2023-12-28 12:55:03 ET
Summary
- Altius Minerals Corporation receives a "Hold" recommendation rating due to solid medium- and long-term prospects driven by the energy transition and electrification.
- The company's royalty revenues are well positioned for future growth, but short-term headwinds from low commodity prices may lead to a lower stock price.
- Altius Minerals' portfolio includes a diverse range of assets, including base and battery metals, potash, iron ore, thermal coal, and renewable energy, which are expected to benefit from various growth catalysts.
A “Hold” Rating for Shares of Altius Minerals Corporation
This analysis reaffirms a “Hold” recommendation rating for shares of Altius Minerals Corporation (ATUSF). The shares of this diversified Canadian mining and streaming company trade on the US over-the-counter market. Altius Minerals Corporation's operations consist of a portfolio of royalty revenue from mineral and energy assets in North America and Brazil.
In the previous analysis , Altius Minerals Corporation received a Hold recommendation due to solid medium- and long-term prospects driven by the energy transition and electrification, while the company's royalty revenues appeared well positioned for future growth. But short-term headwinds from low commodity prices continued to challenge Altius although opening up the possibility of a lower price.
This view is now bolstered by the very positive uptake of other markets adding further growth catalysts for macro and geopolitical reasons, but with the very real possibility that a recession could lead to a more favorable price in the near term.
Altius Minerals' Portfolio Performance
During the third quarter of 2023 , the portfolio generated a total attributable royalty revenue of CA$ 17.808 million. Base and battery metals (copper, nickel, lithium) accounted for 23.8% of total attributable royalty revenue of CA$17,808 million, potash accounted for 21.7% and iron ore accounted for 20%. In addition, thermal coal accounted for 11.2%, renewable energy accounted for 14.9%, while interest and others accounted for 8.5%.
As the power plant transitions from thermal coal to natural gas, it is expected that no further royalty revenue related to coal mining will be received after the current year. However, this portion of royalty revenue will be replaced by attributable royalty revenue from Altius Minerals' 58% interest in Altius Renewable Royalties (ARR:CA), which is currently ramping up.
Except for renewable energy royalties revenues (up 26.8% year-on-year), the other segments of the attributable royalties revenues portfolio have not performed well, mainly due to the following negative factors: a) lower copper throughput and grades at the Chapada open pit mine in Brazil; b) continued conversion of nickel production at Voisey's Bay in Labrador, Canada from open pit to underground operations; and c) lower average realized potash prices and volumes. Additionally, Labrador Iron Ore Royal Corporation ( LIFZF ) (LIF:CA)'s dividends are declining as the issuer struggles with some operational issues such as plant shutdowns, and conveyor belt failures along with lower prices for high-quality fines and pellets. However, the prospects of Labrador Iron Ore Royal Corporation’s dividends remain robust .
So, year-on-year, base and battery metals fell 23.6%, potash fell 62.3%, iron ore dividends fell 5%, thermal (electric) coal fell 47%, but is being replaced by renewables, while interest and others rose 82.25 instead.
As a result, adjusted EBITDA of CA$12.5 million in the third quarter of 2023 decreased 47.35% year-over-year, resulting in an adjusted EBITDA margin of 69%, which decreased 1,500 basis points year-over-year.
Primarily due to lower royalty revenue, adjusted operating cash flow of CA$11 million decreased 57.5% year-over-year and adjusted net income per share of CA$0.05 decreased 15 cents year-over-year.
Despite these short-lived headwinds, Altius Minerals Corporation's portfolio is very well positioned to benefit from solid long-term growth catalysts, which is the primary reason why this analysis continues to recommend a Hold rating. The analysis remains cautious with a buy recommendation, as it is believed that the impending economic recession will open up the opportunity to increase the stake in Altius Minerals at significantly more attractive prices than current ones. The momentum sparked by the establishment of a negative cycle should work in line with a 24-month market beta of 0.99x, meaning recessionary headwinds for US-listed stocks are expected to be putting roughly the same downward pressure on Altius Mineral shares.
