional banking system, there are also concerns about US debt sustainability and the risk of an economic recession, as well as the cost of debt, which remains high as a result of fighting runaway inflation.
Adjusted cash flow from operations decreased to CA$ 4.5 million in the first quarter of 2012 from CA$ 14.2 million in the first quarter of 2022 as a result of interest paid as well as lower royalty income and higher taxes.
Conclusion
Altius Minerals Corporation will likely face a particularly challenging 2023 as the prices and sales volumes of its key commodities are going to perform in a way that will hardly have a positive impact on the company's royalty revenue, and I believe this will be reflected in the stock price.
In the short-term, however, I suggest holding shares of this stock as the projected rise in metal prices in Q2 2023 due to a strong positive correlation with copper prices should help Altius shares trade above current levels.
After the second quarter of the current year, investors should probably consider a sell strategy for Altius, in my view.
For further details see:
Altius Minerals: Challenges Ahead, But Another Flare-Up Likely To Come First