ALS.TO - Altius Minerals

[Dazel]

It's a Value Trap,

For 3. I think you meant "Altius" has a lot of land....and I agree...Altius has huge exposure to the Labrador iron ore trough...

4. Agreed on book value being understated...all of the royalties have 0 cost bases for the most part...under our assumptions whatever you price Alderon at $1,2 or $3 billion...production makes the royalty to Altius a home run...with a cost of 0...roi would be the highest in the royalty industry...

Every one billion of market cap at Alderon almost doubles Altius' current market value with their 25% ownership stake....

*cliffs cancelled expansion during the same time fortes cue arcellor bhp and vale cut back on expansion plans...the iron ore price is up 85% since then...

As I said earlier I think Posco was opportunistic with their purchase...they tried to buy a company in Australia and were rejected.

Iron ore Stocks are following the price upwards and multiples will expand with continued stability in the iron ore price at current prices around $150... All of the big producers are up very big from their bottoms in October...BHP is at a 52 week high.

Dazel.

[no_free_lunch]

Have been doing some digging on this one and it does sound promising however I have a few questions.  I am very much a complete novice when it comes to mining companies so please take my comments below in that context.

In regards to the comparison to other mines, I have read that there are issues with the quality of the iron concentrate at Alderon's upcoming mine.  According to the articles I have read, there are higher levels of Manganese than is standard and as such it has to be sold offshore as North American plants won't process it.  The articles also suggested that there could be a $15 price reduction as a result of the quality.  However, this would seem to contract Hebei's agreement to purchase 60% of the product at a 5% discount to spot.  What is your guys take on this?  Will the remaining 40% go for a lower price?

Also the fact that the product needs to be shipped to China will add some $25 / MT to costs, I wonder if the comparable mines are selling to North America or not?

[ItsAValueTrap]

Those issues have been discussed in this thread before.  (I don't think we ever really reached a conclusion though.)

I'd note that Hebei's agreement is to purchase the first several million tons at 5% off the benchmark price.  If a mine only produces less than 8MT/yr (which is likely in my opinion, given what happened with Bloom Lake; there is a connection between Bloom Lake and Alderon as both used BBA for technical reports and the management teams of both are associated with Forbes and Manhattan).  If the mine produces less, Hebei will be buying more than 60% of the output at a discount.
I presume that Hebei will receive a lower price based on the level of manganese in the ore.  It's standard practice for there to be smelter deductions.  You pay a lower price based on the level of unwanted elements in the product.

The off-take agreement also gives Hebei an option on the remaining 40%.  This option is probably worth something.

Also the fact that the product needs to be shipped to China will add some $25 / MT to costs, I wonder if the comparable mines are selling to North America or not?
A lot of iron ore in the world and in the Labrador Trough is being sold to China.  Drybulk shipping rates have fluctuated enormously in the past and have affected the iron ore trade.

In Alderon's case, the Hebei price is based on a benchmark price for iron ore delivered to a certain port in China.  So Hebei would be paying for shipping.

[Dazel]

http://www.bloomberg.com/news/2013-01-03/arcelormittal-deal-fuels-iron-ore-rally-corporate-canada.html?cmpid=yhoo

This is why this deal within the Labrador Trough is so important..It gives us  a direct comparison and shows us what kind of demand for iron ore their is globally. Steel suppliers know the difficulty involved in mining iron ore and they know what it was like to try to ge supply at $190 a ton. They are willing to put up capital to ensure supply.

The fact is mining is expensive...infrastructure costs are massive...location matters. As Brian Dalton has stated "Alderon" is advantaged because it has the right address. They do not have to be the highest quality mine in the world...but they have to be make sense on capital cost to bring to production  and over the Long term bring down costs of production to make their shareholders a nice profit on the spread. The economics of your location are everything in mining.

We know the demand is there...and we know the capital is there....execution matters...

As for Altius...if the entire labrador trough gets built out...They become the Gina Rinehart of Canada...they are the largest holders of land leases in Newfoundland Labrador.

http://en.wikipedia.org/wiki/Hancock_Prospecting





Dazel

[Ross812]

In regards to the comparison to other mines, I have read that there are issues with the quality of the iron concentrate at Alderon's upcoming mine.  According to the articles I have read, there are higher levels of Manganese than is standard and as such it has to be sold offshore as North American plants won't process it.  The articles also suggested that there could be a $15 price reduction as a result of the quality.  However, this would seem to contract Hebei's agreement to purchase 60% of the product at a 5% discount to spot.  What is your guys take on this?  Will the remaining 40% go for a lower price?