Various Growth Catalysts for Altius Minerals' Portfolio
I believe Altius Minerals Corporation's portfolio has the following long-term growth catalysts on its side.
As far as renewable energy is concerned, this segment is growing very well as the company has been using the royalties from the thermal coal power plant (which is on track to be converted into clean energy infrastructure), to expand the renewable energy business.
To further explore the growth opportunities in this sector, the 50:50 joint venture with Apollo Global Management, Inc. ( APO ) was strengthened with a credit facility of approximately US$247 million.
This segment is increasingly well positioned to reap the benefits of a future that the Cop28 Global Stocktake endorsement at the United Nations Climate Change Conference in Dubai has outlined as follows: tripling renewable energy and doubling energy efficiency by 2030, officially entering the era in which humanity will need to reduce its reliance on burning fossil fuels to produce energy.
Base metals such as copper, and battery metals such as lithium and nickel will benefit from the global strategy to reduce dependence on fossil fuels and promote the adoption of technologies with minimal environmental impact. These metals are a key element in the various “Go Green” projects of countries around the world.
Analysts at S&P Global reported that Nornickel – a major Russian nickel and palladium mining and smelting company – expects global copper demand to rise to 30 million tonnes per year by 2035, a robust increase of 20% from 24.8 million tons in 2022. The development of electric transport, electricity transmission networks, and renewable energy production will be the main drivers of the demand growth. Given the increasing penetration of electric vehicles ((EVs)), whose batteries also require other metals such as nickel, lithium and cobalt, the Russian operator predicts a huge increase in consumption of battery and hybrid EV technologies as well as charging infrastructure in the next decade. These growth estimates are well supported by US President Joe Biden's administration's goal of making at least 50% of all new vehicles sold in the US, electric vehicles (EVs) by the end of 2030 and to build and strengthen the nationwide infrastructure with 500,000 chargers to make EVs more affordable to a growing number of US citizens.
But electric cars, with their various components such as chassis, body frame, and engine parts, and like all technologies that promote the electrification of human activities in the spirit of an ecologically sustainable economy, also require steel, the main component of which is iron ore.
Altius Minerals' portfolio exposure to dividends from Labrador Iron Ore Royalty Corporation will feel the tailwind of the iron ore-consuming global steel industry's robust growth outlook. According to analysts at Future Market Insights , the size of the global steel market will grow faster in the next decade (at a 4.4% annual growth rate) than in the past five years (at a 1% annual growth rate). Due to significant growth in global demand for steel products, the global steel market revenue is estimated to be nearly $3 trillion in 2033, up from $1.82 trillion in 2022.
The Asia-Pacific region, with its rapid industrialization and economic development, will provide an amazing boost to the global steel market in the next decade. The rapidly growing economies of India will play an important role in this region but China will also. The Chinese government's goal is to create the conditions for strong demand for steel products through a series of measures to strengthen the domestic industrial infrastructure. This type of support also appears to be aimed at keeping iron ore and base metals markets active. In this way, the Chinese government believes it can help the domestic economy recover from three years of strict measures against the COVID-19 virus. China is the world's second-largest economy and is likely still the world's largest consumer of industrial metal product, accounting for a significant share of Asia-Pacific demand in 2021 .
Moreover, the sense of insecurity in Western countries due to geopolitical disputes and existing conflicts between countries increases the desire of governments to increase their defense spending. Given the ongoing global arms proliferation around the world, but especially in the United States, where the country is home to the world's largest producers of space technologies and weapons, the iron ore segment is poised for a resurgence. The sharp increase in US military budgets in recent years and near-record sales of US weapons give forecasters a good indication of the current trend.
