Dundee Corp

TSX:DC.A

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to Dundee Corporation's Second Quarter 2020 Conference Call and Webcast being held on Friday, August 14 at 10:00 a.m. Eastern Time. I would now like to turn the call over to John Vincic. Please go ahead, John.

[John Vincic, Head of Investor & Media Relations]

Thank you, operator. Good morning, everyone, and welcome to Dundee Corporation's 2020 Second Quarter Results Conference Call and Webcast. The company's financial results were issued last night and are available on our website at dundeecorporation.com. Before we get started, please be advised that the information discussed today is current as of June 30, 2020, unless otherwise indicated, and that comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties, and as such, actual results may differ materially from the views and expectations expressed today. For further information on these forward-looking statements, please consult the company's relevant filings on SEDAR. Also, please be reminded that all currency amounts discussed on today's call are in Canadian dollars unless otherwise stated. Our presenters today are Jonathan Goodman, Dundee's Chairman and Chief Executive Officer; and Robert Sellars, Executive Vice President and Chief Financial Officer. And now I'd like to turn the call over to Jonathan Goodman. Jonathan?

[Jonathan Carter Goodman, Chairman & CEO]

Thank you, John, and thanks to everyone for joining the call this morning. Let me start today's call by providing a brief update as it relates to COVID-19. We continue to operate under our business continuity plan that was implemented in the middle of March, shortly after we went into lockdown. Since that point in time, we've managed to maintain a steady state of productivity, allowing our operations to continue unimpeded. This is a testament to the dedication and hard work of all of our employees. Their safety and well-being remain our top priority. And to that end, all head office employees continue working from home, and will continue doing so for the foreseeable future. Once again, on behalf of senior management and the Board of Directors, I'd like to extend a sincere thank you to all of our employees. Now I'd like to turn to today's presentation. For the second quarter of this year, marked a strategic inflection point for our business, much was accomplished at the head office level to position our business for long-term success. Most notably, the sale of our most -- of most of our interest in Dundee precious metals. And subsequent to the quarter end, we announced a substantial issuer bid for our Series 2 preferred shares. We see this as a prudent move to further streamline our capital structure and lower our G&A run rate. More importantly though, we are beginning to see our strategy of focusing on the junior mining sector beginning to take hold. The steps we took a little over 2 years ago to reposition our business, our bearing -- are beginning to bear fruit. And we see genuine momentum across our business, which is driven both by the initiatives we undertook and the global metals rally, which we believe is still in its early stages. The performance within our various investment portfolios has been strong. Our ability to conduct due diligence to guide our investment decisions has provided us opportunities to invest in companies with exposure to both gold and base metals. And our deal flow for Dundee Goodman Merchant Partners has been strong, which I'll discuss in greater detail in a moment. As many of you already know, early in the second quarter, we announced our decision to monetize a large portion of our interest in DPM. This led to the corporation realizing immediately cash proceeds of nearly $152 million. And with a full exercise of the $8 warrants, which are very much in the money now, we can expect to generate future cash proceeds of close to $96 million. In total, the sale of our DPM position has the potential to generate nearly $247 million in cash proceeds for Dundee Corporation. Our decision to monetize this position has further supported the rerating of DPM shares and the ongoing diversification of its shareholder base. In turn, DPM has continued to perform extremely well, posting record operating and financial results recently in the second quarter. Should all the warrants be exercised, we will own less than 1% of DPM going forward. More importantly, the sale of our DPM Holdings achieved 3 important things. First, it provided significant cash resources for us to underpin our strategy going forward. Second, it provides us with a playbook and how to drive future value generation within our investments in the mining portfolio. And