Dundee Corp

TSX:DC.A

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to Dundee Corporation's Third Quarter 2020 Conference Call and Webcast being held on Monday, November 16 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 Third Quarter Results Conference Call and Webcast. The company's financial results were issued this past Friday evening 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 September 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 President 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, CEO, President & Director]

Thank you, John, and thanks to everyone for joining the call this morning. Let me begin today's call by acknowledging our employees for continuing to maintain productivity levels and business continuity during the COVID-19 pandemic.Our employees continue to work from home as we monitor recommendations from public health officials regarding return-to-work guidelines. 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. As has been the focus since I returned to Dundee in early 2018, we continue to execute against our strategic business plan. In this most recent quarter and subsequent to quarter end, that meant a continued focus on streamlining our capital structure. To that end, in September, we completed a substantial issuer bid for our Series 2 preferred shares, resulting in the cancellation of nearly $47 million of preferred shares at a cost of $38 million.Subsequent to quarter end, we also successfully completed the early discounted exercise of DPM warrants, generating $57 million in additional cash. I'll speak in greater detail about both of these events in a moment. What I do want to emphasize now is the consistent lowering of our G&A since I rejoined Dundee.On a consolidated basis, at the end of the -- based entity, head office level, we have significantly lowered our G&A during the quarter and year-to-date compared to the same period in 2019. For the third quarter, head office G&A was less than $3 million, and year-to-date, it was less than $12 million. While impressive, I believe we can do better. As we continue to optimize our corporate structure, we would expect our head office G&A to continue to decline.With the successful repurchase of almost 2 million Series 2 preferred shares in the third quarter, we have reduced our total preferred shares outstanding from around $210 million when I rejoined Dundee to approximately $79 million at book value today. In the process, we have lowered our dividend payments by another $2.6 million.Subsequent to the end of the third quarter, we announced an early discount exercise of Dundee Precious Metals warrants at an exercise price of $7.60. This early exercise generated nearly $57 million in cash for Dundee, and we do not expect it will be a taxable event for the company.With the continued economic, geopolitical and market uncertainty, including the ongoing effects of the COVID-19 pandemic, our management team and Board of Directors felt that this was a prudent step to take at the time. A total of about 4.1 million warrants remain outstanding and can be exercised at the full price of $8 up until May 13, 2021. If the full amount are exercised, this will generate an additional $33 million for Dundee. Following the early warrant exercise, we had $140 million in cash on the balance sheet, offering us significant strategic and financial flexibility, which I will discuss in greater detail in a moment.Now I'd like to turn to a discussion of our mining strategy. Most notably, today, I want to touch upon the macro themes impacting the mining industry in a positive way. I spoke about those at the AGM, but I think it's useful to cover them again briefly today. In spite of the recent pullback in gold prices, we remain very bullish on the outlook for gold miners and explorers.Currency debasement has not abated, and there is still significant geopolitical risk in the world today. That risk backdrop is one of the reasons we felt compelled to offer an early discounted exercise on the DPM warrants. And conversely, it is one of the reasons why we continue to believe we are in the early innings of a prolonged bull market in gold.I'd also like to note that the impact of COVID-19 vaccine on gold price. As we've seen in recent days, news of a vaccines and gold price is lower. Clearly, the world needs a vaccine, but we don't believe that this will bring an end to the gold rally. In fact, the gold rally began before COVID-19 and the pandemic merely accelerated its trajectory. In our view, the fundamentals for gold remain strong, and we continue to believe in the positive long-term outlook for the metal.The transition to a greener and more sustainable economy is still in its infancy. Renewable power, electric cars and other greening effects on a broader economy are still beginning to take hold. Fundamental to this shift is a reliance on a variety of metals, including copper, nickel, zinc, PDMs and other metals. This transformation will not happen overnight. Instead, it will happen over a period of years and decades. And while we cannot predict the exact speed at which it will occur or the precise amount of metals that are required, we can be sure that the fundamentals are taking shape to support a sustained demand for these metals over a long period of time.We foresee the mining industry being on the front line in the fight against climate change. Major industries across the world are making commitments to help in this fight. A paradigm shift is taking hold on a global basis, and the mining industry is critical to its success, and we see Dundee benefiting from this for many years to come.I'd now like to take a turn to review our mining strategy. These macro themes are driving strong returns across our mining portfolio. In 2020, with the expectation this momentum will continue into 2021. As I have noted before, Maritime Resources, Saturn Metals and Centaurus Metals are 3 investments, which have performed well for us this year. Each is led by a strong management team, and we believe all 3 are poised for more success in 2021.Maritime Resources is developing the Hammerdown Gold deposits in Newfoundland, led by Garett Macdonald. He's a very strong mining engineer. They will be completing the feasibility study in the first half of next year. And our expectation is sometime next year, we will be working with them to plan on bringing this mine into production.Saturn Metals is an Australian company drilling a very significant gold deposit in the Kalgoorlie gold belt. Also with a very strong management team, they've been discovering and drilling off a lot of gold. Since their last resource statement, which had about -- I think, about 725,000 ounces of gold at around a 1 gram grade, they've been drilling all year-long and adding many ounces to that. And our expectation is before the end of this year, we should see a new resource, which we believe will be through 1 million ounce of gold.And Centaurus Metals has -- owns the Jaguar Nickel Project in Brazil, which we believe is one of the top undeveloped nickel assets in the world. They have a very significant resource. It will most likely be a combination of an open pit in an underground mine, and they also have an excellent management team with tremendous amount of nickel market experience. And their nickel is poised to be used in the battery industry.As noted in our AGM, our business model evolves and is now