Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Altius Minerals Corp. Q3 2018 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Flora Wood, Director of Investor Relations. You may proceed.

[Flora Wood, Director of Investor Relations]

Thank you, Julie. Good morning, everyone, and welcome to our Q3 Conference Call. Our press release and filings were done yesterday after the close and are available on our website. This event is being webcast live with the link on our homepage and in the Investor section, and you'll be able to access a replay of the call along with the presentation slides, which are on the webcast and added to our website. In the room with me, I have: Brian Dalton, CEO; and Ben Lewis, CFO, who will both be speaking on the call. And the room we're in isn't in St. John's this time. Just to tell you, we're in Toronto this time, and we'll open up for questions after the formal remarks. Just getting started, the forward-looking statement is on Slide 2, and applies to everything we say both in the opening remarks and the Q&A. And with that, I'll turn over to Ben to take us through the numbers.

[Ben Lewis, Chief Financial Officer]

Thank you, Flora, and good morning, everyone. Thank you for joining. Altius generated $17.1 million in royalty revenue during the quarter compared to $16.5 million in Q2 and $17.9 million in Q3 of last year. Brian will provide a little more color on our royalty revenues later in the call. EBITDA for the quarter came in at $13.9 million or $0.32 per share. The EBITDA margin at a little over 81%, remained fairly consistent with both Q2 and the comparable period last year. Earnings per share was $0.14 during the third quarter compared to $0.12 in Q2 and $0.16 in the comparable period last year. Our Q3 earnings included a couple of noncash items, the largest of which was dilution gains and earnings from associates, which had a positive impact of about $2 million or a little under $0.05 per share. General and administrative expenses of $1.9 million are up approximately $200,000 from the same period last year and similar to Q2 levels of approximately $2 million. The year-over-year increase in G&A was driven by corporate development and legal services activities. Income taxes of approximately $1.5 million are slightly higher than the Q2 $1.1 million comparable number as a result of higher income. We ended the quarter with $33.8 million in cash and cash equivalents. We put some of our surplus cash to work during the quarter, using $8.7 million to buy additional Labrador Iron Ore Royalty Corporation shares, and we made another investment of $2 million to our rights to co-invest alongside Lithium Royalty Corporation. Other uses of cash during the quarter included a scheduled $5 million payment on our term debt, $1.25 million preferred share distribution, as well as our regular quarterly cash dividend of $0.04 per share. And finally, we were active on our share buyback, spending $2.6 million during the quarter to acquire [ 212 to 300 ] Altius shares, which have been returned to treasury. Total cash and market investments at the end of Q3 were approximately $175 million, and I'll remind you that we have an unused revolving credit facility of $100 million. Thus, we have ample liquidity to pursue opportunities as they arise. So in summary, Altius had another great quarter with solid cash flow from our diversified royalty business. Net earnings came in as expected, and we continued our balanced approach to capital allocation during the quarter. And now I'll turn it over to Brian.

[Brian Francis Dalton, Co]