I would like to read the articles you read about manganese content in the Kami ore. Can you provide a link?

Here is what I came up with earlier:

Smelter deductions as far as I can tell don’t really come into play with respect to iron ore. Smelter credits/deductions are given to compensate the smelter for waste above a certain benchmark. For iron smelting this is usually in the form of credits or deductions above an agreed upon %Fe. The factory has to use the same amount of energy regardless if 58% Fe or 64% Fe ore is used and the recovery from 58% Fe ore is lower and waste higher so a credit/debit is given in the form of $5/%Fe to compensate. Sulfur and Manganese are not smelter deductions because they are actually incorporated into the steel (not a waste product).  Quality deductions may come into play. Most European iron ore contracts I could find state a max allowed sulfur % at 0.05. As far as Manganese goes, 0.4-1.1% is desirable. Alderon ore will have 1.6% Manganese and .053% sulfur which means it will probably be blended with lower manganese/sulfer/fe content ores during sintering. The ore as-is is acceptable to make steel in China, but blending a lower quality 60% Fe Indian ore with Alderon’s 65.5% Fe ore would create a product that could be sold in Europe. Manganese does not start affecting the quality of the steel produced until ~4%. 65.5% Fe 1.6% Mn or can only produce 2.45% Mn steel. Sulfur and the grain size distribution are the two main detractors to this ore’s marketability.

The grain size distribution means the ore would have to be formed pellets before it could be used in North American electric arc furnaces. The quality factors make the Ore unusable in the US without blending sintering then pelleting the ore. There is really no reason to do this because the US already has an ample supply of DSO and acceptable ore pellets from Canada. The grain size distribution is not a problem in China as they sinter and use blast furnaces. China is primarily concerned with the %Fe. Chinese iron plants can buy cheap ore with low sulfur and low manganese from India. The problem with Indian ore is it has a low Fe content 56-60%. This is solved when blending it with hi Fe Canadian ore.

Kami ore is also 65.5% Fe which means it would be priced at a premium to the 62% Platt price. This is about +$5-5.50/%. Which means Kami ore could fetch a price at Platt + $17.5. Hebei was smart when they locked in a price at 95% Platt. Manganese levels do not particularly matter when selling to China. Sulfur levels are just outside the range of what is acceptable in Europe (6% too high), but they are not selling to Europe anyway. Prices for ore are negotiated directly; Hebei gets preferential treatment at 95% Platt. I don’t think other companies are going to get this sweet heart deal. I would look for Platt + $5-17 for everyone else.

Hebei is not stupid. They would not have negotiated a price of 95% Platt if they could get Platt - $15. The Platt price is based off 62% Fe. Alderon ore is 65.5% which would fetch a premium of Platt + $5/%Fe if pricing gets really competitive. Using Platt for the product price assumption seems pretty reasonable and a little conservative.

[no_free_lunch]

I would like to read the articles you read about manganese content in the Kami ore. Can you provide a link?

http://glennchan.wordpress.com/2012/08/08/iron-ore-miners-mainly-in-the-labrador-trough/

The article has a link to a scotiabank analysis of Alderon as well.  Well the link is purportedly from scotia, it's actually hosted on a different site which is kind of strange.  In it, they include the $25/MT transport cost to China so they are assuming the pricing is on a delivered basis.

http://www.grandich.com/wp-content/uploads/2012/07/Iron-Ore-Report-July-2012-ADV-only.pdf

The transport cost is unfortunate but the pricing might actually be higher than spot based on these comments:

• Hebei will purchase 60% of the annual production

up to a maximum of 4.8Mt of the first 8.0Mt of

iron ore concentrate produced at the monthly

average price per DMT for iron ore sinter feed

fines quoted by Platts Iron Ore Index (including

additional quoted premium for iron content

greater than 62%) less a 5% discount.

• Hebei will also have the option to purchase

additional tonnage at a price equal to the Platts

Price, without any such discount.

Quote is from page 8 in this document:

http://www.alderonironore.com/_resources/presentations/ADV_PPT.pdf

[ItsAValueTrap]

Hebei is not stupid. They would not have negotiated a price of 95% Platt if they could get Platt - $15.