focused on 3 distinct investment strategies. Let me recap each. Our CMP platform provides us with access and exposure to early-stage exploration stories in Canada through our flow-through funds. Our Venture Capital Fund, which we launched this year, provides us with exposure to earlier stage companies that are smaller but have good geologic potential. These companies also have the potential to incubate and grow over time through exploration success. Our initial $12 million investment in this plan has nearly doubled and has generated nearly $1.6 million in fees, and we see strong potential for future growth.And our private equity style portfolio allows us to consider larger investment opportunities. It also provides a platform for us to leverage so we can attract third-party capital, enabling us to expand our fee base as we pursue larger investment opportunities. The diversification offered by our strategy helps us mitigate risk while providing us with road exposure across various metals in geographic jurisdictions. Our results to date in 2020 have been positive, and we believe our portfolio is well positioned for growth in this rising metal price environment.As I noted last month on our AGM webcast, we have built our mining merchant banking capabilities. And today, we're one of the strongest investment and deal teams in the industry. Our teams in Vancouver, Toronto and overseas are talented and truly world class. Many of the people on the team are hand-picked and they've had a long track record of working successfully with me over the years. Their combination of capital markets experience and mining expertise helps set us apart from the competition. And it is this competitive advantage that we will leverage to keep driving this business forward.However, as a mining investment house, we need to either raise the fund, get a larger slice of the deals that we're investing in or bring in deals that will provide cash flow. And while I'm happy with the performance this year, we will look to do more with this platform to drive recurring business and grow revenues.Now let me conclude my opening remarks with an update on our capital structure. As noted earlier, we currently have approximately $140 million at the head office. That's a very strong cash position. With a successful substantial issuer bid for our Series 2 preferred shares, we also lowered our annual dividend payments by $2.6 million.Our strong cash position today provides us with optionality we did not have 2 years ago when I rejoined Dundee. Today, we are well positioned to continue funding our mining strategy while also considering options to return excess capital to common and preferred shareholders. On the latter point, we are still in the process of determining the best way forward and are currently reviewing various options with our Board of Directors.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. Let me begin by reviewing the story with a discussion of some of the recent developments, of which Jonathan has mentioned many of them. On September 9, the company completed a substantial issuer bid for the Series 2 preferred shares that are priced at $19.50 per share. Almost 2 billion shares or 63% of the outstanding class of shares were retired. The cost was $38 million, plus $500,000 in dividends, resulting in annual savings of $26 million in dividend payments and a further savings of $1 million in annual dividend taxes. The market value of the publicly traded securities increased from $141 million as of June 30, 2020 to $170 million at September 30, reflecting market appreciation and some net acquisitions. As of November 13, the value was approximately $94 million, of which $36 million made up of the remaining holding DPM shares, which will be limited to $33 million in 2021. The drop reflects the selling of the DPM shares through the early warrant exercise. The share price at DPM increased from $8.94 at June 30 to $9.48 as of September 30.United Hydrocarbon reported a $1.7 million gain on the [Indiscernible] royalty and contingent consideration. We continue to monitor the effect of the global oil markets and future carrying value as well as the ongoing changes in operations at Delonex, which declared a force majeure in Q1 at the onset of the pandemic. In the first quarter of 2020, the BC Lottery Commission suspended all casino operations in the province, and that remains in effect today. Hotel activities at Park are beginning to ramp up, but needless to say COVID-19 has presented challenges for the operations.At the start of the pandemic, Android had plant closures in Europe, China, the United States, Canada, Mexico and Brazil. [Audio Gap] and operational. Dundee corporate employees continue to work from home during the pandemic, and we have been able to maintain steady state operations, as Jonathan noted earlier.Now let me turn to a summary of the third quarter results. The Q3 pretax gain was $21.6 million compared to a pretax loss of $49 million in Q3 2019. The Q3 gain at the UHIC royalty was $1.7 million compared to $1 million gain in 2019. The corporation's carrying value of the royalty, contingent consideration, cash receivables is now at approximately $39 million.As mentioned in Q1, we have written down our investment in Park to nil, resulting in an $11 million charge in the first quarter. We are monitoring developments in that business. The portfolio had a valuation increase of $24 million in Q3 from the mining portfolio compared to a $16 million loss in the same period in 2019.Blue Goose had a gain of $2.7 million in the third quarter compared to a $9.4 million loss in Q3 2019, which included a $10 million impairment charge. Our other operating subsidiaries, such as GCIC, Dundee Sustainable, AgriMarine and Dundee 360 had a combined $1.7 million loss compared to a loss of approximately $2 million in Q2 and a loss of $1.3 million in Q3 2019. The equity accounted losses were $2 million in Q3 compared to a $2.2 million gain in the prior year. And the loss was primarily impacted by a $2.3 million write-down of Dundee Sarea, offset with small gains on Android.Our consolidated G&A in the third quarter was $6.8 million compared to a prior year period of $9.6 million, which included increased stock-based compensation and insurance costs. On a year-to-date basis, consolidated G&A was $20.6 million compared to the prior year, $27.9 million, a significant reduction, and we -- and a trend we continue -- we see continuing for the remainder of the year.Head office G&A for Q3 was $2.8 million compared to $6.7 million in Q3 '19. Corporate head office year-to-date G&A was $11.7 million compared to $16 million for the same period -- 9-month period in 2019. We continue to reduce our corporate run rate, and we expect our G&A to continue declining, subject to ongoing downsizing costs. As previously mentioned, our cash position currently is approximately $140 million after the early -- early discount exercise of Dundee Precious warrants.We have had no further developments with the CRA and continue to have $12 million on deposit regarding the 2014 tax year plus another $1.8 million for the 2015 and 2016 tax years which is separately disclosed on the balance sheet.Overall, we are pleased with our improved balance sheet and the ongoing efforts to streamline our capital structure. This concludes our financial review for the quarter. And I will now turn the call back to Jonathan.

