Chaffee Royalties - Agora Financial Services

14 Pages·2013·0.52 MB·English

Chaffee Royalties:
How to Build Resource Royalty Wealth While You Sleep
The royalty plays I’m about to share with you could change your portfolio forever. The older you get,
the more likely you are to want some key regular income streams to feed your retirement lifestyle.
Jerome B. Chaffee didn’t make enough as a schoolteacher. So he took a job as a sales clerk in a dry goods
store. Then he took that money and started a dry goods store of his own. When that wasn’t enough, he packed
his bags and went to Colorado in 1860.
See, Colorado then — as right now — was resource rich. And even though Chaffee knew next to nothing
about mining, he saw the possibilities. So he snapped up the “royalty rights” on as many gold and silver
claims as he could afford.
Every time one started to pay off, he bought more. Until he had a business making between $300,000–
500,000 per year — or as much as $17.3 million today. Now that’s something to retire on.
Heard of Franco-Nevada? That’s a company that operates just like Chaffee did. It delivered a 50-fold return.
Today, I’m going to give you four such companies — ready to grow up to be big billion-dollar players like
Franco-Nevada. They are set up similarly to how Chaffee did it back in the 1860s. And just like Chaffee did,
we’ll focus especially on commodities: metals, oil and gas, and agriculture.
You’ll get royalties coming in on resources already discovered. Plus, there’s also potential for more discover-
ies down the line at each of these players. By owning a piece of the royalty rights, you’ll be locking in those
future income streams too.
When these resource owners of these companies invest more money to expand their operations, you
also automatically own a piece of that expansion. Without investing another dime.
And if another breakthrough discovery occurs on one of their properties? The royalty rights shareholders
own a piece of that too. Plus, expect a bump in price for the royalty company’s shares.
Buying shares of resource royalty companies is like owning an option on the resource boom. You get all
the future upside gains at a much cheaper entry price. And without any of the major downside headaches that
come from owning, say, a tiny gold exploration company.
As long as these drilling or mining operations are producing, the royalties roll in year after year. And
with the companies I’ve found and featured below, you have access to “long haul” deals that have as many
as 25–30 years of production left.
So those royalties have plenty of time to pile up pretty high. In other words, you could start benefiting
from the royalties immediately. And then keep on collecting for many, many years to come. All while even
more royalty rights get added to your share of the overall portfolio.
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Plus, here’s the best part. Not all royalty companies are resource companies! Today’s recommendations
will further diversify your income streams by skimming the cream from booming areas like health care
and agriculture…
First off, let me show you around a great little royalty player you might want to consider owing. It also
carries six lucrative royalty deals — all of which give you opportunities to pile up royalty wealth…on three
continents, with five different commodities, under six different deals.
“CHAFFEE” STOCK NO. 1:
The “Chaffee Royalty” Genius About to Do It A Third Time!
Profitable Confessions of One of the Youngest
and Most Successful CEOs in Mining
So what we do is we give people money to go build mines or develop oil fields or gas fields, and what
we get in return is a contract that allows us to purchase a certain percentage of their production
for the life of that, and we purchased it at X price.
So for example, on a gold mine, we might give someone $50 million, and what we’ll get in return is
the right to purchase 20% of their gold at $500 now. And then we just take the ounce of gold every
time we buy it for $500, and we sell it at the spot rate, which today is about $1,430 an ounce. The
difference between $500 is our profit margin and our cash flow, and we continue to reinvest our
cash flow into purchasing new contracts.
If we negotiate a contract or buy gold at $500 an ounce, we know we’re buying it at $500 now, this
year, next year and for several years to come. So that really decreases the risk to the operating process
for our investors. — Nolan Watson
What’s genius about the streaming model is that while costs go up for the miners… the royalty company
is locked in at a fixed price.
So say they purchase 20% of gold that a mine produces over a 30-year life. They’ll be purchasing all that
gold at just $500 — for 30 years — regardless of what happens to the miners’ costs during that time.
The CEO of this first “Chaffee” company was previously the driving force at another famous Canadian
“Chaffee Royalty” company…
His previous company cornered royalties in the silver market. In fact, if you’ve followed precious metals
in the past few years, this silver royalty company probably popped up on your radar screen: Silver Wheaton.
