By The Gold Report

Source: Adrian Day for Streetwise Reports   02/05/2019

Fund manager Adrian Day discusses recent developments with two resource companies in his portfolio.

Altius Minerals Corp. (ALS, Toronto, 11.35) reported a strong end to the year, with royalty revenue for the quarter at C$17.5 million, and for the full year C$66.9 million. These are similar results as for the full calendar year 2017; Altius changed its financial year-end this year. In 2018, base metals contributed over C$29 million (with copper a majority of that), followed by potash and thermal coal, C$14 million and C$13.1 million respectively. Overall, higher potash volumes and prices had a positive impact, while the decision of Labrador Iron Ore Royalty, a publicly trade royalty company—of which Altius owns nearly 5%—to withhold a significant amount of its cash flow from its dividend, hurt results. Altius is forecasting similar total royalty revenue this year.

After the end of the quarter, Altius purchased a 2% royalty on the Curipamba copper-gold-zinc project in Ecuador. The purchase was from a third party; Altius already owns 21% of the equity of Adventus, the company which owns Curipamba.

Actively farming out projects

More important than last year’s results, perhaps, is the tremendous progress made on farming out properties it acquired during the long down turn. Self-described as “a very productive year,” Altius sold or partnered a record 25 different properties, covering a range of minerals, and located throughout Canada, and in Australia. On all transactions, Altius has created and retained a royalty as well as either payments or work commitments (or both). One transaction is of particular note, the creation of Adia Resources, currently private, created to advance Altius’ Lynx Diamond Project in Manitoba. Altius retains share ownership and royalty, bringing in De Beers Canada has a major shareholder.

One company which Altius sponsored—Alderon Iron Ore, in which Altius owns 38% of the shares plus a royalty on its projects—is advancing its 75%-owned Kami property, a premium iron ore project in Labrador, signing an agreement with Schneider Electric for the lease or purchase of equipment and help with financing.

At year end, Altius had $28 million in cash, $115 million in debt, and a portfolio of investments worth $139 million, most of which is in Labrador Iron Ore ($73 million) and a portfolio of junior equities ($54 million). (After quarter end, Labrador Iron Ore share price has jumped from just over C$24 a share to over $30, boosting significantly the value of Altius’ stake.

Trading at 7 x revenue and yielding 1.4%, Altius represents reasonable value. More importantly, the strong management, balance sheet and royalty pipeline offer the prospect of growing exposure to commodities in the years ahead. It is a core resource holding. The stock price, having dropped precipitously from $13 to $10 at the end of December, has recovered about half of that. We would buy more on weakness, under C$11.

Funds delayed

Lara Exploration Ltd. (LRA, Toronto, 0.43) reported that its partner Tessarema failed to pay US$1 million due at the end of the year for the Maravaia Copper Project in Brazil. Lara has already extended the due date once, and is in negotiations to amend the terms. Given Tessarema knows the project and has loans from a U.K. trading house for offtake, Lara is likely to stick with its current partner if a reasonable agreement can be reached (though the talks are likely to be complicated, given that three parties are involved and that Tessarema has broken its loan covenants). Currently Lara has a 5% fully-carried interest in the project and a 2% royalty.

For Lara, the lack of the payment means that cash is running low again, currently around C$750,000. There is a concern in the market that Lara may need to undertake a dilutive financing. I am not so sure. The company has demonstrated its ability to run on fumes for quite a time to avoid excess dilution. In addition to the potential Tessarema payment, Lara has other cash payments expected during the year: a payment of US$150,000 from Capstone on its recently closed buy into Lara’s Planalto copper property in northern Brazil is due once the drilling permits are received, expected at quarter end. In addition, Lara has a portfolio of various share interests that present opportunities to raise cash. We expect Lara to wait for some of its anticipated cash and avoid a financing.

At C$15 million market cap, and with astute management, and an active property portfolio, Lara is undervalued with several potential triggers (including a long-delayed lower court ruling on ownership of its Libertade property). For patient investors, it is a good buy here. (Disclosure: Clients of my money management firm own more than 10% of Lara’s outstanding shares.)

CLUELESS AND GUTLESS The Federal Reserve has caved in somewhat sooner than expected, suggesting they may have ended their rate hikes, while the program to reduce the balance sheet will end sooner than previously announced, ending at more than four times the size it was in 2008. Did they really think that the cuts in rates to zero and the massive increase in the balance sheet could be unwound without serious consequences?

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Altius Minerals and Lara Exploration. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Altius Minerals and Lara Exploration. Clients of Adrian Day Asset Managment own greater than 10% of the shares of Lara Exploration. I determined which companies would be included in this article based on my research and understanding of the sector.
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( Companies Mentioned: ALS:TSX.V,
LRA:TSX.V,
)