Altius Minerals Corp. (ALS:TSX)has agreed to buy Lithium Royalty Corp. for C$520 million in cash and shares at a 30% premium. This is the first significant acquisition from Altius since they sold most of their Arthur Royalty, which gave them cash for acquisitions.
The purchase represents almost 30% of Altius' current valuation. LRC shareholders can elect to receive cash or shares, subject to aggregate cash representing no more than one-third of the total consideration (i.e., about $173 million), or a maximum of 11.5 million Altius shares. Altius, which was an early investor in LRC, already holds about 8% ownership interest in LRC indirectly.
The portfolio of 37 royalties includes four producing royalties. Lithium mines tend to be long life, while LRC's royalties are primarily in the Americas and Australia. Thus, this portfolio fits Altius' emphasis on long-life assets in politically low-risk jurisdictions. LRC's CEO Ernie Ortiz is going to stay on with Altius in the corporate development team. The transaction is expected to close at the end of the first quarter.
The Company Has a History of Astute Purchases
Altius is buying counter-cyclically. The lithium price, despite a strong rally in the last month, is trading at barely a third of its end-2023 price and just a fifth of its end-2022 highs. I do not pretend to be an expert on the lithium market sufficient to judge whether this is a good price or the outlook for the price might be. I am a little surprised at the size of the foray into lithium.
But I do know that companies like RTZ are spending millions exploring for new projects, while Brian Dalton and the Altius team, astute analysts of the commodities markets, have been very successful at consistently buying countercyclically. Assuming the maximum cash will be paid for the purchase, it will still leave Altius with about $370 million available, about half of which is cash.
Altius is in strong shape as the commodities bull market gets underway. With a diversified asset base, several projects advancing towards production, and top management, Altius remains a Buy for those who do not already own it.
TOP BUYS this week, in addition to the above, include Midland Exploration Inc. (MD:TSX.V), Lara Exploration Ltd. (LRA:TSX.V), and Kingsmen Creatives Ltd. (KMEN:SI).
Silver up Sharply on Multi-Pronged Buying: Is There a Physical Squeeze?
The silver price has been on a tear in the past month. After moving from under $29 an ounce at the start of the year, it move to over $53 at the end of last month — a strong enough move, no doubt — while this month has jumped to $79.27. Indeed, silver closed at $85 in Shanghai, while it was reported to have traded over $90 in the Middle East on Friday. In the last six months, while gold has appreciated 34%, silver is up a whopping 119%.
What has caused this tremendous price move? Is the paper market going to break? And what is the outlook? Three broad factors have moved silver this year:
- The increased demand for industrial uses, including renewables (especially solar panels) and particularly for data centers, demand which is largely inelastic;
- Structural supply constraints that prevent increased supply matching increased demand, leading to historically low inventories at all major exchanges, including the LBMA, COMEX, and Shanghai; and
- Renewed investor interest, with purchases doubling from last year to about 140 million ounces, even as investor selling has diminished.
Silver Characteristics Differ From Gold
Many differences between gold and silver illustrate the physical issue. There are no large stockpiles of silver; not only are exchange inventories depleted, but neither central banks nor private banks do not hold large supplies that could be sold or leased, for example. Much of the silver used in industry cannot be recovered economically, so scrap is not halting the price advance.
And on the supply side, since some three-quarters of global silver production is byproduct, often small amounts from base-metals mines, there is supply response to higher prices; this situation is almost the reverse of 40 years ago, when most silver came from primary mines. Yes, higher prices will lead to increased exploration and development of silver makes, and make it easier to finance them, and we shall likely see some new silver mines next year. But the bulk of silver comes as a by-product, and the zinc miner in Puru is unlikely to build a new mine because the price of silver, representing less than 10% of his revenues, increases.
Silver Moves to Backwardation, Signifying Current Shortage
Significantly, in the London OTC physical market, the silver price has moved to backwardation, with the spot price trading higher than futures (the reverse of the normal condition). This indicates an immediate shortage of product, with buyers willing to pay a premium for immediate delivery.
However, since the price for futures delivery is lower, it also suggests that the market believes the shortage will be resolved over time. Backwardation situations rarely last very long. Note that as of now, the COMEX paper market is not in backwardation.
