Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Altius Minerals Corporation Q1 2021 Financial Conference Call. [Operator Instructions].I would now like to hand the conference over to your speaker today, Flora Wood. Please go ahead.

[Flora Wood, Corporate Secretary]

Thank you, Adrianne. Good morning, everyone, and welcome to our Q1 call. Our press release and quarterly filings were released yesterday after the close and are posted to our website. This event is being webcast live, and you'll be able to access a replay of the call along with the presentation slides that have been added to the website at www.altiusminerals.com.I'll also point out, after the call, we'll be holding our Annual General Meeting, again by conference call webcast and the coordinates for that event are on our website and in the management information circular. Start time for that is 11:30 Eastern. One more event announcement, tomorrow from 9 to 11 a.m. Eastern we're holding a virtual Investor Day call and webcast, where we're doing a deeper dive into the fundamentals of our producing royalties and also covering development stage royalties. The details for that are on our website, the conference call has a live Q&A session and the webcast is a recording of the session, so no live Q&A interface, but we'd love to get questions in advance, and we'll read them out and answer them on that call. With the Investor Day going on tomorrow, our Q1 call today will be a bit shorter than usual.Brian Dalton, CEO; and Ben Lewis, CFO, are both speakers today, and then we'll open it up for questions.The forward-looking statement, you've seen on Slide 2, applies to everything we say, both in the formal remarks and during Q&A.And with that, I'll turn over to Ben to take us through the numbers.

[Benjamin Gerard Lewis, Chief Financial Officer]

Thank you, Flora, and good morning, everyone. Q1 royalty revenue of $17.8 million or $0.43 per share was down 19% from Q4 2020 when we had the large end of year catch up dividend from Labrador Iron Ore Royalty Corporation and on some price and timing of sales recognition lags this Q1 that we expect to start to catch up during Q2.On a year-over-year comparison basis, Q1 revenue is up 9% from last year. Q1 EBITDA was $14.6 million or $0.35 per share compared to $17.6 million last quarter, consistent with the change in revenue. The EBITDA margin was 82% this quarter compared to 80% last quarter. Both Q4 and Q1 EBITDA margins are at the upper end of our traditional range.Relative to revenue growth, fixed costs remained stable, and so we are constructive to margins. G&A expenditures of $1.9 million in Q1 are down 27% from Q4. This is explained mostly by higher legal and other professional fees in the prior period.The Great Bay Renewables subsidiary G&A is no longer included in our consolidated numbers after the formation of the joint venture between ARR and Apollo funds in October last year, with revenue and expenses now presented in earnings or loss from joint ventures.Adjusted operating cash flow was $8.8 million this quarter, down 35% from Q4 adjusted operating cash flow of $13.5 million and is largely caused by the timing of corporate tax installments.The quarterly net earnings of $11.8 million or $0.28 per share include $0.14 in noncash adjustment items that are identified in the waterfall table and slide that you can find on our website, leading to adjusted net earnings of $0.14 per share. The main adjustment item is a $0.09 per share gain on fair value of derivatives, which reflects the increase in market value of warrants held within the PG equity portfolio.In addition, there are smaller foreign exchange gains, dilution gains, and a reversal of the impairment recorded on the secured loan to Alderon. We fully recovered the loan amount shortly after the quarter when we received an additional 600,000 Champion shares as part of that receivership based asset sales settlement process. I'll also remind you that we hold a 3% gross sales royalty on the Kami Iron Ore project, which Champion is currently evaluating.The Board of Directors declared a $0.05 per share dividend to be paid to shareholders of record on May 31. Payment date will be June 15, 2021.Now I'll turn to the balance sheet and capital allocation. The cash position increased to approximately $112 million at the end of the quarter, mainly because of the net proceeds received from the IPO of Altius Renewable Bodies. We report ARR in our consolidated financial statements because we currently own 59% of that company. The cash position, excluding the ARR IPO proceeds, is $19 million, which has been around our comfort level for the last few quarters.We received $5.6 million from the exercise of 400,000 warrants that were held by Yamana as part of the 2016 Chapada stream purchase. And immediately used these proceeds as well as some additional cash to buy back 473,000 shares during the quarter or 1.1% of our shares outstanding for a total cost of $7.4 million.In addition, our regular interest payments or in addition to our regular interest payments, dividend payment, preferred distributions, and debt reduction payments, we also invested $4 million in investments in our PG equity portfolio. This was offset by $7 million in sales. In addition, we invested $2.2 million in Lithium Royalty Corporation, which was part of the previously disclosed investment commitment.That's my main remarks for today, and I'll turn it over to Brian.

