Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Altius Q1 2019 Financial Results Call. [Operator Instructions] Thank you. Flora Wood, Director of Investor Relations, you may begin your conference.

[Flora Wood, Director of Investor Relations]

Thank you, Heidi. Good morning, everyone. Welcome to our Q1 conference call. A press release and quarterly filings were done yesterday after the close and are available on our website. This event is being webcast live, and you'll be able to access a replay of the call, along with our presentation slides on the webcast and on our website.In the room this morning, we've got Brian Dalton, CEO; and Ben Lewis, CFO, both of whom are speakers on the call. We also have Frank Getman with us, CEO of Altius Renewables, here for the Q&A session. We've done some marketing recently in Toronto and Montreal with the renewables team and have lots of interest in our First Wind Energy transaction and the general transition underway from coal to renewables. Stephanie Hussey, Director of Finance, is also with us.Getting started, you'll see the forward-looking statements, Slide 2. It applies to everything we say, both in the formal remarks and during 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. We had an excellent quarter. Altius generated $21.8 million or $0.50 per share in royalty revenue during the quarter, up 24% from $17.6 million or $0.41 per share in Q4 last year. Adjusted EBITDA of $17.4 million or $0.41 per share is also a record compared to $12.7 million in Q1 last year and $13.4 million in Q4. Net earnings of $6.3 million or $0.15 per common share include a foreign exchange loss and a loss on derivative financial instruments. Together, these 2 items are roughly $974,000 or $0.02 per share, which gives us normalized earnings of $0.17 per share compared to normalized EPS of $0.09 in Q4.Revenue guidance for the year has recently been increased to $77 million to $81 million from earlier guidance that we provided of $67 million to $72 million. This is reflective of the strong first quarter performance and other positive developments within our portfolio. We ended the quarter with $21.3 million in cash and cash equivalents and $180 million in the value of public equities comprised of the junior equity portfolio and Labrador Iron Ore Royalty shares. The junior equity portfolio finished the quarter at $61 million on a mark-to-market basis, which does not include net investment proceeds of $7.5 million during the quarter.We had an active quarter for both the purchase of new royalties and new investments. Royalty investments increased by $13.5 million with the purchase of the Curipamba 2% net smelter return royalty from RCF. We also used the combined total of $23.7 million in cash to add to our Labrador Iron Ore Royalty Corporation position and to acquire the TGE renewable royalty portfolio. We also added approximately $1 million to our investments with Lithium Royalty Corporation to acquire an additional participating interest in a development-stage lithium royalty from Sigma Lithium.The other uses of cash in the quarter was a scheduled $5 million repayment on our term debt, a $1.3 million preferred share distribution and a quarterly cash dividend of $0.04 per share. Total debt at quarter end was $135 million, but this has since been reduced to $109 million with another scheduled $5 million repayment of term debt and -- at the end of April, and an $11 million discretionary repayment on the revolver. Steady royalty revenue growth is allowing us to accelerate the repayment of the borrowing that was utilized to fund several important acquisitions during the last few years.As we begin to look forward to more noncapital-requiring organic revenue growth, we will be in a stronger position to repay previous acquisition-related debt. That said, we still retain the credit-based liquidity and flexibility to execute on special-situation acquisition opportunities should they emerge. Last, but not least, the Board approved an increase to our regular quarterly dividend to $0.05 per share that recognizes the growth that our diversified portfolio of long-life royalties has been experiencing. And with that, I'll turn it over to Brian.

[Brian Francis Dalton, Co]