The potassium market, the main ingredient in fertilizer production, is estimated to grow, increasing from $60.5 billion in 2023 to $90.5 billion in 2032 by this report of Global Market Insights. The fertilizer sector will make the largest contribution to the growth of the global market. To feed a rapidly growing world population, especially in emerging and developing countries, and to protect from collapse the populations who are victims of various conflicts around the world, it will be necessary to increase crop yields and also make them more resistant to parasites and diseases caused by climate change.
Altius Minerals Braces for Rosy Outlook
With the above-mentioned backdrop of long-term growth opportunities to exploit, Altius Minerals is sharpening its weapons:
Its assets base consists of 6 revenue streams from potash production from large operators: 5 productions are made by Nutrien Ltd. (NTR) (NTR:CA) who sees a recovery in potash fertilizer demand and has raised its full-year global supply in 2023 and 2024, in line with the positive global market outlook for 2024 , with moderate prices driving more potash applications and a return of demand from farmers around the world. One potash revenue stream comes from production carried out by The Mosaic Company (MOS), whose Esterhazy potash mine has increased capacity from 6 million tons in 2022 to 8.2 million tons, including debottlenecking.
Also, 3.7% of a payable copper stream comes from Lundin Mining Corporation's ( LUNMF ) (LUN.TO) Chapada mine, where a delineation and expansion drilling program are expected to result in increasing resource estimates in the future, and 0.3% NSR comes from Vale S.A.'s ( VALE ) Voisey's Bay mine. The latter mine is also a source of nickel and cobalt royalties based on a 0.3% NSR.
Plus, 7% Gross Overriding Royalty comes from Iron Ore Company of Canada. IOC production is expected to be higher in 2024 than in 2023 due to the expansion of downtown factories, and IOC operations are recovering from conveyor belt failures and wildfires in northern Quebec in the summer of 2023. Furthermore, revenues from the renewable energy joint venture with APO will replace coal royalty revenues from Capital Power Corporation's Genesee, which is transitioning to natural gas-based firing. Revenue royalty related to coal mining will cease in 2024.
The company recorded its first royalty revenue related to lithium production from its ownership interest in the Grota do Cirilo open pit mine (25 km northeast of Araçuaí, Brazil). The mineral plant produces 15,000 tonnes of spodumene – a commercially important source of lithium – into mineral concentrate and has a mine life until 2032.
Among the projects under development, the Kami project stands out for the extraction of iron ore from an open pit mine with a mine life of 23 years. Champion Iron Limited ( CIAFF ) ( CIA:CA ) is the indirect owner and operator of the project for which Altius is entitled to a 3% gross smelter royalty. The facility focuses on mining an average of 7.844 million tons of iron ore per year. The feasibility study, which is currently being updated, is expected to be completed between late 2023 and early 2024.
Altius holds a 1.5% NSR royalty in connection with AngloGold Ashanti plc's ( AU ) gold projects targeting 6 to 8 million ounces of Merlin and more than 4 million ounces of silicon, both inferred resources in Nevada.
The Financial Condition Still Seems Solid
As of September 30, 2023, Altius Minerals Corporation's balance sheet had cash and marketable securities of CA$67.2 million (or ?$49.5 million ), a decrease of 15.3% sequentially, but 76% of the resources was held by the 58% interest in Altius Renewable Royalties. The market value of various listed holdings, including Altius Renewable Royalties and Labrador Iron Ore Royalty Corporation, totaled CA$374.2 million (US$277.1 million).
While total debt stood at CA$ 115.6 million (or ? $85 million ). The debt outstanding resulted in interest expenses of CAD 9.2 million (? $6.8 million) for the 12-month period ending Q3 2023, and this compared to the 12-month operating income of CA$ 34.8 million (? $25.6 million ), leads to an interest coverage ratio of 3.8x. The index is calculated as a 12-month operating income (it was 38.6% down year over year in Q3-2023) divided by the 12-month interest expense.
The latter indicator of financial leverage means that Altius Minerals can pay the interest expense on its outstanding debt, despite a significant year-over-year decline in total operating profitability in the third quarter of 2023. Lower commodity prices combined with lower dividends from iron ore interest could pose a slightly additional challenge to the interest coverage ratio in the short term, before the medium and long-term growth prospects turn positive instead. However, the safety margin of 3.8x is still well above the minimum tolerable value of 1.5x.