How Much Validity Is There in the Gold/Silver Ratio?
With this move, the gold/silver ratio has dropped under 60x (from 88x at the beginning of the year). Given the fundamental changes in the silver market over the past decades, both on the demand and supply side, I do not put much credence in the ratio going back very far, but it is one indicator of how silver remains undervalued. At the 1980 highs, the ratio was an extreme under 6 times; it has averaged 45 x in the last quarter century.
The spot premium is leading futures buyers to take delivery. It is also leading ETFs to pay up. ETF inflows after years of consistent outflows. Inflows picking up last six months, particularly strong last few weeks, including $1.1 billion into SILV on December 12th, the highest single inflow by far in more than 10 years. Although gold has also seen steadily increasing inflows over this period, it has not seen the massive spikes that the silver ETFs have.
The ETFs Have Begun To Lag the Spot Price
Temporarily, ETF inflows can exceed deliverable supply. There are concerns that this will be a longer-term issue, leading ETF prices to lag the rise in the price of silver. This has not been the case; the iShares Silver Trust (the largest silver ETF) has been trading in a noticeable gap, developing virtually lockstep with silver all year, as has the Sprott Physical Silver Trust.
But a widening gap has developed in the past few months, greater for the far smaller Sprott Trust. For the last six months, while bullion is up 119%, the Sprott Trust has risen "only" 114%, a noticeable gap above the storage and insurance expenses of a trust.
Why Are the Silver Stocks Lagging?
Silver stocks have displayed interesting performance, dramatically outperforming in the first half of the year — the Global X Silver Miners up over 51% compared with 25% for silver itself. But the situation reversed in the last six months, with silver outperforming the stocks by almost 30%. This has something to do with the specific companies that make up the index.
Whereas Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE), Pan American Silver Corp. (PAAS:TSX; PAAS:NYSE), Hecla Mining Co. (HL:NYSE), OR Royalties (OR:TSX; OR:NYSE) and so on were rising in line with gold stocks before silver really took off, they have definitely lagged silver recently, though they have continued to move in line with the gold stocks.
If one looks at the more focused silver stocks, though they have picked up steam and generally outperformed gold stocks in the last months or so, they have mostly still lagged silver bullion.
Short-Term Pullback in the Cards
In the very near term, we could see a pullback in silver, and it could be sharp. Traders holding off selling this year may cut positions in the New Year (postponing paying taxes by a year). The increased COMEX margin requirements on precious metals, effective 29th , may lead to some selling from investors on margin. Margin will increase to 25% for silver, even higher for the initial margin for some contracts.
Margin requirements are already high, however, so any impact will be marginal (excuse the pun) rather than sudden broadscale liquidation. And, of course, any time there is a strong move above trend in any market, there is frequently a pullback, if only temporary. Offsetting these factors, China will require export licenses for silver beginning January 1st, and China controls 60-70% of globally traded silver. Note that these are licenses limiting which companies can export. So while this may limit supplies in the near term, it may not limit them beyond.
Silver Demand Will Continue if AI Projections Continue
I suspect that we may see higher silver prices in the immediate term; $90 or $100 is not out of the question. The silver stocks may play catch-up. But I am not one of those calling for $200 or $300 in the near term as the paper market breaks on the back of a physical shortage. These things tend to resolve, as the futures price and indeed the recent silver equities move suggest.
However, to be clear, if the AI sector continues to call for massive data center builds, let alone actually build them on the scale projected, then there will be huge demand for silver (and other commodities), leading to significantly higher prices. But there's the rub: I tend to think the projections will start to be curtailed in the coming months, and the reality will fall short of projections in the next year or so. Lastly, where silver and silver stocks move in absolute terms will partly reflect where gold and gold stocks move, and as outlined several times recently, I remain very bullish primarily for monetary reasons.
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Important Disclosures:
- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Altius Minerals Corp., Midland Exploration Inc., Lara Exploration Ltd., Wheaton Precious Metals Corp., Pan American Silver Corp., and Or Royalties Inc.
- Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: None. My company has purchased stocks mentioned in this article for my management clients: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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