OLGA Zhukovskaya/iStock via Getty Images
What stock is the best to buy in the current high-inflation environment and what are the best stocks to invest in? My top pick must meet the following criteria:
- As inflation rises it is poised for more production and higher sales prices.The company is gaining sales at an increasing pace. Its operating costs are low, which allows for expanding margins.
- It is preferable to be a capital-light enterprise so that increasing revenue and expanding margins can lead to fattening cash flow.
- Because high inflation tends engender political volatility, the business generates revenue by operating in politically stable jurisdictions.
- Management has skin in this game and is inclined use part of the cash flow to reward shareholders.
- The stock is currently undervalued relative its intrinsic value, but investors can still purchase it at a sufficient margin of safety.
The stock of Altius Minerals Corp. (ALS.TSX)(OTCPK:ATUSF) ticks all the boxes of the afore-described perfect setup. Let me explain.
Altius will benefit from a high-inflation climate
Altius Minerals operates as a mineral royalty company. It owns royalty rights in 12 producing assets in Canada. These are long-lived, high-margin assets that produce base metals like cobalt, nickel, zinc, and cobalt, iron ore, and coal-fired energy generation (Fig. 1).
Fig. 1. Pie charts showing the royalty revenue of Altius Minerals for 2020 and 2021. (Altius Minerals)
Steady growth in royalty revenue
Altius has seen a 37.4% increase in royalty revenue since 2014 (Fig. 2). The three main forces driving the growth are: (1) the perpetual exploratory option at no cost for Altius; (2) new assets to the portfolio; and (3) the strength in commodity prices of late.
Fig. 2. From 1Q2014 to 4Q2021, royalty revenue per Altius Minerals share (Altius Minerals)
As the commodity super-cycle continues, royalty revenue will continue to grow.
- High commodity prices incentivize mine operators to reinvest capital into producing mines to increase production and extend the mine life. Eastern Deeps mineVoisey’s Bay (first nickel cobalt-copper production 2022), Chapada. mine expansionunder technical studies), (ongoing). Tailings for copper reprocessingStudy to extend the mine’s life) and Nutrien (NTR), raising potash production Nameplate capacity 50%Altius will receive the benefit of this at no cost.
- A host of other projects are being developed towards production, including Curipamba copper/gold deposit (2% NSR royalty, fully financed permit pending, first production expected in early 2024). Kami iron ore Project(3% GSR royalty, feasibility study update expected 2H2022), the 3.37 million ounce Silicon gold deposit (1.5% NSR royalty, delineation underway).
- Third, Altius is exposed to the commodities copper, nickel and zinc as well as iron ore, cobalt and iron ore. These commodities are structurally undersupplied and likely to see price strength in the near future. We are only in the beginning stages of a commodity super-cycle.
- The operating costs per dollar in royalty revenue will also drop as top-line growth is predicted to continue. This economies of scale is built on the royalty business model which is known for having extremely low operating costs and being protected from any cost expansion at the individual mine level.
Project generation
Altius, like many other royalty companies, acquires royalty interests from operators. However, Altius generates mining projects and then sells them to junior explorers in return for equity interests and retained royalty. Altius’s royalty pipeline is organically grown at negative capital cost through projection generation.
- Altius had $56 million in junior exploration equity as of 2021 and $16 million in net proceeds (Fig. 3).
Fig. 3. Equity interest from project production relative to cash and/or debt (upper) and project-driven growth equity portfolio (lower). Modified from Altius Minerals
As the commodity cycle swings higher I expect the junior equity portfolio will continue to expand and Altius will realize more proceeds.
Equity investment
Altius holds two strategic equity investments. These are Altius Renewable Royalties Corp. Both are expected to reap huge benefits from the commodity upcycle.
- Altius Royalties holds a 59% equity stake in Altius Renewable Royalties. This company holds gross revenue royalty rights in a portfolio that includes utility-scale solar and wind energy projects. Altius Renewable Royalties’ market cap was C$306.77 millions as of April 14, 2022.
- Altius also holds a 12.6% equity stake in Lithium Royalty Corporation. The corporation has accumulated 18 royalties from lithium projects, including three in production. Lithium Royalty Corporation might seek to sell or offer public stock in 2022.
Valuation and Risk
A well-run royalty stock is a profitable business model that can be used to compound over industry cycles. Examples of this include Franco-Nevada (FNV), and Wheaton PRECIOUS Metals (WPM). The crown jewel of the mining sector, royalty stocks merit a high valuation (Fig. 4). Altius Royalties became a royalty company for the first time in 2014. It has been consistently FCF positive since 2018. Altius Royalties is an emerging royalty play and is significantly undervalued compared to large-cap peers (Table 1).
Fig. 4. Stock charts of Franco-Nevada and Wheaton Precious Metals, (WPM) and Altius Minerals, (ATUSF). Laurentian Research modified the Seeking Alpha chart.
Table 1. Table 1. Laurentian Research compiles Seeking Alpha.
- If it continues to grow for 10 years amid the ongoing commodity super-cycle and conservatively assume it enters a terminal decline of 20 years, then Altius Royalties could be worth US$42 per shares. This confirms the safety stock investors have.
Even though mature royalty companies compound secularly over time, commodity cycles make them relatively high beta. The operations at the individual mine levels are out of the control and control of the royalty companies. Investors are therefore exposed to unfavorable volatility when one or more mines are affected by resource nationalism, labor issues or subsurface uncertainties. Franco-Nevada is Wheaton. 113 23Altius currently produces 12 assets; it will take Altius long to reach the level of portfolio diversification achieved by Wheaton, Franco Nevada.
Royalty companies are capital allocators that specialize in unconventional financing for mining projects. Altius’ 25-year-old track record and success in converting project generation into royalty income shows that its management is skilled in capital allocation, uncommon discipline and long-term perspective. Insiders hold 6.3% of the company, which gives them substantial stake in the game. Through ever-increasing dividends, opportunistic stock buybacks, and increasing shareholder returns (Fig. 5).
Fig. 5. Altius Minerals’ capital return, in C$ Millions, is achieved through dividend payments or share repurchase. (Altius Minerals)
Takeaways for investors
“Not gold, oil and copper are the best inflation hedges. Inflation is not a good hedge with gold.” Jeff CurrieGoldman Sachs.Especially given the Fed pivot, commodities are the best place to be.“
Altius Royalties, a rare royalty stock, gives investors exposure both to copper and a host commodities that are at the center of this inflation climate, without introducing operating costs expansion, capital intensity, or jurisdictional risks into the equation.
Altius therefore fits the bill perfectly as an inflation hedge and, most likely, an inflation beater.
[This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.]