All-Canadian royalty portfolio
Thermal coal production in Alberta is dominated by “mine mouth” operations, wherein power generation plants are built in close proximity to the coal mines in order to minimize coal transportation costs and take advantage of improvements in long distance power transmission. All four of Altius' thermal coal royalties cover mine-mouth operations.
The coal royalties contained in the Altius Prairie Royalties portfolio comprise:
Royalty interests in respect of coal supplied to thermal (electrical) power stations from four (4) mines located in the Canadian province of Alberta (Genesee, Paintearth, Sheerness and Highvale Mines)
A royalty interest in respect of coal produced from the Cardinal River (Cheviot) metallurgical coal mine in west central Alberta
The "electrical" thermal coal royalty agreements are tonnage-based royalties on mine-mouth thermal coal mines generated from the lease of subsurface mineral rights, from the Prairies Royalties to a utility company that supply a power station for a specified term, in return for a royalty payment. In essence the coal royalties are more of a royalty on the utility of power generation than a normal mining operation. These thermal coal royalties tend to offer lower-risk than other types of royalties given that royalty rates are based on the amount of production multiplied by an unflation indexed per tonne rate, rather than based on revenue and commodity price, hence, providing no exposure to commodity price fluctuations.
For the metallurgical coal royalty, the royalty is based on a fixed share of net revenue from the coal sold.
The Prairies Royalties coal royalties provide a consistent stream of revenue. With the exception of the royalties received from the Cheviot mine, variations in operating costs or coal prices have no effect on these royalties, with the volume mined from leased areas being the greatest determinant of royalty revenues.
The market for thermal coal in Alberta
Thermal sources (coal, gas and fuel oil) account for the majority of Alberta's installed generating capacity. Coal supplied c.53% of the electricity generated in 2012, with natural gas supplying c.37% and water, wind, fuel oil and biomass based generation making up the balance.
In November of 2015, the newly elected Alberta government announced a goal of accelerating the phase out of its coal fueled electrical generation capacity by 2030. This contrasts with a prior federal regulatory condition that says these plants would either meet more stringent CO2 emission standards by the approximate 50th anniversary of original commissioning or be forced to close. Four of the Altius producing royalties are tonnage based royalties derived from mining operations that provide fuel to 15 individual electricity generating units in Alberta. Under the federal regulation we had assumed the largest of the Altius royalties, being the Genesee mine and coal-fired station, to remain operational well past 2030.
In late 2016, the Alberta government announced and implemented compensation plans to the three affected utilities, namely Capital Power, TransAlta and ATCO for a total of $1.36 billion to be paid in annual instalments over a 14 year period. The Alberta government has not yet provided any compensation to Altius despite the lost royalty revenue for years from 2030 - 2055.Previous Page
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Highvale (thermal coal)