Plus, taking into account the Altman Z-Score of 4.14 (scroll down this page to the Risk section), which is better than the 3.94 from the previous analysis and better from 3.76 from the other previous analysis , it means that the company has less chance of going bankrupt now than a few quarters ago, which should provide reassurance to investors.
Altius Minerals Corporation paid a quarterly dividend of CA$0.08/share on December 15, 2023, in line with the previous dividend, resulting in a dividend yield ((TTM)) of 1.68% as of this writing, versus the S&P 500’s dividend yield of 1.45% .
The Stock Valuation: Tolerable Risk with Hold
ATUSF shares traded at $14.20 per unit, giving it a market capitalization of $670.98 million. Shares have declined over the past year and are now trading well below the 200-day simple moving average of $15.46 but are close to the 50-SMA level of $14.15.
Shares are also below the middle point of $15.665 of the 52-week range of $13.33 to $18. The 14-day Relative Strength Indicator says that shares are still far from oversold levels despite the significant decline over the past year.
Under the negative pressure of the expected recession in the US economy as early as 2024, shares of ATUSF stock could reach lower levels and the downside room to do so is sufficient.
The inverted yield curve for the spread between 10-year and 3-month Treasury notes (3.88% for 10-year Treasury notes vs. 5.396% for 3-month Treasury notes at the time of writing) is a strong predictor of an economic recession. It has predicted each of the eight economic recessions of the past six decades.
Investors are increasing their forecasts for a Fed rate cut in 2024. However, the first reduction is not expected until March 2024. In the meantime, there will be concerns that a “longer and higher” policy on interest rates could slow economic activity and lead to job losses. These headwinds still have sufficient time to further fuel risk aversion on the equity markets.
Earlier this month, Andrew Challenger, a labor expert and senior vice president of Challenger, Gray and Christmas, Inc., said that he believes the number of layoffs to strength in the coming months. Nela Richardson, chief economist at Automatic Data Processing, Inc. ( ADP ), expects hiring and wage growth are going to moderate remarkably in 2024 following an increase in restaurant and hotel job creation during the post-pandemic recovery. On top of this, economic data from the U.S. Bureau of Labor Statistics showed 2 weeks ago that nonfarm payroll growth in November dropped below last year's average for the second month in a row, suggesting a “slowdown in the labor market”.
The headwinds will impact US listed securities and Altius shares due to the 24-month market beta of 0.99x. There is also a risk that consumption will pick up somewhat after the Christmas shopping season, which could also lead to the Fed postponing the first interest rate cut. Such an event would not be viewed favorably by equity markets and would provide an opportunity to increase exposure to Altius' long-term robust growth catalysts from a more favorable entry point.
The stock now deserves a Hold rating.
Altius Minerals performs very well with the following companies operating in the industry of “other industrial metals & mining”, with 12-month revenues of approximately $20 million to $90 million:
Americas Gold and Silver Corporation ( USAS ) has 12-month sales of $84.9 million, a negative 12-month EBITDA of $8.9 million, and it has a Total Debt/Equity ((MRQ)) of 23.51%, Current Ratio ((mrq)) of 0.43 and negative Operating Cash Flow ((TTM)) of $3.22 million. EV / EBITDA ((TTM)) is negative versus sector median of 9.37. Price / Sales ((TTM)) is 0.61 versus the sector median of 1.26. Price / Book ((TTM)) is 0.84 versus the sector median of 1.77.
American Resources Corporation ( AREC ) has 12-month sales of $21.4 million, a negative 12-month EBITDA of $17.4 million, and it has a Total Debt/Equity ((MRQ)) of 389.14%, Current Ratio ((mrq)) of 0.71 and Operating Cash Flow ((TTM)) of $8.93 million. EV / EBITDA ((TTM)) is negative versus sector median of 5.68. Price / Sales ((TTM)) is 5.15 versus the sector median of 1.37. Price / Book ((TTM)) is 7.78 versus the sector median of 1.67.
