Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Altius Q1 2022 Financial Results. [Operator Instructions] I would now like to hand the conference over to Flora Wood. Please go ahead.

[Flora Wood, executive]

Thank you, Mary. Good morning, everyone, and welcome to our Q1 conference call. Our press release and quarterly filings were released 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 the call along with the presentation slides that have been added to our website. Brian Dalton, CEO; and Ben Lewis, CFO, are both speakers on the call, and following their remarks we'll open it up for questions.

The forward-looking statement is on Slide 2, and applies to everything we say both in our formal remarks and during the Q&A. And with that, I'll turn over to Ben to take us through the numbers.

[Ben Lewis, executive]

Thank you, Flora, and good morning, everyone, and thank you for joining. Q1 attributable royalty revenue of $25.5 million or $0.62 per share, was up 44% year-over-year, mainly thanks to increased potash revenue and a strong base metals quarter. Additional nonrecurring and project generation related revenue of $3 million was also recorded during the quarter.

Q1 adjusted EBITDA was $23.6 million or $0.57 per share, up 62% year-over-year. EBITDA emergence of 83% are up from 80% a year ago, following the trend in revenue, but partially offset by higher expenses for ARR, which went public in the second part of Q1 last year. The Mineral Royalties EBITDA was 86%.

Q1 adjusted operating cash flow was $14.2 million, up 61% year-over-year. Adjusted operating cash flow also followed the general revenue trend and is net of $5.5 million in cash taxes paid. Adjusted earnings for the quarter was $8.8 million compared to $6.1 million in the same quarter last year. Adjusted EPS was $0.21 compared to $0.15 in Q1 2021.

The main adjusting items are $539,000 in foreign exchange gains, approximately $1 million as a gain on disposal of mineral properties during the quarter and $2.9 million in investment income relating to a Chilean project generation initiatives. Offsetting these items, was a $313,000 unrealized loss on fair value of the adjusting derivatives.

Turning to capital allocation. We made an investment during the quarter of $5 million into Invert Inc. in the form of a secured convertible note. We also amended our royalty agreement related to Wolfden's Pickett Mountain project to receive additional timber royalty rights and any related carbon credits in exchange for USD 1 million.

We paid $2.7 million in dividends in the first quarter and bought back 10,000 shares under the normal course issuer bid for a cost of $165,000.

We ended the quarter with $34 million in cash and cash equivalents, excluding the ARR cash that is included in our consolidated results. Subsequent to quarter end, 2 events deserve attention.

First, Fairfax exercised their 6.7 million warrants, with the proceeds used to redeem $100 million worth of preferred securities that it also had. As a result, Fairfax has become our largest shareholder, and we have eliminated $5 million in annual preferred share dividends.

We are also pleased to see the beginning of an expected revenue ramp-up at ARR and the first quarter of positive cash flow for its underlying GBR joint venture business.

And with that, I'll turn it over to Brian to talk about the investment climate and give some views on this outlook. Thank you.

[Brian Dalton, executive]

Thank you, Flora. Thank you, Ben. Our first quarter was marked by record levels of royalty revenue that were largely due to higher prices and relatively stable operational performance across our diversified portfolio. Perhaps more importantly, from a long-term perspective, it was also characterized by several positive developments regarding various embedded growth prospects, which is where I will focus my remarks today.

Starting with potash, recall that we've acquired our royalties in most of these Saskatchewan mines in 2014 and 2018. At the time of the original investments the key feature of attraction was the nearing completion of a series of major capital investments that were design significantly move up nameplate operating capacities.

These investments have been incentivized during a strong price runoff 7 to 8 years prior. We believe our lower -- certainly not the wider market narrative at the time, but these additional tonnes will be need by the market sooner rather than later. And that, therefore, the production volumes we were buying are going to increase significantly as compounding demand growth ran its course and make the purchase price even more attractive on a long-term basis.

Moreover, we believe that over time, these Altius long-life operations would continue to successfully attract investment and expand further.

We're paying a little more to buy the second tranche 4 years later but at a time when ramp up had begun, progressing and the next phase of growth investing was looming closer.

Fast forward to today, and we're seeing the incremental tonnes that remain being placed as quickly as possible into a market that looks like will have unmet demand this year and that is experiencing pricing level similar to the previous investment in centralization period.

This has in turn caused the investment community to suddenly start pressing the operators on when they will begin a new wave of capital investing in longer-term growth.

In potash, it is always important to note the long lead-times required to build new production capacity. Meaning that these commitments must come sooner rather than later or the operator face losing the market -- global market share gains they've made or worse global demand facing long-term undersupply conditions.

Our last comment here to say that recent geopolitical events have fully solidify the importance of Saskatchewan and Canadian based potash to global food security. Given high capital intensity and long lead-times for the industry generally, and the increasing relative risk base cost of capital in competing major production jurisdictions, we continue to believe that our royalties in potash relate to the most important mines of any commodity type in the world, and that their scale and value will only continue to increase. The signaling for the next phase of this has already begun.