It trades under the ticker SLW on both the New York and Toronto exchanges.
The royalty genius in question is the 34-year-old Nolan Watson.
When just 26 years old, he took the CFO helm, and helped drive Silver Wheaton’s market cap from
$300 million to $3 billion — a more than 10-fold increase.
Then in 2008, he left the silver royalty firm to found another “Chaffee Royalty” play, Sandstorm.
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He applied his royalty model that had worked so well in the silver market to the gold market. He raised C$47
million in 2009. In the first two years, he nearly quadrupled this gold royalty company’s share price…
Sandstorm Gold Ltd. (SAND:nyse) focuses on acquiring gold and other precious metal purchase agree-
ments from companies that have advanced-stage development projects or operating mines.
The company also offers upfront financing for gold mining companies that are looking for capital, and
in return it receives a gold streaming agreement, which gives the right to purchase a percentage of the life
of mine gold produced at a fixed price.
It has 10 gold streams, including six producing gold streams, and four net smelter return royalty agreements.
With more on the way… but that’s not the important story here.
Because now the third time’s the charm… his third “Chaffee” opportunity could prove even bigger.
This time, he’s applying the same super-successful royalty model he used in precious metals to the natural
gas, copper and other commodity markets.
He split his company into two parts to create the new Sandstorm Metals & Energy (SND:tsx and
STTYF:otcbb). It’s the very first diversified streaming company in the resource arena. It balances energy
with metals. So you don’t have to pin your fate to a single metal’s market.
For this reason, and with this royalty innovator at the helm, I believe Sandstorm Metals & Energy
could prove even better than getting into Franco-Nevada at the start of its amazing 50-to-1 profit run.
Using the same “upfront financing” model, Sandstorm targets companies looking for capital. In return,
they receive a commodity streaming arrangement: the right to purchase a certain percentage of what’s pro-
duced over the life of the asset — a fixed price.
Sandstorm’s portfolio includes four commodity streams in copper, palladium and natural gas. And don’t
think the growth will stop there. It plans to pick up streams from more low-cost operations fronted by strong
management teams.
So far it has Canadian Zinc Corp., Colossus Minerals Inc., Donner Metals Ltd., Entrée Gold Inc.
and Thunderbird Energy Corp. in its wheelhouse.
Let’s check out some details on those commodity streams and its net smelter return (“NSR”) base
metal royalty, starting with the Mancos Shale play.
If you’ve ever flown cross-country, say from Los Angeles to New York (or vice versa), there’s a good
chance you’ve seen this huge deposit. Looking down from your plane window, you might have missed the
significance because it looks like miles of mountains and wasteland. But underneath the elephant-skinned
outcroppings, there’s a “Chaffee Royalty “ stream of unbelievable proportions…
It’s called the Mancos Shale. And underneath it, there’s the equivalent of 59 billion barrels of oil. However,
many oil investors have not even heard of this shale play — and for good reason. Because it’s not oil buried
in the Mancos Shale, but natural gas.
Hidden deep in Mancos Shale is one of the most promising natural gas finds in the country. At 3,600
square miles, the basin is the largest natural gas-producing region in the Rockies. There’s easily enough energy
here to make this one find a cash cow for the next 20–25 years.
On the Mancos Shale deal alone, this “Chaffee” play should collect minimum royalties of $25 million.
That’s just the bare minimum, which they’ll get even if natural gas prices today don’t budge another inch.
That’s all thanks to their royalty deal with Thunderbird Energy Corp.
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Gordon Creek Property — Natural Gas Stream
Sandstorm has a natural gas stream with Thunderbird to purchase 35% of the natural gas produced from
the Gordon Creek Property at $1.00 per mcf (plus 20% of the price received that is above $4.00 per mcf).
Gordon Creek stretches across 7,900 acres of Mancos Shale, with four wells currently producing, and
seven shut-in wells. It has a 100%-owned gas gathering and water disposal system that does require some
upgrading. Thus, Sandstorm is in process of adjusting the terms of the natgas stream to help Thunderbird
raise additional third-party capital.