[Brian Francis Dalton, Co]

Thank you, Ben. Thank you, Flora. As Flora said, we have our Investor Day tomorrow, so we'll keep these remarks brief. We don't want to run the risk of having nothing fresh or fun to talk about tomorrow. By way of a teaser for Investor Day, I want you to consider the following excerpts from our 2019 letter to shareholders, which can be found in its entirety in the Investors section of our website. At the conclusion of that letter, we said, the business is strong and filled with embedded royalty volume growth that is already happening in a meaningful and measurable fashion. This is occurring across a diverse portfolio of long-life, high-margin mining assets, mines that produce those commodities that are best aligned with long-term global structural trend shape.The Altius Renewable Royalty platform is developing more quickly than they could have hoped. The timing of the perfect storm for metal prices is hard to call precisely, but its forces are deeply structural and intensifying. These demand drivers have already begun to emerge while the incentivization conditions needed to bring on required levels of new supply for replacements and growths are still absent. The longer that this combination persists, the stronger the storm is likely to be when it comes. And our royalties will directly immediately benefit. Our PG business should flourish and even more production growth will materialize from within our current pipeline.So an incredible number of things have gone on in the world to try to offset that thesis since then. In 2019, there was the Trump trade war with China, then [ Bolden the bear ] and slowed the approach to the storm. And then, of course, the whole world shut down for the best part of 2020 to keep the meteorological analogy going, we can probably call it COVID, the mother of all blocking systems. The front edge of the storm has made its inevitable landfall now, however, and it is feeling like a [indiscernible].The previous super cycle, we measured from bottom to bottom, ran from about 2001 to 2016. Incentive pricing sentiment conditions were crossed into around 2005, 2006, have persisted until, say, 2011, 2012, if we ignore the little global financial crisis episode in the middle when resulting supply impacts began to push the market to below incentivization levels for the next 9 years or so, until today. The boom sets up the buzz and vice versa.Our focus during Investor Day will therefore be to highlight how Altius has positioned itself to benefit from this latest cyclical shift. You will hear the words organic growth and optionality quite a bit. So don't gloss over the forward-looking statement warning. We've had a lot of fun putting it together. So I hope our shareholders and investors will find it an interesting session. We also have a special treat of being joined by Champion's David Cataford, who'll tackle the topics of iron ore quality and cleaner steelmaking process and explain why the Labrador Trough is about to become so much more globally relevant and necessary.Anyway, I hope that's enough of the teaser. Any questions on the quarter.

[Operator]

[Operator Instructions]. The next question comes from the line of Craig Hutchison with TD Securities.

[Craig Hutchison, Research Analyst]

I'm sure you're going to address this tomorrow, but just -- and I don't want steal on your thumbnail. But just in terms of a question of capital allocation, obviously, given the extraordinary strength we're seeing here in the underlying commodities and then your royalty portfolios. Any insight you can provide into thinking what you guys might do with some of that excess cash flow, both in terms of capital allocation and maybe further capital returns to shareholders?

[Brian Francis Dalton, Co]

First off, Craig, I can't even tell you how happy I am to get a question like that. We are -- we actually had a Board meeting yesterday. Look, it's been a really busy, busy quarter between the ARR spin out and everything else. But as we go into the rest of the year and even this quarter, there's a lot of work that we're planning to do on updating our capital allocation strategy. We feel like this is a bit of an inflection point now, cyclically. Conditions are not great for M&A type activity and buying assets. It's just not the right part of the cycle. That was the last part when we were very busy. We've obviously got some debt still on our books from all of those acquisitions. So that will be part of the prioritization, but returns of capital are definitely going to be a huge part of that discussion. But give us a quarter or so to do the work and think things through with a longer-term perspective, so we can give our shareholders some better guidance. So work in progress.

[Craig Hutchison, Research Analyst]

And maybe just one other question from me. In terms of your project generation portfolio, we are seeing a lot of renewed exploration spending on budgets here. Is there anything in the 1 or 2 assets in your portfolio that you just want to highlight, maybe just in terms of what you see the best kind of growth potential and maybe the possibility of eventually being a paying royalty in your portfolio?