third, it gives us additional cash to support our balance sheet restructuring and capital structure. Now I'd like to turn to the Series 2 preferred shares. Subsequent to the end of the quarter, on July 22, we announced a substantial issuer bid to spend up to $44 million to buy back some of the outstanding Series 2 preferred shares at a discount to face value. This offer is being made as part of a process called the modified Dutch auction, which will set a price range of not less than $16 and not more than $18.50. When the offer expires on August 27, we will determine the lowest purchase price based on all the ballot tenders that will allow us to purchase the maximum number of shares of Series 2 preferred share tender. Shareholders to tender will be eligible to receive a portion of the cash dividend for the quarter ended September 30, 2020. Retiring a large portion of the outstanding Series 2 preferred shares makes sense on a number of levels. First, this series pays a higher coupon than the Series 3 preferred share, making this a more prudent use of our capital. It also helps us with our continued efforts to lower expenses at the corporate head office by reducing our operational run rate. And finally, it is another important step in our efforts to streamline our capital structure. I would like now to turn to a review of junior mining strategy. I am pleased to report that we're seeing strong performance across our junior mining portfolio. This is due, in large part, to our efforts to rationalize and reorganize our investment approach to this sector. For many years, Dundee has had one of the leading platforms for flow through financing in Canada through its CMP funds. This platform is continuing to perform well and we expect it -- while maintaining its market-leading position through this bull market. To enhance our new investment capabilities in the junior money sector, we have introduced 2 new platforms. One is what I would refer to as a venture capital funding -- fund designed to invest in early-stage opportunities in the sector. The other is a private equity style fund, where over time, we will look to invest larger sums across the mining sector. Both platforms will benefit from the support of our technical team that is capable of conducting deep dive due diligence to ensure we thoroughly get all investment opportunities. Both of these platforms have performed well to date, and as they grow their AUM, we will look to diversify their portfolios, and we will also seek opportunities to attract third-party capital, allowing us to invest larger amounts while we also expand our fee-generating capabilities. Our ability to invest in the sector is supported by Dundee Goodman Merchant Partners. This group provides advisory services and financing support for junior mining companies, and they've been very active in this bull market. During the second quarter, the group was involved in 6 mandates and that momentum has carried over into the third quarter as well. In the coming months, we expect to provide more information about our plans for the junior mining strategy. Suffice to say, in the meantime, we are well positioned to continue benefiting from the early stage bull market in metals. Now let me conclude my opening remarks for an update on our capital structure. In recent months, we undertook 2 important steps to streamline our capital structure. Notably, the monetization of the majority of our Dundee Precious Metals position and a substantial issuer business Series 2 preferred shares. Combined, these tests will result in a significantly improved cash position and a lower cost of capital. And reduced expense profile for Dundee. We ended the quarter with nearly $140 million in cash at the head office. And as noted earlier, we have the potential to generate nearly $96 million of additional dollars that the warrants related to the DPM transaction are exercised. So clearly, even upon the conclusion of the modified Dutch auction, we will still be in a very strong financial position to consider strategic decisions related to our growth strategy and our capital structure. This optionality has the potential to be further enhanced if we are able to monetize some of our legacy holdings in our portfolio, such as Blue Goose and TauRx. Where we sit today is a much different position than when I rejoined Dundee in early 2018. And as I noted earlier, we believe we have reached an inflection point for our business. The heavy lifting our team has done over the last 2.5 years is beginning to pay off. And we believe we are well positioned to keep moving Dundee forward. Now I'd like to turn the call over to Bob Sellars for a review of our financial performance. Bob?