Serra Pelada Mine — Palladium Stream
Sandstorm has a palladium stream with Colossus Minerals Inc. to purchase 35% of the palladium produced
from the Serra Pelada mine at $100 per ounce. Palladium goes for around $750 per ounce.
Look for Serra Pelada to start producing gold before the end of 2013. Platinum and palladium production
will follow at the end of 2014.
Right now, Colossus is building a stockpile of ore ahead of processing plant commissioning.
Bracemac-McLeod Mine — Copper Stream
Sandstorm has a copper stream with Donner Metals Ltd. to purchase 24.5% of the copper produced
from the Bracemac-McLeod mine at 80 cents per pound.
Currently, copper’s going for over $3 a pound. Should that change and copper prices fall below $2.75,
payments to Sandstorm would be 55 cents per pound.
The mine has started production, although Donner isn’t selling anything to Sandstorm this calendar year.
The idea is that it will be striving to meet working capital obligations with project operator Glencore Xstrata.
This is Sandstorm’s largest stream. Expect material cash flow generation in 2014 and beyond. Bracemac-
McLeod will be the reason to see the stock price get a re-evaluation from Wall Street soon…
Hugo North Extension and Heruga — Copper Stream
This copper stream deal with Entrée Gold Inc. takes us to my favorite emerging market: Mongolia. And
this deposit is part of the world-class Oyu Tolgoi copper mining complex in the southern Gobi desert. I’ve
been to Mongolia and I’ve been following the development of the Oyu Tolgoi (OT) mining project for years.
This is the biggest financial undertaking in the history of the country. It is the largest undeveloped copper and
gold project in the world. Right across the border to the south is China, the biggest consumer of commodities
in the world. And this mine just started producing…
Open-pit mine construction was completed early this year, but the first shipment out was delayed several
weeks as Rio Tinto lined up necessary approvals.
Meanwhile, Mongolia’s government has been putting pressure on Rio Tinto to maximize returns, while
Rio wants to keep an eye on debt and cutting costs. Expect some hiccups ahead.
The mine will continue to up output and should clock production of at least 75,000 metric tons of cop-
per concentrate this year. That promises some 36 truck convoys a week carrying copper to China. Full output
will be 450,000 tons of copper. Plus, there’ll be gold, silver and the rare earth metal molybdenum as profitable
byproducts. The IMF expects the mine to generate up to one-third of Mongolia’s GDP when full production
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is reached circa 2021.
The deposits are on the Entrée-Oyu Tolgoi LLC joint venture property, part of the big mine complex.
Sandstorm has an agreement in place to purchase 2.5% of Entrée’s 20% share of the copper produced from
the Heruga and Hugo North Extension deposits at 50 cents per pound.
This agreement will stand in place until 9.1 billion pounds of copper are produced. After this, the pur-
chase price will go up to $1.10 or the market price (whichever is the lesser). However, this is subject to any
inflationary adjustments.
Sandstorm purchased this copper stream for an upfront $5 million back in 2013. The Hugo North Extension
is one of the world’s richest copper-gold deposits. Heruga is the one that offers the molybdenum in addition
to more copper and gold. (Additionally, Sandstorm Gold, which I mentioned earlier, has the right to purchase
over 20% of the gold production at the Heruga and Hugo North Extension.)
Oyu Tolgoi LLC (a subsidiary of Turquoise Hill Resources and the government of Mongolia) and its project
manager Rio Tinto are developing the project. Entrée has a 20% interest in both mine deposits. First production
from Entrée’s joint venture is set for 2019.
Sandstorm also just acquired a 1.2% base metal NSR on the Prairie Creek project located in the Northwest
Territories, Canada, for $6.8 million.
Prairie Creek Project — Zinc-Lead Royalty
The Prairie Creek deposit offers zinc and lead in addition to silver. The total proven/probable reserve
offers 151 grams per tonne of silver on 5.2 million tonnes, along with 9.4% zinc and 9.5% lead grading.
Canadian Zinc holds permits for the exploration and development of Prairie Creek and is moving through
the final stages of the Type A water license — without which it can’t operate the mine. Lead sulfide, zinc
sulfide and lead oxide concentrates will be produced on-site and then transported to a smelter. Exploration
drilling around the mine site and north of the existing resources is ongoing.