[Brian Francis Dalton, Co]

Definitely getting into thunder for -- stealing thunder from tomorrow, but I give it a stab. I mean, the things we're looking at with high anticipation obviously are -- probably for most would be hopes that Champion goes ahead and builds the Kami Project, that will be an incredibly material event in our future if that were to come to be, broadly speaking, within the PG portfolio, [indiscernible] has got a feasibility study coming this year, half a dozen or so have resource estimates and PEA type studies coming. I don't think all of those really are -- it's possible some of those could get through this cycle. Others, I think, are probably longer term. That's the bet, but they're all -- lots of things going in the right direction. Far more speculatively, we own a royalty on a project that AngloGold Ashanti in Nevada has been very busy on, called Silicon. And there's quite a bit of buzz around that. I don't know. They've been very tight-lipped about results to date. I think there are some strategic reasons for that. But just as a little -- something that we're watching kind of item. There's quite a bit, like we really did a lot of work between, say, 2013, '16, '17, loading up on land, converted those equity positions to junior that ended up with those projects, are doing really well. They've been, I think, raising an outsized share of capital, they've been attracting really strong new investors coming alongside of us. So couldn't be happier with how the PG business is unfolding now that not a speculative capital to return to the sector. It seems like it has finally left weed and everything else, and it's come back to its natural homes, so done too soon.

[Operator]

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

[Carey MacRury, Analyst of Metals and Mining]

Just one question for me on the quarter. Just in terms of the coal business, you had a big Q4, and then it came down pretty sharply in Q1. Just wondering, is there any guidance you can give us for coal for 2021? Is it going to be more similar to Q1? And I noticed you mentioned sort of Sheerness reaching end of life on this. So just any color on the coal business would be great.

[Brian Francis Dalton, Co]

Yes, we don't see much hope for surprises from Sheerness and that was, of course, a lot of what happened in Q4 with the bit of a surge. I don't know if it was getting rid of what inventories were around or whatever, but we don't see much there. For Genesee, it looks like business as usual for a bit of time yet as they get going on their gas conversion. So I think if I were looking at us and how I see it, I mean, looking at Genesee doing okay and keeping ongoing for a bit here, but we all know the writing is on the wall. And that capital power is trying to get coal off of its record as well as quickly as possible, so a couple more years there.

[Operator]

The next question comes from the line of Brian MacArthur with Raymond James.

[Brian MacArthur, MD & Head of Mining Research]

Again, just quickly, vis-a-vis your capital cycle comments. Do you have much more to monetize in the private or junior equity portfolio? Or are we pretty well done? Are you expecting a lot more to commit to that as far as monetization?

[Brian Francis Dalton, Co]

So what we did with the PG portfolio?

[Brian MacArthur, MD & Head of Mining Research]

Yes, please.

[Brian Francis Dalton, Co]

Wow! No, we have -- I think at the end of March, we reported somewhere in the mid-50s of equity values held. And we've been monetizing lots over the last few years, but we've also been continuously adding positions because we've still been -- the team have been doing really well with selling on new projects for new equities, it was a bit of a natural replenishment that happens there. So, it would have been mid-50s, and you know what the market has done since in the March, it's more than that now. But yes, it's -- there has been good appreciation, and I think they're still quite a bit on some of the names to come. And we'll keep adding new equity positions as additional projects are appended for shares and royalties. Pretty early days for what's going to come from that portfolio for this cycle as far as I'm concerned.

[Brian MacArthur, MD & Head of Mining Research]

Right. But that's -- sorry, just to be clear, there's more private stuff that you can vent out. I mean, last cycle, you had a whole inventory. I'm just curious, where we are in that part of the phase of vending the land back up to juniors. Whether we're 80% done or 60% done?

[Brian Francis Dalton, Co]

Yes. Sorry, I misinterpreted the question. So even if you remember, back in 2016, we would have talked about letting loose somewhere around 1.7 million hectares and to then on oxy pile that builds over the next few years. And inventory has been running on a sort of just-in-time basis ever since. So the team is active and building up positions, there's a handful of projects within the portfolio that are at different stages and there's new ones being added. So there's no -- there hasn't been a big inventory there for a couple of years. It's been a -- but we continue to work at replenishment all every day. The big backlog or the big boulder, if you call it, through the down cycle, and things are really opportune has been cleared, and now it's just new ideas and continuous addition.