Hycroft Mining Holding Corporation ( HYMC ) has 12-month sales of $11.5 million, a negative 12-month EBITDA of $54.6 million, and it has Total Debt/Equity ((MRQ)) of 630.61%, Current Ratio ((mrq)) of 13.65 and negative Operating Cash Flow ((TTM)) of $42.14 million. EV / EBITDA ((TTM)) is negative versus sector median of 9.37. Price / Sales ((TTM)) is 3.92 versus the sector median of 1.26. Price / Book ((TTM)) is 2.01 versus the sector median of 1.77.
Instead, Altius Minerals has EV / EBITDA ((TTM)) is 19.91 versus the sector median of 9.37. Price / Sales ((TTM)) is 11.97 versus the sector median of 1.26. Price / Book ((TTM)) is 1.81 versus the sector median of 1.77. Altius has 12-month sales of $56.6 million, a 12-month EBITDA of $40.2 million, Total Debt/Equity ((MRQ)) of 18.41%, Current Ratio ((mrq)) of 6.08 and Operating Cash Flow ((TTM)) of $50.14 million.
Altius Minerals is performing well, and its valuations are interesting, although not more attractive compared to the sector average. The above chart of share price performance over the last year might give the impression that refraining from buying Altius Minerals shares today carries a significant risk of missing an opportunity. As if the outlined growth catalysts, which are diverse given the exposure of Altius Minerals' portfolio to different global commodity markets, would exhaust their positive effect within months rather than the following years.
As you can see, extending the time horizon from 1 year to over 10 years shows how Altius Minerals' share price has risen over time driven by commodities, albeit not steadily but across cycles. This implies that the current share price may seem like a bargain compared to twelve months ago but compared to prices further down the line in 2021, when the 12-month sales and 12-month EBITDA were higher (see below chart) than the last, it's not really a bargain anymore. Also due to their current focus, certain markets such as renewable energy, electric vehicles, defense, and foodstuffs will have a big impact on Altius' business, which should have a more powerful catalyst to expand faster than before.
But nothing is lost by not buying shares today in my view, as these markets are expected to grow and provide tailwinds in the several coming years. So, there is time to reap the benefits of growth, while the near future could provide an opportunity to add to the position at a lower price if the recession intervenes in the cycle, as the Fed has signaled.
Altius’s 12-month sales and 12-month EBITDA in past 2 years:
It is difficult to say whether the share price will show significant weakness due to the deterioration in employment levels, as was the case with the temporary inactivity of workers due to the COVID-19 virus crisis. But there is a chance that the share price will go down somewhat, and it should not be a big hassle for the retail investor to wait a little longer for the chance to reappear in my opinion.
The same consideration can broadly apply to the shares traded in the Canadian market in Toronto.
Shares also trade on the Toronto Stock Exchange under the symbol (TSX: ALS:CA ). Shares were trading at CA$18.67 per unit on the TSX as of this writing for a market cap of CA$880.27 million. Shares are trading below the 200-day simple moving average of CA$ 20.87, and below the 50-day simple moving average of CA$ 19.27.
Shares are also below the middle point of CA$ 20.995 in the 52 Week Range of CA$ 18.02 to CA$ 23.97. Also, the 14-day Relative Strength Indicator of 46.22 suggests that shares are still far from oversold levels.
Altius Minerals Corporation offers a dividend yield (forward) of 1.71%, as of this writing.
Conclusion
Headwinds from a potential economic recession could make Altius Minerals look more attractive in the near term: sometime in 2024.
From a medium- and long-term perspective, Altius Minerals Corporation has significant upside potential.
So, for now, retail investors should "Hold" their position.
For further details see:
Altius Minerals: Robust Outlook, But Some Near-Term Headwinds