Royalty Knockout Match #2
Another Takeout
Vizla Royalty (VROY) is set to be taken out by Elemental Royalty, another company in the contest.
VROY has one strong asset: the net smelter royalty (NSR) on the Panuco property being developed by Vizla Silver. It’s a great royalty by itself because it’s uncapped and for the life of the mine. If precious metals take off again, that could be a homerun asset.
Risk is its a one-trick pony. If Vizla doesn’t get the mine going, you own 2 percent of want comes out of an empty hole in the ground.
Elemental Royalties is taking on the risk with a buyout. The price values VROY at about 10x future revenue.
My verdict: don’t particularly like Vizla Silver though I did trade it when it had a nice setup. Don’t like a single-assert royalty at this price. Would love to sell it to Elemental for a premium if I owned it.
Altius Minerals ATUSF ALS.TO
Altius is a well-establish royalty firm with a $2.4 billion market cap. It’s at the emerging mid-cap stage of the game having exited junior status.
It trades at about 33 times earnings that fluctuate with metals prices and production levels.
Top royalty assets in terms of revenue contributors are Chapada owned by Lundin, which generates about 1 percent of ALS’ revenue. Saskatchewan potash another 1 percent, lithium about 0.9 percent, wind/solar royalties small now but scaling up.
Looking ahead, Gunnison copper could become as important as Chapada is today once it is in production, assuming current prices. Electricity could become a major new revenue source (PDF). It still retains a 0.5 percent NSR on Silicon-Merlin that could prove valuable as production rises and Anglogold Ashanti keeps finding more metal. Lithium could potentially become a huge revenue generator, but the price has been extremely cyclical so guessing the average price point might as well be a dart toss here. Altius is diversified enough that one asset won’t make or break the firm, nor will one commodity.
Royalty stocks are tough to price because they are usually discounted sum of parts and might still be discounted further if they tried selling off assets. Revenue is running at about 3 percent of market cap currently, an inverse of the aforementioned P/E ratio.
A very conservative estimate of asset values that assumes $3000 gold and $50 silver, copper holds at $6, lithium, iron ore and electricity also flat, plus nothing moves towards production that isn’t already under construction: about $1.5 billion versus a $2.4 billion market cap. That’s not a worst-case valuation, but it does ignore several great assets.
Add all those other assets back into the mix and we get close to the $2.4 billion valuation. A rare moment when the market has it about right. From here, upside and downside in real terms will be driven by commodity prices and advancing younger assets to production. In reality, the market will price ALS based on its current mood for speculation and commodity-backed assets.
If commodity prices rise to where gold at $5000 is the norm, copper heads for $10 per pound, iron ore takes off and so on, then we are looking at a world where Altius’ current futures could justify the current market cap alone. That’s an entirely speculative valuation however. NPV and probability require valuing it less as the market does. The point is the optionality upside is in the future assets.
Future Potential
Altius could offer 3x to 4x return over 5 years if commodities rally off the recent highs. For gold and silver, that means new all-time highs. For Altius, copper is a major asset. $10 to $12 copper is well within the target area if the 20-year base in the real copper price breaks out. It would also need some additional assets, but management has been accretive with purchases.
The big headwind is the rally to this point. We’re working our way through the Royalty Knockout, so I will save discussion of other firms for later. Price agnostic, Altius has potentially higher upside than the major commodity royalty companies because it’s still at a scale where a single major asset could move the needle. Factoring price in, the attractiveness of these smaller firms lies both in their potential and the market ignoring or mispricing them.
Will the market misprice Altius in the future? Quite possibly yes. Here is a chart of Altius and copper futures.
The market treats Altius like a copper story. It has major copper assets, but it’s not only a copper story. Best case for a new buyer here: copper suffers a brutal correction before it’s bull market really gets going.
The chef’s kiss move is a panic down to the 2007 high around $25 per share Canadian. Testing the massive base before beginning a major bull market.