[Operator]

[Operator Instructions]. The next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

[John Charles Tumazos, President and Chief Executive Officer]

We realize that the history of all of this is very patient project generating exploration, getting in sort of on the ground floor and helping to grow a project and some of the other companies write big checks. In the March quarter, Franco-Nevada invested about $600 million in iron ore. They bought a $538 million debenture in Vale as a participating debenture plus some Labrador Iron units. Could you give us a sense of the speed of the redeployment away from coal and potash into base metals and renewables and the trade-off between patience or Franco writing a big check and getting immediate exposure?

[Brian Francis Dalton, Co]

Yes. I think it's a great question, John. The first one thing to clarify, I guess, there's no doubt that Franco recently bought Vale debentures. But I note that they were actually basically disclosing much earlier purchases of Labrador. In fact, based on their average prices, it sounds like we're running a pretty parallel track in terms of when we started, probably in around 2016. There's no other way you can get to that average price other than there. We were at 2016 and right up in the 2018, soon after the -- we used a bunch of the Fairfax proceed to actually, where we got a lot of our acquisition. As far as the longer term approach, yes, I mean, we're more -- I guess, we're countercyclical, obviously, and we'll build things up a bit slower and let the option value play out. And so kind of where you're going, I think, is do we buy all through the cycle. And generally speaking, no, that's not how we do it. We feel really good about the bets we have in, in some of the earlier stage that we made over the last number of years, making it, growing our portfolio, whether it's expansions at existing mines or new developments like Kami or those sorts of things. Yes, I guess, it's not -- I wouldn't look for it. I mean, I would just look forward from us. You never say never because special situations arise, but it's not our intent to buy all through the cycle. We buy when conditions are really opportune. And we let organic growth take over when prices and incentivization conditions kick in. So that's why we were picking for royalty, whether they were existing operations or development assets that we felt were most likely to be invested in when the time came or big resource lives, great margin positions, pretty straightforward predictors really of future investment. And so that's what we see in our immediate future. The last comment I'll make there is, Franco has a different situation than we do in that they have a different equity cost of capital profile. And that gives them, I think, more flexibility to work throughout the cycle. I mean, maybe we get there someday, but that's not where we're to now. And the other thing -- the other way that reflects that a lot of our acquisitions through the down cycle may use of leverage, frankly, those typically do that because their equity capital, cost of capital means they don't have to. I don't know if I'm answering any part of your question there, but we feel really good about where we're positioned for this part of the cycle and whenever this one ends, hopefully, 10 or 15 years from now, we'll be ready to go again on the -- more on the M&A side, but it's not the key focus right now.

[John Charles Tumazos, President and Chief Executive Officer]

That's a very good explanation. If I can ask another question, once again on iron ore. Champion lists 8 projects on their website. Clearly, a couple of them are much bigger and advanced, producing or potentially producing. Are you open to investing in such early stage iron ore exploration in the Labrador Trough to add to your iron ore exposure or is owning 600,000 shares of Champion a good enough way to participate in the package of the different growth properties?

[Brian Francis Dalton, Co]

We've got a little more than that as we still have share. We invested in Champion back whenever they -- soon after they bought Bloom Lake. And we have, I believe, somewhere just over a million shares, I think, of Champion, but still to your question, a lot of our exposure here going forward to what Champion does, at least we hope is through our royalty and Kami. We really hope that that rises to the forefront as far as their next phase of expansion and growth develops there. But we also do have other pretty significant iron ore interests within the Labrador Trough. We've been active there for, I don't know how long now, 15 years, probably. So we all know about Kami and our royalty there, but there are other projects that -- actually, one of which we probably have a first resource estimate published on later this year. It's within a company called Avidian Gold or a spin-out of their or a division theirs called High Tide. So we're definitely -- we've got more layers of exposure to the Labrador Trough, and I do think the Labrador Trough, the way that it has been running now for whatever it is, 50 or 60 or 70 years, I think it's really just coming into its A day. So from a long-term perspective, we're very deeply positioned there. Would we get involved with other projects? Probably. We have a great relationship with Champion that goes way back. And through something else that they were advancing, and they wanted to work with us. David, Michael would only have to pick up the phone and we've got very open ears for sure.

[Operator]

I will now turn it back over to Flora for closing remarks.

[Flora Wood, Corporate Secretary]

Well, thanks, everybody, for dialing in and really appreciate the questions. And we'll look forward to talking to you tomorrow.

[Brian Francis Dalton, Co]

Thanks, everybody.

[Benjamin Gerard Lewis, Chief Financial Officer]

Thank you.