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SMALL CAP IDEAS: Altus Strategies has the perfect balance of risk and reward

In early September Altus Strategies completed a transformational deal.

Up until that point, Altus had largely been a mining exploration company with aspirations in the royalties space.

But with the US$34million acquisition of a copper royalty over the Caserones project in Chile, the company has made a major and significant step towards developing a full-blown royalty section of the business.

The attraction of royalties is that they provide a steady income at a relatively low risk.

Balance that against the upside of the Altus exploration portfolio – Altus already has close to a million ounces of attributable gold and a diversified portfolio of more than 30 projects – and you’re beginning to get a company that looks very well balanced indeed.

Gold rush: Mining exploration company Altus already has close to a million ounces of attributable gold and a diversified portfolio of more than 30 projects

For years Altus has been running its portfolio of highly prospective precious and base metals assets in West and North Africa, and the upside has been impressive enough to attract in banner investors like Sprott and La Mancha, the major shareholder in Endeavour Mining.

Now though, if you head over to Altus’s website the first thing you see on the home page is a descriptor of Altus as… The Mining Royalty Company.

So the acquisition of Caserones is more than just an opportunistic bolt-on to an existing business.

In fact, it’s laying the foundation stone for one of the two pillars that will hold up Altus going forward.

Caserones is likely to bring in more than US$3million a year for Altus after tax, according to co-founder and chief executive Steven Poulton, cashflow that’s likely to be recycled almost entirely into the African exploration endeavours.

Ultimately though, Poulton would like to get Altus’s royalty income up to around the US$10million mark and, entrepreneur that he is, there are already deals in the pipeline.

When and where these actually get done is a matter for conjecture at this stage. But the direction of travel is clear.

Altus, and its big-name supporters, want to create a highly cash generative royalty company that’s capable of supporting significant exploration efforts across a broad range of assets.

After all, US$10million in a year goes a long way in junior exploration, especially if some of your assets are partnered up with other people.

Although relatively new to the UK market, this kind of business model has played well in Canada over the past few years.

Probably its most notable exponent has been near-namesake Altius Minerals, which has managed to build itself up into a C$660million company over the past couple of decades.

But Altus’s partner in the Caserones deal, EMX Royalties, has also been building up a considerable head of steam of late pursuing the same strategy – its capitalization has almost tripled over the past three years and now rings in at just over C$300million.

That sort of scale is still some way distant for Altus, but it’s not the impossible dream it once was.

Altus began its life in 2007 as a minnow with only pennies and dreams, when Poulton started it up with colleague Matthew Grainger and ran it out of an unfashionable business park in Didcot.

Since then, in spite of the headwinds of the financial meltdowns and commodities bear markets that have occurred over the years, the company has been able to build its value up to the current £60million that the Aim market recognizes.

The shares are also traded on the Venture Exchange in Canada, but by and large the action takes place in the UK, where Poulton and Altus have long been known as an energetic force in the junior mining space.

Whether or not the acquisition of the Caserones royalty will bring more of a spotlight onto the company in Canada remains to be seen.

But there’s no doubt that the Altus model is likely to have significant appeal.

“Our shareholders like zero-risk royalties, and they like high risk exploration,” says Poulton.

“It’s the bit in the middle, when you build a mine and take some debt on that’s not appealing. We want to get to the stage where we’ve got +US$10million per year and all exploration costs are funded.”

The corollaries in regard to dilution are clear enough however again the company has thought ahead by arranging a low cost strategic loan facility with its cornerstone shareholder, La Mancha, to cover the Caserones acquisition.

This strategy means that the company doesn’t have to be beholden to anyone – neither to sentiment in the equity finance market, nor the risk committees that hold sway in debt markets.

It also means that the decisions it makes in exploration, like moving into new countries and jurisdictions can be its own. Already Altus has shown itself ready to think outside the box. 

Aside from some good-looking gold exploration in Mali, it’s also been a trailblazer in Cameroon, was one of the first movers in Egypt when the mines ministry opened things up there last year, and has been slowly and steadily progressing a portfolio of projects in Morocco for the past few years.

The exploration focus has been deliberately on Africa, says Poulton, even though Altus will look to source royalty deals globally.

So why Africa for exploration? The answer is simple enough.

“Africa is a huge continent that’s been underexplored,” says Poulton.

“It has an average depth of discovery of nine metres. In the US it’s closer to 200 metres. We’re not looking at glacial terrains or trying to interpret trace elements.”

In many cases, he says, you can initiate your exploration by interpreting satellite imagery alone.

It’s an approach which has paid off so far, in terms both of growth and of the support Altus has managed to garner. Now that the first royalty deal is done and Altus is likely to become cash generative shortly, Poulton is looking to put the company on a few more radar screens.

The first cashflow from the royalty is expected before Christmas, and that should help. But there’ll be plenty of newsflow from the exploration projects, and possibly even some deal flow too. It’ll be very interesting to watch. 

Read more at DailyMail.co.uk