I’ll stop short of officially recommending Sandstorm Metals & Energy here. It’s a very exciting emerging
royalty player, but for the purposes of my average newsletter reader, it’s a bit too early stage to be in our
portfolio. Plus, it’s quite small, with only a tiny $38 million market cap.
Nonetheless, I could not resist telling you about it, because the upside is potentially huge.
If you have a pretty strong stomach and want to take a flier on a $1.15 stock, you might want to build
an early position now.
However, I have another “Chaffee Royalty” play that is a proven performer that you can buy right now…
Let’s explore a second great streaming royalty company that I’m following regularly in Mayer’s Special Situations.
What makes it unique is that it’s about creating a steady income stream… not a few big home runs. How they
do it gives you a special advantage.
“CHAFFEE” STOCK NO. 2:
Royalty Profits While You Sleep — 12 Cash Streams From
Alaris Royalty
Alaris Royalty (AD:tsx) is a company that invests in private, owner-managed companies in exchange for
a royalty. Alaris, though, is a unique royalty company. A former investment banker, Stephen King, saw an
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opportunity to invest in private companies. But he wanted to do it in a different way than is usually done.
King wanted to invest only in preferred equity, not the common, which ensures that steady income stream.
King pitched the idea to Clayton Riddell, a self-made billionaire in the oil and gas business in Canada.
Riddell liked the idea and backed a $75 million line of credit.
King developed a set of investment criteria: a long track of sustainable free cash flow, low debt levels, low
capital spending needs, an experienced management team, low cyclicality and low obsolescence risk. He also
wanted to assemble a diversified portfolio of royalty streams in different industries and geographies.
Then King, along with Stephen Reid and Riddell, founded Alaris in 2004. Stephen King is the president
and CEO. Stephen Reid is vice president. Clayton Riddell sits on the board and owns about 17% of the shares.
Altogether, insiders and directors own about 21% of the company. There are only seven employees.
Basically, you can think of Alaris as a holding company that invests in a group of different com-
panies. But the twist — and what makes Alaris unique — is how they structure these investments. It invests
only in passive preferred stock. This has several advantages.
For investors, the preferred equity status means Alaris gets paid ahead of the common shareholders.
Remember, Alaris’ goal is to create a basket of dependable royalties. So this is a safer place to be in a company’s
capital structure. Alaris protects itself through covenants and other agreements much like a secured creditor.
For example, a change in control or a big capital spending project or the incurring of debts — all need approval
by Alaris. If a royalty company doesn’t pay Alaris, then Alaris has a number of remedies it can pursue.
Alaris receives its royalty payments monthly, which are determined 12 months in advance based on some
agreed-upon metric — usually on some adjusted sales or gross profits figure. The royalties usually have ceilings
and collars — meaning they can go up and down only by no more than some predetermined percentage.
Private companies can get out of the deals by buying out Alaris.
Today, Alaris has a diversified basket of 12 companies. The largest is LifeMark, at 20% of revenues.
Over time, as Alaris adds more investments, the diversification should increase.
Here is a brief overview of Alaris’ investments:
LifeMark is one of Canada’s largest health care providers, with over 120 clinics. Amount invested: $9 mil-
lion. Annual royalty to Alaris: $3.9 million. Alaris originally invested $74 million. But in June 2011, thanks
to a partial buyout, Alaris received $65 million in cash. It was a home run for Alaris shareholders. Alaris had
already received over $65 million in royalties. The deal handed Alaris a $28 million gain, while still retaining
the royalty. In 2013, another redemption of shares put $7.5 million in Alaris’ pockets. It still retains $35.5
million in LifeMark preferred shares. As long as they remain outstanding, the royalty will increase by 4%
on July 1 of every year.
LMS Reinforcing Steel is a western Canadian company that makes concrete-reinforcing steel for the
construction industry. Amount invested: $51 million. Annual royalty to Alaris: $2 million.
End Of The Roll is a discount floor retailer with 55 franchises in Canada. Amount invested: $7.2 million.
Annual royalty to Alaris: $1.2 million.
