Top Stock For A High Inflation Environment: Altius Minerals (OTCMKTS:ATUSF) – Advice Eating

OLGA Zhukovskaya/iStock via Getty Images

What’s the best stock to buy given the evolving high-inflation environment? In my opinion, a top pick must meet the following criteria:

  • As inflation rises, it is ready to produce more and sell at higher and higher prices Pick up sales at an accelerated pace. At the same time, however, operating costs are hardly estimated, which leads to increasing margins.
  • It’s preferably a capital-poor business, so growing revenue and rising margins translate to thicker free cash flow.
  • The Company generates income from operations in politically stable jurisdictions as high inflation tends to result in political volatility.
  • Management is involved and tends to use some of the free cash flow to reward shareholders.
  • The stock is currently undervalued relative to its intrinsic value, and investors can still buy it with a reasonable margin of safety.

Altius Minerals Corp stock (ALS.TSX)(OTCPK:ATUSF) meets all the criteria of the perfect setup described above. Let me explain below.

Altius will benefit in a high inflation environment

Altius Minerals is a mineral licensing company. It owns royalty on 12 producing assets in Canada, US and Brazil. These are long-lived, high-margin operations that produce base metals (copper, nickel, zinc, and cobalt), iron ore, potash, and coal-fired power plants (Fig. 1).

Pie Charts of Altius Minerals Royalty Revenue in 2020 and 2021.

Fig. 1. Pie charts of Altius Minerals royalty income in 2020 and 2021. (Altius Minerals)

Increasing license income

Altius has grown its royalty revenue at a CAGR of 37.4% since 2014 (Fig. 2). Growth has been driven by three forces: (1) the ongoing exploration option at no cost to Altius; (2) new additions to the portfolio of production facilities; and (3) the strength of commodity prices recently.

Altius Minerals royalty earnings per share from Q1 2014 to Q4 2021.

Fig. 2. Altius Minerals royalty earnings per share from Q1 2014 to Q4 2021. (Altius Minerals)

Looking ahead, as the commodity supercycle unfolds, royalties are expected to continue to grow.

  • First, high commodity prices are encouraging mine operators to reinvest capital in mine production to increase production and extend mine life, particularly at the Eastern Deeps mine in Voisey’s Bay (initial nickel-cobalt-copper production in 2022). Chapada (copper-gold mine expansion in engineering studies), 777 (ongoing tailings reprocessing for copper studies to extend mine life) and Nutrien (NTR) increasing potash production by ~50% to nominal capacity, benefiting Altius at no cost will come .
  • Second, a variety of projects are advancing towards production including the Curipamba copper-gold deposit (2% NSR royalty, fully funded, permit pending and first production expected in early 2024), the Kami Iron Ore Project (3% GSR royalty) . , feasibility study update expected in 2H2022) and the 3.37 million ounce silicon gold deposit (1.5% NSR royalty, delineation in progress).
  • Third, the commodities that Altius is directly exposed to — copper, nickel, zinc, cobalt, iron ore, potash, and even thermal coal — are structurally undersupplied and poised to see price strength for the foreseeable future. After all, we are in the early innings of a commodity super cycle.
  • Finally, the revenue growth described above is expected to result in incrementally lower operating costs per dollar of royalty revenue. These economies of scale are in addition to the advantageous royalty business model known for having extremely low operating costs and being protected from cost escalations at the individual mine level.

project generation

Like many other licensing companies, Altius acquires royalties from operators; Unlike them, Altius also generates mining projects and sells those projects to junior explorers in exchange for equity and retained royalties. By generating forecasts, Altius is organically expanding its royalty pipeline at a negative cost of capital.

  • By the end of 2021, Altius had raised US$56 million in junior exploration capital and monetized US$16 million in annual net proceeds (Fig. 3).
Share of equity from project generation relative to cash and debt

Fig. 3. Share of equity from project generation versus cash and debt (top) and project generation-driven equity portfolio growth (bottom). (Modified by Altius Minerals)

As the commodity cycle swings higher, I expect the junior equity portfolio to continue to expand and Altius to generate more revenue.

equity investment

Altius has two strategic holdings, namely Altius Renewable Royalties Corp. (OTCPK:ATRWF) and the private Lithium Royalty Corporation. Both should benefit massively from the raw material upcycle.

  • Altius Royalties owns a 59% interest in Altius Renewable Royalties, which holds gross yield licenses on a portfolio of utility-scale wind and solar projects. Altius Renewable Royalties had a market capitalization of CA$306.77 million as of April 14, 2022.
  • Altius also has a 12.6% interest in Lithium Royalty Corporation, which has accumulated 18 lithium project royalties, including two in production and three under construction. Lithium Royalty Corporation may be targeting a sale or public offering in 2022.

Assessment and Risks

Thanks to their favorable business model, well-managed royalty stocks are known for being secular compounders across industry cycles, as exemplified by Franco-Nevada (FNV) and Wheaton Precious Metals (WPM). As the crown jewel of the mining industry, royalty stocks deserve a premium valuation (Fig. 4). Altius Royalties first became a licensed company in 2014 and has been consistently FCF positive since 2018. As an emerging licensing company, Altius is currently significantly undervalued relative to its large-cap peers (Table 1).

Franco Nevada, Wheaton Precious Metals and Altius Minerals stock charts

Figure 4. Franco-Nevada (FNV), Wheaton Precious Metals (WPM) and Altius Minerals (OTCPK:ATUSF) stock charts. (Search for Alpha modified by Laurentian Research)

Valuation metrics of selected royalty stocks on a TTM basis.

Table 1. Valuation metrics of selected royalty stocks on a TTM basis. (Seeking Alpha compiled by Laurentian Research)

  • Assuming it maintains current growth momentum for 10 years amid the ongoing commodity super cycle, conservatively assumes it then enters a 20-year terminal decline, and cuts net debt and adds its holdings, I think Altius Royalties ~US could be worth $42 per share, confirming the large margin of safety the stock offers investors.

Although mature royalty companies proliferate over the long term, they have relatively high beta due to commodity cycles. Operations at the individual mine level are outside the control of the royalty corporations; Therefore, when the royalty portfolio is insufficiently diversified, investors are exposed to undesirable volatility when one or more mines suffer from resource nationalism, labor issues, natural disasters or subsurface insecurity. Franco-Nevada and Wheaton have 113 and 23 producing plants, respectively, while Altius currently has 12; it will be a long time before Altius can match the level of portfolio diversification that Wheaton and Franco Nevada have achieved.

Royalty companies are essentially capital allocators specializing in unconventional financing for mining projects. Altius’ management has excellent capital allocation skills, unusual discipline and long-term perspective, as evidenced by its 25-year track record and success in transitioning from project generation to royalty collection. The insiders own 6.3% of the company, giving them a sizeable role in the game. Since 2015, they have returned ~C$84 million to shareholders through ever-increasing dividends and opportunistic share buybacks (Fig. 5).

Altius Minerals returns capital in C$ millions through dividend payments and share repurchases

Fig. 5. Altius Minerals cash returns in millions of C$ from dividend payments and share repurchases. (Altius Minerals)

Investor snack

Oil and copper are the best hedges against inflation, not gold. Gold is a lousy hedge against inflationsaid Jeff Currie of Goldman Sachs.The best place to be right now, especially given the Fed pivot, is commodities.

Unique among royalty stocks, Altius Royalties offers investors exposure to copper and a variety of commodities that are at the heart of this inflationary environment, but without adding operating expense expansion, capital intensity and legal risk into the equation.

Altius therefore fits perfectly as an inflation hedge and most likely as an inflation fighter.

[This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.]

Leave a Comment