[Robert Mark Sellars, Executive VP & CFO]

Thanks, Jonathan. The market value of publicly traded securities declined from $176 million at the end of March 2020 to $141 million at June 30, which was reflecting market appreciation, offset by the sale of 23.9 million shares of DPM at $6.35. As of August 13, the value is approximately $188 million with DPM accounting for $104 million of the total. Shares in DPM rose from [ 44 ] at March 31 to [ 894 ] at June 30. UHIC, our subsidiary UHIC reported a $17 million loss in the quarter on the carrying value of its royalty and contingent consideration. We continue to monitor the effect of the global oil markets on future carrying value as well as the ongoing changes in operations at Delonex. The COVID effect on Parq was on March 17, the BC lottery commission suspended all casino operations, which has clearly had a large impact on Parq Vancouver. However, hotel activities are beginning to ramp up again. Previously during the pandemic, Android had plant closures in Europe, China, the United States and in Mexico and Brazil. Most of the plants are back up and operational, except for Brazil. As Jonathan mentioned, Dundee Corporation employees continue to work from home with little disruption to operations, and we expect that to continue for the foreseeable future. A few comments on the second quarter results. The second quarter pretax gain was $53 million compared to a pretax loss of $4 million in [ 2019 ]. The loss on the UHIC royalty in those numbers was [ $17 million ] compared to a $3 million gain in 2019. The corporation's carrying value of the royalty and contingent consideration, cash and receivables is now approximately $38 million. We continue to monitor developments in the global oil markets, the price of Brent crude and [indiscernible] a project operator, determining the ongoing value. As mentioned in Q1, we have written our investment in Parq to nil, resulting in an $11 million charge in the first quarter. We continue to actively monitor developments in that business. The investment gain or our portfolio valuation increase was [ $93 million ] in the quarter. Primarily from DPM, which was a net $83 million of the increase with the remainder of the portfolio being a net $10 million. As previously mentioned, DPM was sold on May 7 as a unit for $6.35 per share and that included a half [ warrant ] for gross proceeds of $152 million or net proceeds of $147 million. [ UHIC ] continues to have losses with $3.3 million in the quarter compared to $3.8 million a year ago. The other subsidiaries GCIC, Dundee Sustainable, AgriMarine and Dundee 360 combined for a $2 million loss compared to approximately a $3 million loss in Q1 2020 and a [ $4 million ] loss in the prior year. Our equity accounted losses were $4.7 million in Q2 compared to $2.8 million in the prior year and was driven primarily by a $2.8 million [ Audio Gap] Dundee Sarea, which is the holding company for holding [ Redecam ] in Italy and a $1.1 million equity loss pickup from Android, some of it by the effect of the U.S. dollar weakening. Q2 consolidated G&A was $7 million compared to $9 million tier and this is we did have an increase in stock-based compensation and insurance costs. Year-to-date Q&A consolidated is $13.8 million compared to $18.4 million last year. So we continue to reduce our run rate. Corporate head office G&A was $4 million compared to prior year of $5 million in the prior quarter of $4 million. We continue to reduce our corporate run rate and expect to be in a normalized range of $12 million to $14 million sub [Audio Gap] downside to cost. We continue to monitor liquidity, but the sale of DPM units has provided $147 million of net proceeds with the potential of another $96 million on the full exercise of the warrant. We have had no further developments with the CRA and continue to have a $12 million amount on deposit regarding the reassessment of the 2014 tax years. This amount is separately disclosed on the balance sheet. As Jonathan noted earlier, we have taken important steps in recent months to optimize our capital structure, lower expenses and improve our cash position. The result is greater financial flexibility as we continue to advance our growth strategy. This concludes our review of the financials for the quarter, and I will now turn the call back to Jonathan. Jonathan?

[Jonathan Carter Goodman, Chairman & CEO]

Thank you, Bob, for your thorough and comprehensive update. I'd like to conclude with a brief overview before we take your questions. As noted earlier, we expect our business continuity plans to remain in place for the foreseeable future. Employee health and safety remains our top priority as we continue to manage through this global pandemic. The sale of our position in DPM has been a great success, and we stand to benefit even further should the full warrant exercise occur. These warrants are currently in the money and if exercised fully could generate $96 million additional dollars for Dundee. The substantial issue or bid modified Dutch auction for the Series 2 preferred shares will conclude in approximately 2 weeks and we should close the process shortly afterwards, including another important step in the streamlining of our capital structure.We are continuing to advance discussions with interested parties regarding Blue Goose and TauRx in spite of COVID-19 parties remaining very interested in these assets, and we'll continue our efforts to monetize our positions in these noncore holdings. The efforts we made in the last few months towards the streamlining of our capital structure have been a mess. Most notably, our cash position has improved dramatically, providing us stability during the uncertainty brought on by the global pandemic. Most importantly, this improved financial position has allowed us to accelerate our efforts around our new mining strategy. We have been able to deploy capital in a prudent manner through our various funds, and our emerging capital group has been very active in the deal flow. Generating advisory fees and strengthening their business model. As we look ahead into what we believe is still the early innings of a market for gold and other metals, we believe Dundee has turned a corner, and we are shifting from defense to offense and are excited and encouraged by what we see on the horizon for our business. There is an exciting momentum across our business today. And while much more work needs to be done to complete the optimization of our capital structure and continue our cost reduction measures manager myself, the management team and our Board of Directors are aligned when we say we see better days ahead for Dundee Corporation. And now I'd be happy to open it up for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Brett Reiss from Janney.

[Brett Reiss]

Jonathan, how much capital do you have in mind that you're going to allocate to execute on your strategy in the junior miners? And how much have you already allocated to the private equity and venture capital vehicle that you've already set up?