I think what will happen is this:

Hebei gets the Platt benchmark price
They may pay extra if the Fe% is high, as specified in the benchmark.
There will likely be quality deductions as outlined in the Kami technical report.  Maybe it's $15/ton... who knows.
In general, deductions are based on the level of unwanted elements in the ore.  Over the life of the mine, the quality of the ore will vary.  By using a variable price, the smelter will pay less for bad one.  Using a fixed price would be stupid... otherwise the mine could sell some really crappy ore to the buyer and they could adjust the processing circuits to output more concentrate at the expense of delivering lower quality concentrate.

2- The other question is whether or not you should trust Alderon's management, BBA, etc.  The mining world is full of people who overpromise and underdeliver.  I would take the Kami technical report with a huge grain of salt considering what happened with BBA's technical report on Bloom Lake.  The economics of the project may not be as good as outlined in the technical report.

There is (a small amount of) metallurgy risk.  The concentrate may have lower than 65% Fe.  Sometimes we don't know how well a processing plant will perform until it is actually built... look at the failure that is Vale's Goro project (e.g. acid spills, environmental damage, etc.).  What happens on a bench or pilot scale doesn't necessarily extrapolate to production scale.  If you want to fudge the economics of a project, you would make minor tweaks to your metallurgy assumptions.  Of course, the Goro project is an extreme example where technological risk was very high because that type of processing is cutting/bleeding edge.

3- You can read skim through this book if you are masochistic:
http://www.scribd.com/doc/23475626/Wills-Mineral-Processing-Technology

Basically...
- What happens on a bench or pilot scale doesn't necessarily extrapolate to production scale.
- Mineral processing engineers have to optimize for getting rid of unwanted elements versus not getting rid of valuable ore.  Mineral processing techniques usually remove a lot of waste and a small amount of wanted ore... you have to find the right balance between getting rid of unwanted waste and throwing away less ore.

http://glennchan.wordpress.com/2012/08/08/iron-ore-miners-mainly-in-the-labrador-trough/

That's my blog by the way

[ItsAValueTrap]

The article has a link to a scotiabank analysis of Alderon as well.  Well the link is purportedly from scotia, it's actually hosted on a different site which is kind of strange.

Technically those analyst reports are the intellectual property of the firm that put it out.  Sometimes there are bootleg copies floating around because there are people who want to pump a stock.  Sometimes you will find copies of analyst reports hosted (presumably with permission) on a junior's website.

Of course the analysts generally suck up to juniors because the analyst's investment bank may raise capital for the junior and collect big underwriting fees.  So I never trust analysts.  There may be academic studies that show that you should do the opposite of analyst recommendations.  Check out this book:
http://www.amazon.com/Confessions-Wall-Street-Analyst-Information/dp/0060747706

[Dazel]

http://finance.yahoo.com/news/alderon-release-feasibility-study-kami-110000386.html

http://www.metalbulletin.com/Article/3136976/Iron-ore-and-coking-coal/Spot-635-Fe-iron-ore-prices-jump-13-this-week.html


Prices are now above $150....this is extremely positive for all involved in iron ore...Alderon's timing on the feasibility study has worked out very well.

Dazel.

[Dazel]

Its a value Trap,


I enjoy your posts...so please do not take this the wrong way...

To take Cliffs production costs for a mine "bloom lake"  where they have had nothing but operational troubles and a change in strategy for a couple of quarters is "wrong". I looked at your blog...you have asia pacific production costs at half of what they are. Your timing of your report is at the crash point of the iron ore market...your assumptions are on prices that are unsustainable for producers in the market globally not just the Labrador Trough.

Example of the Alderon bash was that they used $115 in their PEA...instead of the market price of $135 at the time of production....
"which may indicate that they think the price of iron ore is coming down over time"....should they use $170 for the feasibility study if they think it will go up from the current $155?

Sounds a bit off does it not?

As for the bloom lake and Alderon bashing you have been doing...I will give you the benefit of the doubt as you and everyone else that joined the crowd in being wrong on iron ore pricing in August to October...

We are talking about nothing when prices are this high...bloom lake production costs will come down and Alderon will be a successful mine.

Sorry have to call a spade a spade...you are wrong on bloom lake and Alderon...

And in your genius you will make a fortune on Altius!!!!