Altius Minerals

01/20/2014 7:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

Offering value, growth, plus a future dividend, our top pick for 2014 is a resource exploration company with a difference, suggests Adrian Day, money manager and editor of The Global Analyst.

Altius Minerals (OP:ATUSF) (TSX:ALS) is a resource exploration company with a difference. It has sought out partners for the expensive work of developing properties while retaining royalties. Now in a transformational transaction, Altius has announced it is buying 51% of a package of mineral royalties for $233 million.

The royalties are on 11 long-life producing mines of potash and coal, with most of the coal assets paying based on production, not the prevailing coal price. The royalty payers are mostly large companies, utilities in the case of the coal, and Potash and Mosaic for the potash.

Thus, these are mostly low-risk assets with almost utility-like returns. Last year, Altius' 51% would have paid $25 million.

To finance the deal, Altius will spend about $110 million of cash and take on about $130 million in debt; it will issue no equity. The company plans to eliminate the debt as a priority, either from royalty cash flow or from the sale of some of the shares it holds in other companies (valued at about $100 million now).

The company has also indicated it plans to initiate a dividend from the royalty cash flow, once debt is reduced significantly. The transaction completes the transformation of Altius, from a prospect generator exploration company, to Canada's largest diversified royalty company.

In addition to these royalties, Altius also has a cash-flow generating royalty on the Vale's large Voisey's Bay nickel mine, as well as a significant royalty on the development-stage Kami iron ore deposit.

Once in production, Kami will generate as much as the new royalties (while Voisey's Bay, at around $5 million last year, is considerably less, but covers the overhead).

Altius remains a low-risk, value play, undervalued on a sum-of-the-parts calculation, with lots of upside and the potential to morph into a dividend-paying company within a couple of years.

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