Thank you, Ben. Good morning all. Thank you all for joining. On our last conference call, I described structural shifts underway globally related to pollution reduction and decarbonization initiatives in transportation, power generation and steelmaking. I also highlighted the strategic long-term acquisitions we've made over the past several years to address these macro trends. As Ben has just outlined, these investments are working well and have resulted in a record quarter and solid justification for a revenue guidance increase, accelerated debt reduction and a dividend increase.Today I'll speak to a few quarterly highlights in both the royalty and project generation business, and then I'll finish by touching on our assessment of where we are in the cycle and the resulting adjustment of prioritization within our capital allocation strategy.Our copper stream from the Chapada mine benefited from particularly strong fourth quarter 2018 production that partly flowed through to us during the first quarter. The big news in Chapada, however, was the announcement that operator, Yamana Gold, has agreed to sell the operation to base metals focused Lundin Mining Corp. While Yamana has been a great and effective counterparty, we do welcome this change since we have long-held that Chapada is a copper district with gold credits and not vice versa. We also believe that there remains exceptional copper exploration upside throughout the large property package, and that Lundin is well suited and capitalized to maximize on this type of opportunity.777 revenues were weaker this quarter. The mine plan encountered lower zinc grades. Hudbay Minerals did report, however, an increase in ore mined due to improved equipment availability and a focus on improving several key performance indicators. It also announced the planned extension of the mine life into 2022 based on its most recent estimate of mineral reserves.Vale continued to progress the $1.7 billion development of an underground mine, which is intended to extend the Voisey's Bay life to at least 2034. Vale expects the underground mine to begin production in 2021 and to ramp up over 4 years. While the current open-pit mining of the Ovoid deposit is expected to progressively decommission through 2022. During this transition period, we expect royalty amounts to remain around currently subdued levels and to improve thereafter.Revenue from our potash mine royalties in Saskatchewan continue to trend of steady orderly growth as a result of improving potash prices and the continuing ramp-up of production levels in the strong global demand growth. Note that at current rates, these mines can collectively further increase production by almost 50% before nameplate capacities are reached. We increased our holding of Labrador Iron Ore Royalty Corporation from 5.46% to approximately 6.3% during the first quarter of 2019. LIORC has recently confirmed that it operates as a passive flow-through vehicle for proceeds from a 7% growth overriding royalties and a 15.1% equity position in the Iron Ore Company of Canada operations in Labrador.Dividends received were up strongly as a larger-than-normal cash buildup during late 2018 was distributed to shareholders this quarter. Iron ore prices have moved up substantially during the quarter on the combined basis of considerable supply disruptions and continuing global steel demand growth. A noteworthy tidbit here is that much of the supply that has disappeared contained lower impurity levels and was critically important for blending with pollution and cost-intensive high impurity ores. IOC produces a rare ultra-low impurity ore.Our royalty on Teck Resources Cheviot metallurgical coal mine benefited from significant volume improvements during the first quarter compared to recent periods. Teck is currently undertaking a detailed design study to evaluate the MacKenzie Redcap project, which has the potential to extend production at Cheviot, Cardinal River to approximately 2027. A development decision regarding the project is expected later this quarter.Production volumes related to our tonnage-based electrical coal royalties in Alberta were stable during the quarter and continued to provide consistent revenue. We continue to progress litigation against the Alberta and Canadian governments related to policy and regulatory changes that will effectively expropriate our royalty entitlements at the Genesee mine after 2030. We also announced our first renewable energy royalty investments during the first quarter, and you will recall that these are intended to replace electrical coal within our commodity mix as it is phased out over the coming decade. This first investment is related to a portfolio of U.S.-based development-stage wind energy projects being advanced by Texas-based TGE, which has an excellent track record of generating projects that successfully reach commercial operational status.As Flora mentioned, several members of the ARR team, including CEO, Frank Getman, are here with us at St. John's this week, and Frank is here today and available for any questions at the end of the call.The corporation's junior equity portfolio continued to edge up and seeming defiant to the apathy being displayed in the capital markets for the sector. The portfolio had a market value of $60.7 million at March 31. This does not include proceeds from sales and investments during the quarter that was a net amount of $7.5 million. This amount also excludes the market value of Labrador, LIORC and the book value of privately-held Lithium Royalty Corporation, which stood at $118.4 million and $9.4 million at the end of the quarter, respectively.Within the Project Generation business, we are shifting our primary emphasis away from the conversion of our portfolio of mineral projects into royalties and junior equities, primarily because this objective is largely being completed with 57 projects stealth since the market bottomed in 2016. We will now work closely with the management teams of the various junior equity portfolio investment companies to find ways to add value through the provision of technical and various other supports where deemed helpful.In terms of a highlight development within our PG business, note that Altius owns 15.5 million shares or approximately 22% of Adventus as well as a 2% royalty on its Curipamba project located in Ecuador. Subsequent to quarter end, Adventus released an overview of a preliminary economic assessment for the El Domo deposits, which is part of the Curipamba project. This described robust project economics while outlining next project steps, including the plant testing of additional nearby exploration targets. Also, subsequent to quarter-end, Adventus announced an equity financing, which is being led by Nobis Group, an influential Ecuador-based conglomerate, who will be very helpful in -- as Adventus navigates its all-important social licensing programs in that country.We have sold a portion of our holding in Champion Iron Ore. This was done irrespective of our generally positive views of the value and potential of Champion, and is instead reflective of the fact that our interest was converted entirely to a noncash flowing equity interest at the end of 2018. We generally feel that pure equity holdings without a strategic royalty or other direct revenue-generating components are not appropriate as long-term holdings within Altius.Also, subsequent to quarter-end, we announced an investment to increase our ownership of Renaissance Gold. Renaissance holds a royalty interest in the Silicone project as well as several project joint ventures that are anchored in royalty interests. Altius is also a direct royalty holder in the Silicone project, which is being advanced by Anglo Gold Ashanti and for which the Anglo Gold's CEO recently indicated that a new discovery has been made.Another positive PG portfolio development is the continued entry of strategic investors into several of our portfolio companies. This stands in contrast, again, to the still-near complete absence of capital market participants in the junior sector. Within our portfolio, examples include Newmont buying into Evrim, Kinross into Wolfden, BHP into Midland, DeBeers in Adia, Anglo Gold in Renaissance, Eric Sprott investing in Sokomon, Itochu and Allegiance, and Wheaton Precious, Greenstone and now Nobis investing in Adventus.Finally, and as touched upon by Ben, given the recovery of commodity market since 2016 to levels that are beginning to translate into stronger operator margins and cash flows, Altius foresees decreasing opportunity for M&A-based royalty activity in the near term after 5 years of intense activity. This is now being more than replaced, however, by the improved confidence of operators to sanction asset-level investments to build, extend or expand operations at several of our royalty projects.As conditions begin to favor this type of noncapital-requiring organic royalty growth versus providing deep-value M&A-type opportunities, we expect to transition our capital allocation prioritization towards the repayment of borrowings that we utilized for our many strategic acquisitions during the cyclical trough period. If this cyclical transition persists, we look forward to being able to continue to increase our dividend in accordance with our growth and reduce debt service and repayment costs.And that will conclude my remarks for the call, and we're happy to take your questions. Operator, could you open up the Q&A, please?