KMH Partnership is a Canadian-based health care provider and the third-largest independent health
facility in Canada. KMH performs cardiology diagnostic tests at 21 clinics in the U.S. and Canada. Amount
invested: $54.8 million. Annual royalty to Alaris: $8.3 million.
Solowave Design makes wooden play sets. Based in Ontario, Solowave sells its play sets all over the world.
Amount invested: $32.5 million. Annual royalty to Alaris: $5.0 million.
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Killick Limited Partnership sells and services aircraft engines and parts. Amount invested: $36.25 million.
Annual royalty to Alaris: $5.8 million.
Quetico is a warehousing company based in California. It operates over 400,000 feet of warehouse space.
Amount invested: $26.9 million. Annual royalty to Alaris: $4.25 million.
Labstat provides tobacco analysis and testing services, driven by regulatory requirements. It has a global
business in North America, Europe, South America, New Zealand and Asia. Amount invested: $41.2 million.
Annual royalty to Alaris: $6.2 million.
Agility Health is a leading healthcare provider in the rehabilitation of physical injuries and conditions.
Established in 1968, Agility Health delivers personalized care at more than 155 service sites in 14 states
nationwide. Amount invested: $12.5 million. Annual royalty to Alaris: $2.0 million.
So far this year, Alaris added three new partners:
SHS Services Management Limited Partnership operates the Sears installed home improvements
business as a licensee to Sears (stuff like HVAC, windows, doors, roofing). SHS also operates Canada’s
only national flooring installation services company. The SHS Group’s principals also used a portion of
their proceeds to invest in Alaris shares, a good testament to what should prove a prosperous partnership.
Amount invested: $15 million. Annual royalty to Alaris: $2.5 million.
SCR Mining and Tunneling LP operates out of northern Ontario, as it has for the last 20 years.
It covers mining services and other infrastructural services with a team of 250 employees. It benefits
by being a part of the full mining service cycle: from site prep to shaft building, to ventilation and ongo-
ing maintenance. Its customers range from large multinational producers to the smaller wildcat explorers.
Amount invested: $40 million. Annual royalty to Alaris: $6.4 million.
Sequel develops and operates programs for people with behavioral, emotional or physical challenges
with a range of treatment options for children, adolescents and adults. This includes areas like autism and
substance abuse. Amount invested: $66 million. Annual royalty to Alaris: $9.9 million.
These are all private companies with owner-managers working hard to make their businesses better.
They have every incentive to do so. That’s part of the beauty of investing in Alaris. You go along for the
ride — in a protected way aimed at simply providing steady royalties.
Alaris has, as I say, a unique model. I asked the company if there were any comparable outfits. The
answer was no. And I could not find any, either. It’s also been extremely successful in implementing this
unique model, as the shares have quadrupled since the IPO.
One thing I really like here: Alaris is slowly and steadily upping its dividend. It now stands at $1.44 annually
— a 14% increase since 2012. The payout ratio is 85%. Keeping the payout less than 100% means that if roy-
alties fell for whatever reason, Alaris would not have to cut its dividend — to a point. Essentially, there is some
cushion built in. Also, it allows Alaris to build a bit of a reserve. The target is to get to an 80% payout ratio
over time to ensure steady payouts. What management doesn’t want to do is decrease the dividend.
An added plus is that Alaris is a business whose cash flow streams can easily adjust to changing interest
rates. Say we see higher interest rates. No problem. Alaris gets a percentage of the revenues of the com-
panies it is invested in. So if higher interest rates bring higher inflation and higher sales in its companies,
those royalties automatically adjust upward.
To sum up: Alaris is a unique way to invest in an owner-managed company that streams royalties. Of
course, investing alongside insiders is not foolproof. Nothing is. But there is no doubt that this is the way
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Talk About Steady Wealth Creation! Look up and to the Right…
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to bet over the long haul, and you’ll win more than you lose by sticking with owner-managers. I see Alaris’
owners as doing things right for the company AND us shareholders.
Alaris is debt-free, and as their CFO, Darren Driscoll, said on a recent call: “Our balance sheet is poised
for the next opportunity.”
As long as Alaris sticks to its core philosophy, it should provide a growing stream of income over time.