Thank you, Ben. Good morning, and thank you all for joining. The quarter and year-to-date have unfolded reasonably well and demonstrated the value of our diversified portfolio as headwinds at some operations were offset nicely by tailwinds and others, allowing us to maintain our royalty revenue guidance. First, for the headwinds. Copper and zinc prices were down and revenue from 777 was impacted by lower grades and a timing lag between production and sales. These are partially offset by an encouraging recovery and operational volumes at that particular mine. Thermal coal revenue was down as mining at Sheerness moved on to lower-paying royalty lands as part of its normal mine sequencing. We continue with preparations to initiate legal action to seek compensation for governmental policy changes that will cause our thermal coal royalty revenue to end by 2030, significantly earlier than was allowed under the policies in place at the time of our acquiring the royalties. We expect to be in a position to file a statement of claim before year-end. Turning now to the positives. Potash prices were sharply higher on strong global demand growth, while Rocanville and Esterhazy continued to ramp up. With these factors multiplying by our recently increased royalty ownership level, potash accounted for approximately 25% of our revenue total for the quarter. Chapada production was solid and Yamana has increased its full-year copper production guidance to 125 million pounds from 120 million previously. This mine typically performs better in the second half of the year as the first half is impacted by the Brazilian rainy season. Premiums for high-quality iron ore concentrates and pellets remained robust and ROC was largely able to return to a normal production volume range, following the strike in quarter 2. We increased our Labrador Iron Ore Royalty Corporation ownership during the quarter by approximately 344,000 shares and now hold 5.46% of that company. The revenue impact to Altius was lower than expected, however, as Labrador Iron Ore Royalty Corporation made an election to withhold a significant portion of its cash flow to its balance sheet in contrast with more typical focus on delivering a high-dividend payout ratio. Metallurgical coal revenue from Teck's Cardinal River mine was up on improved production volumes and prices. We received a lot of encouraging news during the quarter related to potential extensions, expansions and new future royalties. I'll begin by speaking of Voisey's Bay. We were happy to reach a settlement with Vale that will see payments resume. While this is hardly a new royalty for us, I include it in this part of my remarks because it does feel as if it's a new or at least a resurrected royalty after 2 years of nonpayment. Based upon questions we received upon press release of the settlement, I think it is worthwhile to further clarify the press release description of the 3% royalty as representing approximately 50% of the gross metal value at current prices. This seems to have confused some investors into thinking we accepted 50% of the intrinsic royalty value. But in fact, this refers to the gross metal value, less normal NSR-type deductions with the result approximating well what we always believed to be the royalty value. Importantly, this now very well defined royalty calculation formula applies to all future mining potential at Voisey’s Bay, including newly approved underground development plan to the extensive Eastern deeps deposit. At Cardinal River, Tech has announced that it is studying the opening of a new pit on our royalty lands that could extend mining from the original 2020 plan to around 2027. Yamana continues its studies aimed at expanding production levels at Chapada in recognition of strong exploration and delineation results from several areas within the lands covered by our streaming agreement. Excelsior made 2 significant announcements related, first, to the completion of its permitting process at the Gunnison copper project in Arizona; and secondly, the completion of project financing through a stream and equity arrangement with triple flag. This moved the project into development and triggers an option that we hold to increase our growth revenue royalty for CAD 5 million. We do intend to exercise this option and look forward to Gunnison becoming our 16th paying royalty in the near future. Alderon provided results from an updated feasibility study for its Kami Iron Ore project. The study showed strong economics based upon its expected premium quality product, fully permitted status and access to existing infrastructure. Financing alternatives and other strategic avenues are currently being explored amongst stakeholders in supporting the moving -- in support of moving the project into development. We're a large equity holders of Alderon and also hold the project royalty. Allegiance Coal made excellent progress in advancing its Telkwa, metallurgical coal project in British Columbia. It announced that Japan's Itochu has joined -- it has a joint venture partner -- as a joint venture financing partner and product marketer. An updated feasibility study is expected early in the new year, and the permitting process has begun. Telkwa came to us as part of our acquisition of royalties and lands from Sheer a few years back and we then [ vested it ] to Allegiance for a significant equity stake and a sliding scale royalty. Moving on to our Project Generation business. There are also quite a few positive developments to update. Our portfolio of PG equities increased in value to $68 million at quarter end from $44 million at the end of the last quarter, despite a relatively weak period in the market for junior exploration companies. Adventus continued to report excellent infill drilling results from its polymetallic Curipamba project in Ecuador. These largely focused on better defining a very copper and gold rig zone within the El Domo deposit that could feature prominently in an updated study that is expected to be completed in early 2019. It is now turning its attention to testing several exploration targets that offer the potential for the discovery of additional satellite deposits. Adventus also added another strategic investor during the quarter, as Wheaton Precious Metals made a significant equity investment while securing rights to potential future precious metal streams. Evrim has begun our first-ever drilling program at its quality gold project in Mexico, where very exciting surface transfer results have been reported. It recently attracted Newmont as a major strategic equity investor and also announced that it reached an agreement with First Logistics that will see it hold the royalty on the resource delineation stage Ermitaño project. We are a large shareholder of Evrim and hold a royalty on the Cuale project. Sokomon Iron has reported high-grade drilling results from the Moosehead gold project to Newfoundland and has raised significant equity to replacement led by well-known investor, Eric Sprott. Our planned diamond spinout, Adia Resources, has announced that DeBeers Canada is coming on board as an early-stage investor by providing an in-kind contribution of technical services. Drilling on the Lynx project is planned for this coming winter with an IPO to follow. We are also absolutely delighted to announce that Marco LoCascio, well known to many of you in his prior role as a highly successful New York-based resource investment manager, has come on board to lead Adia as its new CEO. That wraps up our formal remarks, and we'll turn back to the operator for the Q&A.

[Operator]

[Operator Instructions] Your first question comes from Carey MacRury with Canaccord Genuity.

[Carey MacRury, Analyst of Metals and Mining]

Question on Voisey's. I know the royalty is effective back to April 1. I'm just wondering for the amount you received this quarter, what time period does that correlate to?

[Ben Lewis, Chief Financial Officer]

This is Ben. The first payment we received was for the period ended June 30, and we will catch up at some point. But that was part of the settlement. So that's been delivered. And we should have a catch-up period where we will have 2 quarters recognizing revenue. And the next payment is actually November 15, and then we'll follow thereafter.

[Carey MacRury, Analyst of Metals and Mining]

So the 2 quarters, would you expect that in Q4 or...

[Ben Lewis, Chief Financial Officer]

Probably Q4, but it really depends on what information we get from Vale as well, and just to make sure we can do an accurate estimate.

[Carey MacRury, Analyst of Metals and Mining]

And then secondly on the Lithium Royalty Corporation. You've got $8 million invested there for a 10% stake. That's pretty sizable. I'm just wondering if you could provide a little context of what types of assets you're looking at there? Are these developed -- Lithium development stories, are they producing? Is it all the above? Any color you could provide on that?

