To add on...
4- I am just extremely cynical about juniors. And to a lesser degree, I don't like mining stocks. If I was forced to index, I would never want to index these stocks. These stocks are screwed up because:
a- Even Goldcorp (a large cap) pays for people to shill for them. Goldcorp sponsors theaureport.com
b- Gold miners should have made more money in a bull market.
c- As far as juniors go, their lack of capitalization means that they constantly have to spend money to raise money. For some juniors, not that much money is spent on actual exploration (sometimes less than 50%).
d- Sometimes juniors will extend warrants (this is sort of like giving away free money) because it's a cheap way of raising money. Because the alternatives have paperwork costs and you may need to pay brokers several percent. Very few companies do rights offerings (arguably the fairest for shareholders) because it costs money to do it and it doesn't make brokers happy so they won't pump your stock. Raising money is expensive... but they have no choice.
Rick Rule (he/Sprott is long Altius):
It is critical for gold stock speculators to remember that the junior market, in aggregate, is always overvalued. If we were to merge every gold junior in the world into one entity (let's call it Junior Goldco), that company would lose (profits and corporate acquisitions less industry expenditures) somewhere between two billion and eight billion dollars per year.
http://www.caseyresearch.com/cdd/rick-rule-why-im-excited-about-marketHarris Kupperman, hedge fund manager (no idea if he is long Altius):
Quick, what’s the world’s worst investment sector?
Airlines? Autos? Biotech? Give up? Junior mining is way worse. Airlines limp on for years in quasi-bankruptcy—so do autos. A few companies like Toyota even do well. Biotech companies sometimes find something interesting. Even if your junior mining company finds something, you still will probably lose money.
http://adventuresincapitalism.com/post/2010/03/07/Mining-worse-than-airlines.aspx*He may be making a reference to Warren Buffett's shareholder letters where Warren points out that airlines have made no money for investors.
5- I hope you see why Altius is brilliant. The royalty structure protects them against a lot of the problems in the mining sector. And usually those problems work to the royalty holders advantage.
If somebody chases an uneconomic mine, the equity holders lose a lot of money but the royalty holder still makes some money. If Alderon turns into a mine and the equity owner goes into empire building mode and expands production at the mine, the royalty benefits.
On the exploration side, sometimes juniors will keep on drilling so that they can generate news flow to raise more money to pay insiders' salaries. Why do exploration yourself when you can get a junior to do it?
6- Assuming that everybody was rational and that juniors act in the best interest of shareholders, it doesn't entirely make sense for Altius to seek royalties on their joint venture deals. If they took equity instead, they would be helping out more in terms of raising capital to build a mine. Altius has a lot of cash on its balance sheet. In theory it would make sense for it to deploy its capital into building mines.
Building mines is not that good of a business. Altius isn't buying more shares of Alderon to push it towards production (even though it could). It is exercising capital discipline and waiting for really high rate of return opportunities. They are really smart.