If you want to be extra-conservative, pay no more than C$29 per share — which gives you a 5% yield
on your money with the current dividend rate. That means buying on dips at last check. But remember, Alaris
will surely add new royalties and increase its dividend over time. So you’re in good shape to earn a lot more
the longer you hold it. Time is your ally here.
Recommendation: Buy Alaris Royalty (AD:tsx).
“CHAFFEE” STOCK NO. 3:
Harvest Profits Without Swinging a Hoe
Next up, this unusual new “Chaffee Royalty” company is like none I’ve ever seen before. It’s the world’s
first “Chaffee Royalty” company for agricultural commodities. Food prices are already up around the world.
Meanwhile, global populations are rising, which means even more mouths to feed. Here’s the only way right
now to “make money while you sleep” with royalties from agricultural commodities — and best of all, it only
costs $1.70 a share to get in.
Two summers ago, I visited Brad Farquhar, the co-founder of Assiniboia Capital in Regina. Hence, I call
him “our man in Saskatchewan,” as he operates out of the capital of Saskatchewan.
Back in 2008, I showed readers how to invest in Assiniboia’s farmland partnership. The price was about
$26 per unit. Today, it’s about $58 per unit — plus, investors have received $2.66 per unit in distributions.
All in, that’s a 140% total return. This new idea could be even better…
In fact, a friend of mine and reader — a teacher — invested in the new company in November. It looks
like he will about double his money so far. As this new company gains traction in the market, it could generate
returns of 20–40% annually for its investors, with fat 50% cash flow margins. And it has a lot of room to grow.
Brad drove me around and showed me several farms, and I got a feel for what it’s like there and what
makes it all work. At the time, Brad’s firm was in the second year of running a partnership created to invest in
canola farming. The idea was to supply farmers with their “inputs” like fertilizer and whatever else in return
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for a set percentage of the crops. That all ended in 2012, when Brad and his business partner Doug Emsley
had an even better idea.
In November, they launched Input Capital Corp. It would provide financing to canola farmers in exchange
for a fixed tonnage (not percentage) of that farmer’s canola crop. Again, you may recognize this as a streaming deal.
Input Capital is similar to Alaris Royalty and Sandstorm Metals & Energy. Here’s how it works…
So say there is a farmer that wants to expand. Annual inputs for fertilizers and the like can set them back
$200 per acre. For a 4,000-acre farm, that’s $800,000 right there. Equipment could be another $1.3 million
for this farm. The farmer doesn’t have that kind of money. Enter Input Capital. It can give the farmer an
upfront payment for these things in exchange for a crop interest.
It works for the farmer on many levels. First, the upfront payment allows him to save by buying his fer-
tilizer off peak season. This alone can bring a savings of $25–30 per acre, cutting fertilizer costs by 20–25%.
Second, the money also allows the farmer to improve the productivity of his farm by purchasing precision
equipment he wouldn’t be able to afford otherwise. Input Capital targets a 50% increase in average yield.
So he gets a lot more out of his land. These are just a couple material advantages.
It works for Input Capital too because Input sets its fixed tonnage at a level where it will make an attrac-
tive return. Input gets a set tonnage and makes money depending on the pricing of the canola. Input uses
crop insurance to cover its downside. Currently, canola trades for over $500 per tonne. Input would make
20% annual returns at just $500 per tonne. Even at $450 per tonne, Input’s rate of return on its investment
would be over 15%.
Today, Input has eight streaming agreements in place at an average investment of $1.75 million.
(The agreements are for six-year terms.) Input also has a long runway. Canada is the largest canola exporter
in the world. It made up 72% of the export market last year. Most of it wound up in China and Japan.
Over the last five years, exports to China and Japan have grown at 333% and 21% clips, respectively.
There are over 20 million seeded acres in western Canada devoted to canola. That’s over 52,000 farmers.
Brad estimates that Input’s addressable market is about 20,000 farms.
I love this idea. You are investing with proven owner-operators who know the market. And the upside
is tremendous. Even at half the valuation of the public streaming companies — and assuming Input invests
the $100 million it just raised — Input Capital could be worth $200 million.