[Operator]

[Operator Instructions] And it appears there are no questions in the queue.

[Flora Wood, Director of Investor Relations]

Okay. Well, that's an unusual circumstance for us. We definitely didn't prepare any script for that. But...

[Brian Francis Dalton, Co]

I think we were very clear.

[Flora Wood, Director of Investor Relations]

Yes. Hypnotized. I guess, if there is no questions for us...

[Operator]

Oh, my apologies, we just had a couple queue up.

[Flora Wood, Director of Investor Relations]

Excellent.

[Operator]

And your first question is from the line of Orest Wowkodaw with Scotiabank.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Just some issue because we couldn't *1 up until about 5 seconds ago, just so you guys know. But my question was on Chapada and with Lundin's announced acquisition of Chapada, I'm just wondering if you see upside to the value of your royalty there maybe through higher production levels a more focused mine plan on copper and what kind of upside we might see there?

[Brian Francis Dalton, Co]

Yes, thanks, Orest. I recall being on the due diligence visits when we were considering that purchase and what struck us more than anything else was that first and foremost, this is not a gold district, it's a copper district. And we were pretty taken aback by just how much exploration potential we saw throughout the property to the point that we even tried to convince Yamana to sell us the peripheral exploration land at the time. They obviously didn't go for that. So, yes, I think that Lundin is really very well suited to advance those opportunities. I think there is potential for several other deposits on that project beyond what Yamana has already begun to talk about in terms of more immediate production expansion levels. I should note, however, though that there is a small reduction in our stream amount that accompanies an initial expansion. It wouldn't -- I forget what the actual numbers are, but it's certainly in our material, but it wouldn't impact on larger expansions. And the other thing that I think is very important to point out here is that our stream amount is not capped. We were very focused on making sure that we maintain full exposure to the asset and all that might happen to it into fullness of time. So it's a really positive development. It's a copper asset being run by a copper miner, and we do believe that there's a lot of option value there in the form of exploration, discovery and expansion production rates for sure.

