Saturday, March 7, 2015

Altius Minerals acquires Callinan Royalties Corp.


Pursuant to the Arrangement, Altius will acquire each outstanding Callinan common share for 0.163 of an Altius common share and C$0.203 in cash, valuing each Callinan common share at C$2.27 based on Altius’ closing share price on the Toronto Stock Exchange as of March 4, 2015. This represents a 28% premium to Callinan’s closing price on March 4, 2015 and a 26% premium to the respective 20-day VWAPs of both Altius and Callinan for the period ending March 4, 2015. Upon completion of the Arrangement, Callinan will become a wholly-owned subsidiary of Altius and existing Altius shareholders and Callinan shareholders will own approximately 81% and 19%, respectively, of the outstanding Altius common shares. Callinan will be entitled nominate one member to the Altius board of directors upon closing of the Arrangement.

Altius is a long term holding for me. The management at Altius has demonstrated over a period of years that they know how to serially compound capital. This acquisition is another demonstration of this principle. The Altius royalties are long life assets (30+years) in commodities that are needed for modern civilization itself. Thermal coal, potash, copper, the case of the thermal coal royalties there is no price risk as the royalty is based on volume and are tied to coal fired plants in Canada. 

This is one you just buy and put away for many years and let the management compound your capital for you. The kicker is that once the debt comes down a bit more the management has been clear that they plan to institute a dividend. In the past share buybacks have been the norm whenever management has felt the shares were undervalued. Most people will not buy a company like this because they are not patient enough to wait for the plan to play out over time along with the fact that collecting royalty checks is not very sexy. However, it is quite profitable and this is how long term wealth is created. 

The other thing I like about these royalty companies is the optionality they provide. Typically, along with the royalty, the company has an option on the surrounding ground which can add up to thousands or tens of thousands of acres. As money is invested in exploring adjoining properties the royalty company usually has the option of acquiring a royalty on any additional resources that are found. As the former CEO of Franco-Nevada said, "If you control a million acres of ground don't you think at some point you get lucky?" So there is long term upside. 

As this article from Richard Mills explains the demand for commodities is not going to go down over time it will only increase.

At this moment there are slightly over 7 billion people living on this planet, an urbanization rate of 53 percent means there are roughly 3.71 billion urbanites in the world today. It has been estimated that by the year 2050 our global population will reach 10 billion people. If our global population does indeed reach 10 billion people, and if Birch and Wachter's expected urbanization rate of 70 percent is achieved, seven billion people, or almost the equal of today's current world population will be considered urban.

Could we hit the ten billion people mark? Could 70 percent of us be living in cities by 2050? The answer is likely yes. Developing countries are responsible for 90 per cent of current population growth - these are on average very young people with many years of fertility/reproduction left to them. By the year 2025, in just 10 short years, 84 per cent of the world's people will live in developing regions.


The developing world's urban centers are expected to burgeon, drawing 96 percent of the additional 1.4 billion people by 2030. Due to the overall growing global population - but especially an exploding urban population (urban populations consume much more food, energy, and durable goods than rural populations) - demand for water, food, housing, heat, energy, clothing, and consumer goods is going to increase at an astounding rate.


But what if all these new one billion consumers were to start consuming, over the next 10 years, just like an American? What's going to happen to the world's mineral resources if one billion more 'Americans' are added to the consuming class? 

In 2010, more than 38,000 pounds (19 tons) of minerals and fuels were needed per person to maintain the American lifestyle.

What will happen to prices of commodities long term indeed? Buy right and sit tight.

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