Input Capital began trading on the Toronto Venture Exchange under the ticker INP. As I write, the price
is C$1.70 per share. I believe the stock is both a compelling value and a long-term growth story on an inno-
vative business model applied to agriculture. It is truly unique.
The company is too small to officially recommend, so I will not be adding it to the portfolio page,
but I will follow the story more informally in future letters.
Some guidance, in case you decide to pursue the idea: Use a limit order, as the stock is not very liquid.
I would not pay more than C$2 per share, at least at the outset. Also, start small and look to add to your
position over time. The model, as compelling as it is, has not yet proven itself as a public company.
However, there is one ag company that IS on my portfolio page. It doesn’t grow anything, but it’s able
to, like Input Capital, get a slug of ag profits, simply by adding value in the production chain. It’s my favorite
bargain in commodities right now.
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“CHAFFEE” STOCK NO. 4:
Unique Agriculture Assets in Europe’s Fastest-Growing Economy
Our story starts in Mersin, a port city on the Mediterranean coast…
I met with Hasan Arslan, son of the founder of Arbel Group, which is part of Alliance Grain Traders
(AGT:tsx; AGXXF:otcbb). Hasan is a big, friendly Turkish guy in charge of Alliances operations in Mersin.
I spoke to him through an interpreter, as his English is, he says, “not so good.”
I warmed up to him quickly and enjoyed asking him questions. I wanted to get a look at the assets in
Turkey, because it is a significant part of the business. About 25% of the crops Alliance sources come from
the Turkish heartland. Turkey is also an important staging ground for future growth, as you’ll see.
Alliance processes a wide variety of crops. These mainly include pulses (lentils, peas, chickpeas and beans).
It also turns these into food ingredients such as flour, milled wheat and pasta. The business is simple to under-
stand: Alliance brings the crops in from a farm. It cleans, sorts (by color or size), splits, polishes and bags pulses
so they are ready for use in the kitchen. It can also further process the crops into food ingredients as mentioned,
either for its own or customer labels (such as grocery store brands).
The overall growth story is exciting. It starts with a few numbers you’ve probably seen batted around:
The world will need to produce 70% more food by 2050 to feed a growing population. Even if only half
right, this forms the appealing backdrop for anything involved in agriculture and food production. There
is a long and clear path of demand growth.
Pulses, which Alliance specializes in, are part of the solution in meeting that demand. Pulses are high in
protein and fiber. They are “nutrient dense,” as the food pros like to say. They are low fat, gluten-free, non-
GMO and have low allergenicity. Farmers use far less energy to produce them (reducing greenhouse gases —
an important political consideration, regardless of what you think of the greenhouse gas theory). And adding
pulses to rotational cropping improves soil health and water efficiency.
Mainly, Alliance’s Mersin facilities process lentils and milled wheat. There is also a bulgur wheat mill.
Turkey is where Alliance makes semolina and pasta. Alliance also has a rice facility here.
Traditionally, Alliance shipped goods to the Middle East and North Africa as well as south Asia. But
thanks to food producers discovering the merits of pulses, Alliance now ships to the U.S., Europe, China,
South Korea and Japan. (One curious fact: Japan is one of Alliance’s largest pasta importers. Alliance makes
bundled spaghetti that the Japanese love and that is available nowhere else currently. Besides this, I learned
that Turkic, Japanese and Korean share certain linguistic affinities that make it easy for people who speak
one of these languages to learn the others. This surely helps facilitate trade between what seems an odd
connection at first.)
I want to emphasize that Alliance is a global company. This next chart shows you where Alliance gets its
crops. Between Canada and Turkey, you get 63% of the total. But many of these other locations are fairly new.
Over time, I’d expect the source of Alliance’s crops to diversify further.
Alliance’s big push is China. It’s building a new bean and pulse processing plant in Tianjin this year.
China exports beans today, but Alliance believes it will become a big consumer of pulse ingredients for
moon cakes, dumplings, noodles, pasta and snack foods.
Anyway, this diversification is important because weather patterns are not uniform. Harvest seasons also
vary from region to region. So the more diversified you are, the more you have a cushion against the whims
of Mother Nature. Your ability to source pulses is more reliable.
10 www.agorafinancial.com