[Operator]

And your next question comes from the line of Craig Hutchison with TD Securities.

[Craig Hutchison, Research Analyst]

Just a question on your iron ore business, so you guys have added to your LIORC position a couple times now. Obviously, since you guys put out your asset segregation analysis, the share price has actually weekended despite, actually, stronger iron ore fundamentals. Do you guys have a sort of set limit internally in terms of how much of a position you're willing to add here? Are you sort of comfortable with the existing position or if you see a pullback would you add more?

[Brian Francis Dalton, Co]

Generally, I'd say that we're comfortable around where we're to right now. If you look at the presentation and you look at the percentage of revenue that we have coming in from iron ore, it's starting to match up relatively well with the amount that iron ore represents as a global mining industry. So I think it's a nice -- it's around a nice level within our portfolio. More recent acquisition during this past quarter timed with a really sharp and unusual pullback in the share price. And, yes, so I mean if it looks really dumb we're going to buy more for sure, but we see our position right now as a core position, whether we'd also do trade around a little bit, around a little bit of a trading position there. And we know the asset really well, so we're certainly in a good position to do so. But we wouldn't rule that out, but, yes, generally speaking, we're happy roughly where we're to.

[Craig Hutchison, Research Analyst]

Any potential updates on Alderon and how that project moves forward?

[Brian Francis Dalton, Co]

There are things happening there, but I'm not really in a position to talk too much about it. It's obviously -- there's an effort underway by Alderon right now to look to strategic partners and other opportunities to advance project. I mean, realistically, if ever there was a time for new high-grade, low-impurity, magnetite-rich, telepathine-type iron ore sitting on infrastructure, now would seem to be it. So there is a big push underway, and we're trying to be as helpful as we can. But I can't really speak anymore to it than that.

[Craig Hutchison, Research Analyst]

Understood. And maybe your -- in terms of your Renewable Energy business, I know you guys have some staged milestones and payments to make. Can you just maybe talk about how that's going and when you guys sort of expect to make your next sort of payment going forward?

[Brian Francis Dalton, Co]

I'm going to hand that one over to Frank.

[Frank W. Getman, Member of the Board of Managers]

Sure. It's going well. Things are on track for TGE in their development schedule. I would expect in later this year there would be -- they would achieve milestones, so there would be another tranche released in the schedule. Things are on track. We're still looking at late 2020 to have the first cash flow from this and then going forward from there building the position over time.

[Craig Hutchison, Research Analyst]

Okay. And maybe one last question for me. I know Brian you mentioned that just given where you're in the cycle maybe there's less opportunities to do royalties with some of the producing companies given that most companies are in a cash-flowing position. Are there other opportunities to buy royalties from other players in the industry? I know you guys were able to purchase the Curipamba one this past quarter. Are you seeing opportunities there in terms of people selling down some of their royalties that maybe are noncore?

[Brian Francis Dalton, Co]

It's a funny time right now. We're definitely not seeing much opportunity coming out of producers and those that have cash flow. It's just not desperate times for them. They can be a bit more selective and generally speaking, when we like to buy when people have to sell, not when they want to sell. So that's the first thing. And then when it comes to development-stage opportunities, we need more things working at the same time. You're not going to do a project -- a complete project finance generally around royalties and stream. So you need equities and debt markets to be open as well. So we're not at that point. I think there'd be appetite amongst royalty players, including ourselves, particular to where there was a really strong technical view. But the rest of the market just isn't there yet, and until that happens, I expect that to be subdued as well, but we'll stay ready.

[Operator]

And your next question comes from the line of Carey MacRury with Canaccord Genuity.

[Carey MacRury, Analyst of Metals and Mining]

Just had a question on the Alberta litigation. Just wondering if you could provide a little more color on where that stands? And is there any sort of milestones or time line that you're thinking there?

[Brian Francis Dalton, Co]

It's not a fast process, that's for sure. We haven't -- yes, maybe Flora, you -- Flora has been keeping on top of this pretty closely, you might be able to speak to anything more specific, but generally, we're just trading a bunch of paper back-and-forth and getting ready for discovery that sort of thing. It'll take a while.

[Flora Wood, Director of Investor Relations]

I think the last items we have, Carey, are posted on the website under call 2030, but like you said, Brian, I think there's a long time lapse before the -- and it's the other side, I think, who has to do something next.