[Jonathan Carter Goodman, CEO, President & Director]

Thank you, Bob, for your thorough and comprehensive update. I'd like to conclude with a brief overview before we take your questions. We have injected momentum into our business by developing a track record of execution since 2018. We will keep building on that momentum as we close out 2020 and look ahead to key strategic priorities in 2021.Our focus on G&A has helped us achieve significant expense reductions across our business. We see the potential for further savings by reducing our real estate footprint in 2022. Remote work during COVID-19 has taught us to rethink the future of the office. In doing so, we believe we can maintain productivity while lowering our real estate costs. And as we continue to reshape our business, a lower head office G&A run rate is our goal.As part of our mining strategy, we are working on plans to bring in cash flow. Attracting third-party capital can help us generate more fee business while accelerating our growth plans in the mining sector. With that at scale, we can also increase our participation in deals and boost the size of our investments. And ultimately, our goal is to grow the cash flow generation from the business, and we think we're on the right path to achieving this objective, and we'll pursue this aggressively in the coming months. The continued rationalization of our legacy investment portfolio remains a priority. Discussions with third parties are advancing and interest in Blue Goose and TauRx remains high. Monetizing these noncore holdings can potentially have a significant positive impact on Dundee's financial position. And we will continue to work diligently to advance both these and other files.As noted earlier, where appropriate, we will consider means by which we can return excess capital to shareholders. This is most likely to be done through either a normal course of substantial issuer bid for either subordinate voting shares or preferred shares or through a dividend. We are actively considering our options with input from our Board of Directors.As I mentioned last month at our AGM, Dundee is shifting from defense to offense, much of the heavy lifting to rightsize their business has been done. And while much more work remains, we are encouraged by the progress we've made since early 2018. We can look ahead with optimism and confidence that our strategy is sound. Our results in our mining portfolio and the work of our mining merchant banking put into show we are heading in the right direction.And now we'd be happy to answer your questions. Operator?

[Operator]

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

[Brett Reiss]

Glad to see everybody's well in these trying times. The junior mining platform that you have, do you have any idea what percent of the $140 million in cash you're going to kind of set aside or earmark to grow that business?

[Jonathan Carter Goodman, CEO, President & Director]

Well, that's kind of what we're working on right now. So I'm not going to give you a number at this stage.

[Brett Reiss]

I mean, could it be 50% of it, 20% of it? Any color?

[Jonathan Carter Goodman, CEO, President & Director]

I don't have any color for you right now. We will work to get you more color.

[Brett Reiss]

All right. When you come up with that number, what remains, I guess, you could do a share buyback or you could pay a special dividend; I know this is a state of discussion at the Board level. But Jonathan, could you give me a sense of where your inclinations may be leaning with those 2 alternatives for corporate cash?