[Jonathan Carter Goodman, Chairman & CEO]

Well, the first answer is, I don't have that exact number. We're still trying to figure it out. And it's also subject to monetizing some of the other things that we're trying to monetize. So it's not like we're going to fully fund the merchant bank day one. I think when you want to talk on the private equity-style deal, I think we've done 3 or 4 deals. None of them very large. We're keeping them small at the time. So I think I'm trying to think off the top of my head. It's certainly -- it's less than $20 million. I think on the venture fund, we originally put $6 million invested in some junior securities. That $6 million expanded and grew by market appreciation to $9 million. At that point, we realized that the strategy is starting to work. So we put -- we actually created an internal fund it's called the new venture equity fund. And we've put another $6 million in that, which brought it to $15 million. And I think today, the market value of that portfolio is about $25 million. It's done very well. And that was kind of recognizing that there is a gap between the private equity side. And as a very gee, where we saw really interesting stories but we didn't feel that they were advanced enough where you could take a very low risk, bulky position, like you weren't ready to own between 10% and 19.9% of them, but they were companies with good management teams, good business plans, well thought out strategies and trading at very attractive prices on a risk-reward basis, but they were still very risky. So that fund will invest in smaller positions across a very interesting story, and it's done very well.

[Brett Reiss]

Okay. Thank you for that color. In terms of returning money to shareholders. I mean one vehicle, the Board could consider is as a tender. And I hope the Board when they consider, they opt for a tender as opposed to a special dividend because special dividend tax wise would be not good for us. And unfortunately, some of my shareholders have losses in Dundee. So is a tender on the table?

[Jonathan Carter Goodman, Chairman & CEO]

Well, I would tell you that there's nothing that's off the table. But I think as we continue to monetize the historical investments. And as we continue to see the opportunities, we certainly do understand what shareholders are asking for. We understand the fact that we put out 41 million shares last year to people that really didn't want to own shares. But -- and we will consider everything as further moneys come in.

[Brett Reiss]

Right, right. If you do a tender, would Insiders and the Goodman family members be precluded from participating so that other shareholders would have a greater ability to participate?

[Jonathan Carter Goodman, Chairman & CEO]

Well, I can tell you, honestly, the only person I speak for on that would be myself, and I would certainly not tender into a tender. I think usually, these things are -- do have us with inside or don't participate. And I think to the extent that certainly my father's assets, which are a control block, I think they would also be precluded from tendering. I can't speak for the whole family.

[Brett Reiss]

Okay. I know you have to kind of let the smoke clear on the Series 2 initiative. But if it's a tender or some other way to return money to shareholders, do you think we'll hear from the Board, let's say, by the end of this calendar year?

[Jonathan Carter Goodman, Chairman & CEO]

Well, as I said, it really depends on some of the monetization efforts and the $96 million that's going to come in. So I think we're going to we're going to see how all that works out. And as I said, nothing is off the table.

[Brett Reiss]

Okay. And one last one, and then I'll drop back into queue. The glass lock process Dundee sustaining technology…

[Jonathan Carter Goodman, Chairman & CEO]

Sustainable.

[Brett Reiss]

Sustainable technology. The engineers at your potential customers that would vet and kick the tires on the process. Has the company -- has Dundee sustainable already educated them so that there will not be a big time lag between them looking at the process and then recommending to their to their management that the process works and that the potential customers should use the process?

[Jonathan Carter Goodman, Chairman & CEO]

Well, I would say that Dundee Sustainable has actually pilot planted. And when I say pilot plant, it was a pretty decent-sized pilot planted the process and successfully implemented technology. And yes, they have done a lot of educating of engineers on different companies. And what has to be recognized is just for people to know the glass lock process is an [ arsenic petrification process ] process that was developed by Dundee Sustainable Technologies, which is a company that we own 82% of. And it's a better and more environmentally superior way of dealing with mining assets that have -- that are high in arsenic content. And that process has been actually implemented and planted, and now they're working towards doing a feasibility study with that group. And hopefully, it gets implemented. But what has to be recognized as the mining industry is very slow to take on new technologies. So they're doing a lot of good work on educating. This is a tremendous process in that the alternative would -- to that would be to use an autoclave, which is a pressure cooker vehicle that produces an inferior product. And their process involves roasting, which is lower cost than a name with that better insight, is a lower cost solution.

[Operator]

[Operator Instructions] Ladies and gentlemen, this concludes the Q&A portion of our call. I'd like to turn it back to Jonathan Goodman for final comments.

[Jonathan Carter Goodman, Chairman & CEO]

Okay. Thanks again to everyone for joining today's call, and have a wonderful day. Thank you.

[Operator]

Ladies and gentlemen, this does indeed conclude today's conference call. Thank you again for participating. You may now disconnect.