[Brian Francis Dalton, Co]

Yes. It's Brian here, Carey. The $8 million isn't entirely for the coal participation, right. It also includes direct investment at the equity level in LRC. LRC is -- right now, its focus has mainly been on development stage projects. The market has actually been pretty good. If you're a buyer in that space, things -- it hasn't been a fantastic year for lithium prices, and that's created good opportunity. So we're pretty encouraged about the quality of the projects that, that team has been able to gain traction with. So hopefully, we'll be able to provide you with some more color on that in the coming quarters, but it's a pretty busy time and lots of strategic files open there.

[Carey MacRury, Analyst of Metals and Mining]

And are these all over the globe? Or is there more of a focused...

[Brian Francis Dalton, Co]

Global search.

[Carey MacRury, Analyst of Metals and Mining]

Yes, okay. And then maybe one last question on the hydroelectric opportunities you're pursuing in terms of royalties, any progress on that front?

[Brian Francis Dalton, Co]

Yes, not just hydro. Obviously, renewables generally. Yes, that's been really, really moving along over the last 4 or 5 months. The focus has been largely on trying to secure royalties related to development stage rather than operating stage opportunities, and that's because the kinds of returns we could expect from production stage finding are too low. The space is quite crowded once these projects are fully buttoned down. But we are finding good opportunity at the development stage, and we feel we're pretty close to securing our first batch of royalties there.

[Carey MacRury, Analyst of Metals and Mining]

And is there still an opportunity to kind of roll the coal assets into that? Or is that...

[Brian Francis Dalton, Co]

Yes. I don't think we'll actually roll the coal assets in. But the idea there, the content we're running with is to reinvest an equivalent amount of royalty revenue from the coal portfolio into renewable assets. And if we play that right, the long-term effect should be to essentially replace the coal royalty streams, the last of which are legislated to end in 2030 and essentially turn them into perpetual royalties. So it's less of a formal linkage, but that's the investment rationale and sort of how we're thinking about it when we plan our broader corporate -- or capital allocation work for the next few years.

[Operator]

Your next question comes from Jacques Wortman with Eight Capital.

[Jacques P. Wortman, Research Analyst]

Your decision to increase your position in Lith is kind of interesting as you have disclosed publicly that you oppose any change in mandate to amend business restrictions. And although they haven't closed the door on that at Lith, they have deferred that meeting. Can you just go over the decision-making process to increase your interest at this time?

[Brian Francis Dalton, Co]

We keep pretty close tabs on the operations at IOC, and we, like everyone else, could see that not only we're premiums strong, but there are steady operational improvements at that asset. So at a point late in the quarter, we felt that the value represented by the share price was good enough to make another move. We had extra cash on the balance sheet. It obviously wasn't a huge investment for us, but we'd see ourselves as being opportunistic in the future there as well. As far as the decision or the talk of expanding mandate and whatnot, we were happy just to read in the report last night from Labrador Iron Ore that they have elected not to call that shareholder vote now. Toronto would be interested essentially. When we see it as a flow-through of royalty income, and we'd rather not deal with anything that might change the historical pattern of high payout of that royalty revenue on to shareholders. That's really what allows us to treat it in our minds at least as a royalty interest. But once it -- once there are extra corporate factors involved there, our motivation would decrease. So we're very happy with that decision.

[Operator]

[Operator Instructions] Your next question comes from Joseph Levatino with Jalaspen.

[Joseph Levatino]

This question concerns the year at Alderon. In my mind, it seems that Alderon is coming up against some hard stops over the next year or so. And I'm just wondering whether Altius has conducted any thought experiments regarding the outcomes for Alderon.

[Brian Francis Dalton, Co]

I don't know about thought experiments, but we're obviously involved very heavily with that file. There's really not much that could happen that could impact us positively as a go-decision or financing for that for the Kami project. We have a pretty sizable royalty there. The time feels like it should be around now. We're watching other developments in the Labrador trial. Obviously, IOC is performing extremely well. There are rumors out there that Rio Tinto is looking to sell its stake. So that's obviously bringing lots of attention from strategic investors towards the trough. Whatever marketing and efforts that they've been doing, it's certainly bringing many eyeballs there. Plus, we've been gratified to watch the great success that Champion Iron Ore has been having with the restart of the Bloom Lake project. So a lot of really positive things going on in the Labrador trough right now. And the Kami project is fairly unique in the world right now in terms of being a project that can deliver the very high-grade, high-quality product that the market is short of right now in a project that is fully permitted and linked to existing infrastructure. Obviously, when you look at the market value of Alderon today, it doesn't look like there are many pure market-based financing solutions right now. The market cap relative to the capital requirement is -- the gap there is pretty wide. But we do believe that, that market is much stronger at the strategic level than the -- at the broader market investment level. So we're working with Alderon and the other major shareholders to try to bring things forward. Hebei is digesting the results of the new updated feasibility study. I'm heading to China later today to meet with Hebei and others as part of a broader Eastern Canadian trade mission. So we're focused on it. It feels like if it's going to happen, it should happen soon. So that's -- we're putting off the time and effort into it, but obviously I can't promise anything other than our very best effort to help do what we can.

[Operator]

There are no further questions at this time. I will now turn the callback over to Flora for closing remarks.

[Flora Wood, Director of Investor Relations]

Okay. Thanks, Julie. And we want to thank everybody for dialing in, and we will talk to you next after year-end.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.