[Brian Francis Dalton, Co]

One thing I will point out is that the newly elected premiere one of the planks of this platform was to ensure that where policy resulted in events can't demount to expropriation the government would treat those types of events as expropriations and provide compensation. So kind of goes pretty much straight down the alley of what we're talking about and claiming, so we'll see how true they are to the word now that they are in power versus what they promised reelections or something to look to, but yes, the whole concept of takings as being essentially expropriations was quite clearly articulated in the campaign. So let's see if Mr. Kenny is a promise keeper.

[Carey MacRury, Analyst of Metals and Mining]

So maybe on that point with the new premier, I think, they're pushing back more on the carbon tax. Do you think there's an opportunity for some of this colder gasification that's happening to slow down and we could up having more life out of the coal assets?

[Brian Francis Dalton, Co]

Possibly. I mean the other thing that's been fun to watch there is that when all the conversations was handed out to encourage shifts from coal to gas, there were announcements made, but they were pretty loose and it seemed to deal more with building in the flexibility, the switch between fuels as economics dictated rather than full-blown philosophical conversion. So that was interesting to watch. They were quite happy to take all the compensation. But we're not seeing the big actions that would drive the changes that were meant to motivate. Obviously, a lower carbon tax would change the -- skew the economic argument for coal for longer if that's the main factor. But, yes, interesting times in Alberta, as always.

[Carey MacRury, Analyst of Metals and Mining]

Maybe one last one on the Gunnison project is under construction. I'm just wondering what's your view on how that's progressing and when you expect to receive royalty revenue from that one?

[Brian Francis Dalton, Co]

From what we understand from Excelsior things are moving along quite well. We don't -- we haven't been down ourselves in a while, but we're going to go down pretty soon. So maybe by the next call, we'll be able to give you a little bit of a better update, but all reports are that things are quite on track.

[Operator]

[Operator Instructions] And your next question comes from the line of Jacques Wortman with Laurentian Bank.

[Jacques P. Wortman, Director of Research for Mining]

Three quick housekeeping things for me, if you could. First of all, I just want to confirm that you said that you sold all of your Champion stock? And if you could just let me know when about that was?

[Brian Francis Dalton, Co]

Well, we haven't pulled all of the Champion position. We sold some during the first quarter. Share price would have been in the $1.30, $1.40 range, I guess.

[Flora Wood, Director of Investor Relations]

No, no, $2, wasn't it?

[Brian Francis Dalton, Co]

That was during the quarter.

[Flora Wood, Director of Investor Relations]

Okay, got you.

[Brian Francis Dalton, Co]

And in subsequent quarter we sold another little bit and that would have been in current range sort of somewhere north of $2. We currently hold 2.5 million shares.

[Jacques P. Wortman, Director of Research for Mining]

That's exactly what I was looking for. Second thing was, could you just give me a sense -- and I know that 777 is winding down by sort of Q2 2022, but what's the relative timing of your receipt of your royalty revenue? Is it essentially a 1 quarter delay?

[Ben Lewis, Chief Financial Officer]

This is Ben. So the zinc we get paid pretty well immediately, that's based on production. But the copper there is the typical delay because they have to sell it to the third party.

[Jacques P. Wortman, Director of Research for Mining]

Okay. And last thing, if you could just provide any kind of an update on what's happening with Adia? I know it's private, but any kind of update would be appreciated there.

[Brian Francis Dalton, Co]

Yes. So they've completed a winter drilling program. It unfortunately got shortened because of just weather conditions and drilling condition. But we're successful in the sense that it collected a lot of the ultramafic rock material of the type that we saw at Cyprus and then all the micro diamonds were in. So we definitely -- we did manage to -- or Adia did manage to collect lots of material sufficient to do the next level of sampling and to put much better constraints on the general geology. I won't preempt more detail than that, but basically, mission accomplished for the winter drilling program, and we look forward to those results later this year.

[Operator]

And there are no further questions in the queue.

[Brian Francis Dalton, Co]

Thanks, everyone.

[Flora Wood, Director of Investor Relations]

Thanks, everyone. We'll talk to you after Q2.

[Operator]

And this concludes today's conference call. You may now disconnect.