[Jonathan Carter Goodman, CEO, President & Director]

Well, as I said, Brett, and I'm sorry, I can't give you a lot more color on that right now. But obviously, a big chunk of that money will remain with the company that we have right now. And the question should be of future monies that we liquidate. We do have a lot of significant assets that we haven't liquidated, what percentage of those we'll begin. We're working hard to get you better answers than we're giving you today.

[Brett Reiss]

All Right That's okay. How are the discussions going regarding the potential monetization of TauRx?

[Jonathan Carter Goodman, CEO, President & Director]

Well, there's no issue with the discussions of that or even of the Blue Goose. The question is, and we don't have an answer, when we can get these discussions to the finish line. And I would say that one of the casualties of the COVID pandemic is that it's become a lot harder to do business internationally. And particularly when you're trying to sell things and people need to due diligence and the ability to have face-to-face meetings is hard, and other -- countries, including ours, are closed, getting deals to the finish line seem to take a lot longer. But we're still -- the good news is we still appear to be heading towards that end -- the right end result, but it's taking longer than we had hoped.

[Brett Reiss]

Right, right. Now I noted the other day in the United States, the special committee at the FDA struck down an Alzheimer's drug by Biogen. With something like that, since there's 1 less potential competitor be a positive for the valuation we might ultimately get for TauRx?

[Jonathan Carter Goodman, CEO, President & Director]

Well, I think Biogen drug, well, it has some similarity to TauRx. I think it also has a lot of things different. And I can't really talk intelligently enough about their drug to give -- it's always better when there's fewer competitors out there. But the real market the company is attacking is in the Far East. I mean, they're also spending time to try in the U.S. as well. But the Far East seems to be where a lot of things are happening for TauRx.

[Brett Reiss]

Okay. And one last one and I'll drop back in queue, courtesy for other questioners. Are you -- what's going on with the oil and gas industry, are you considering just selling the Delonex royalty?

[Jonathan Carter Goodman, CEO, President & Director]

Well, we haven't had any discussions. I mean right now, once again, the state of -- and chat is that the company has declared a force majeure. They can't get their drill rigs and all that going. I believe that with the oil price down, there's been a lot of matter that changes at Delonex, and the asset is still in a force majeure. I think it's in everybody's interest to see how this plays out. But certainly, if we try to sell it right now, we would not get a lot for it.

[Operator]

[Operator Instructions] Your next question comes from Mark Vanry with Vanry Capital.

[Mark Vanry]

Following up on the first part of the question from the previous question. With your healthy cash balance, looking at where you're trading, you're currently trading less than half of your net asset value. And looking at that and looking at the cash balance and simply running some numbers, the most accretive thing you can do is buy back your own shares at this point in time be easy to, for example, buying 50 million shares at $1.50 would be the 300% accretive to common shareholders. So that's just 1 potential scenario. The talents could take care of that. So the first question is, what do you plan to do as far as the buyback?Number two, I wanted to get more of your thinking on why you bought the prefs over the common. The common are very accretive. With the prefs, you had plenty of cash on hand in order to pay the dividends on those. So it just seems that buying the common makes a lot of sense for all shareholders. And certainly, that implies a lot less risk than adding to your junior mining portfolio at this point in time.

[Jonathan Carter Goodman, CEO, President & Director]

Okay. Well, the first -- I mean, I'll take the second part of the question first. When we did the deal on the prefs, we said very clearly that this is the first step of a process is likely going to be many steps. And so it wasn't that we chose, we're going to buy back the prefs over the comment, and we thought that we should start with the prefs or some of the prefs. We didn't make a bid for all of our prefs. We only bought -- we only made a bid for the ones that had the higher dividend rate. That's number one.Number two is the second step we've done is we've taken in some of the warrants. And now we're working to discuss where our next steps are, as I said in my remarks, we understand the math that you're talking about.With regards to our portfolio, we have not -- while we're very happy with our portfolio investing, and the way it's done. We have not spent a lot of money on the portfolio year-to-date. I think it's significantly less than people might think. I think we've -- it's less than -- it's probably between $25 million and $30 million over the last 2 years. And we are actively looking at everything. And that's about all I can say right now.

[Mark Vanry]

Yes. Just following up a bit. Again, I think the best thing that for all common shareholders, I realize you're looking at multiple different uses for the cash right now. But to me, it seems like overall, the least risky way to move forward with at least a portion of your very large cash balance would be to buy back, initiate a significant share buyback.

[Jonathan Carter Goodman, CEO, President & Director]

Thank you.

[Operator]

I'm showing no further questions at this time. I will now turn the call back over to the presenters.

[Jonathan Carter Goodman, CEO, President & Director]

Okay. Sorry, I apologize because my iPad turned off on me here. Thanks again for everyone for joining today's call. And hope you all have a wonderful day. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.