In basin battery metals, we are similarly feeling quite positive on the internal growth possibilities. At Chapada there was exciting news announced during the quarter surrounding a new discovery called Sauva. Apologies to many Portuguese speakers on my pronunciation there. Little fun fact, the name actually really translates into leaf cutter inch.

The discovery is located in little ways north of the existing resource and production area of Chapada. The deposit footprint is rapidly being delineated and expanded. It has some intriguing early signs of being a more intense metalizing systems then the current area being mined, based upon the alteration assemblage and mineralogy being described. As well as indications of having a markedly higher copper grade.

While still early days with much work to be done in delineation and other studies, the obvious potential as it relates to our stream interest, the prospect of a longer total resource life and higher annual copper production volumes. These could come either through a blended average grade improvement at the existing processing facilities, or more intriguingly, a second processing facility on the property.

At Voisey's Bay, we continue to believe that it remains excellent potential for the operation to continue beyond its currently stated resource life. This could come through exploration success or more simply through the lowering of cut-off grades for resource calculations at the mine.

Significant quantities of no mineralization exists at Voisey's Bay that were not incorporated into the current mine plan was modeled in a lower nickel price environment and prior to the growth in relative demand for premium quality and low carbon footprint nickel emerging in response to EV and other battery requirements.

Vale's announcement during the quarter that it has entered into long-term supply agreements with Tesla for its Canadian production underscore this feature.

Advances achieved and major milestone during the quarter with respect to the copper and gold rich Curipamba project in Ecuador when it announced the comprehensive project finance package that is backed by both Wheaton and Trafigura. The project features very strong feasibility results and is currently in the process of seeking to secure environmental and other approvals that are required before commencing construction. We expect progress announcements throughout the remainder of the year.

Our various exposures to the Labrador Trough iron ore district and its high purity material that results in the lowering of carbon footprint during steelmaking continue to show signs of driving volume growth within our portfolio.

Rio Tinto's IOC has now significantly expanded growth-focused investment levels during the quarter. While Champion continues to advance the rescoping of the Kami project as it considers next growth opportunities following its recent achievement of first production from Bloom Lake expansion. Results from the Kami study are expected later in the year.

We'd also like to highlight the remarkable progress being made by Lithium Royalty Corporation. Altius hold the privately held founding equity position in LRC as well as directly interests in 2 of its advanced stage royalties. It acquired to co-participation right. It has grown its portfolio of royalties in '19 with 4 of these expected to be generating revenues in 2022 and another 2 possible next year.

Lithium prices also continued to be very strong and are being supported by global EV sales that look to be leading the steep part of the adoption curve. LRC has further commented that its exploring possibilities for an IPO or corporate transaction later this year that we believe could result in a material crystallization of value for us.

We have seen strong potential emerge from our Nevada-based Silicon Project gold royalty interest during the quarter. While this is perhaps an unusual commodity to think about for Altius given our diversified and generally nonprecious metal focus. Silicon Project is quickly emerging as a potentially very important royalty assets.

Early indications suggest world-class potential, in fact with production potential from several discovery areas. The operator AngloGold has announced a significant maiden resorts and the commencement of a pre-feasibility study for the silicon main discovery and the commencement of a resource estimate and concept study for the Merlin discovery.

It is also indicated additional target areas are showing promise and receiving considerable drilling attention, including at the new Maverick discovery amongst others. These developments from across our mining royalty portfolio provides strong validation for our contention over the past 2 years, that the current paying royalties represent the tip of the proverbial iceberg within our portfolio.

Moreover the growth potential comes at little or no cost to Altius' top line revenue participants. The signals around option value realization and growth therefore represent what we consider to be the main highlight for Q1 2022. Despite it also being a record royalty revenue quarter.

ARR continues to build out its portfolio with a new developer financing announced with Bluestar Energy, which is headed by one of the most successful leaders in the global renewable development sector. This new relationship continue ARR's strong deployment record since IPO just over a year ago, and opens up several new possibilities, including for international expansion, and bespoke renewable energy solutions for mining and other industry sectors as they pursue decarbonization initiatives.

We also made an investment in the quarter and Invert Inc. Invert is a startup company that invests in and develops carbon sequestration projects in exchange for credits so they can sell on to those seeking to offsets or emissions and achieve net-zero objective. These customers include mining companies, amongst many others.

We think that this is an enormous market in the making and appreciate the royalty like attributes of the business model that Invert had developed. We would also note that its project portfolio development strategy share certain broader due diligence type considerations with our mining project generation business, and we look forward to working collaboratively with the team as it seeks to scale up its business.

It's still early days here, but generally speaking, we are looking at this investment as having characteristics akin to those we consider during the co-founding of both ARR and LRC.

A few closing comments on our views regarding the current cyclical position of the resource markets. Ours little pick me up moment, if you will, and has been trying couple of weeks from any resource investors I'm sure. We've been refreshing our reviews off late and focusing on the copper market as usual bellwether.

Last year around this time, we took the view that incentivization levels had been reached, putting us a third or so of the wave from the bottom to the top. This meant that the next thing to expect will be a wave of growth investing announcements that will take several years to get to ground and ultimately result in oversupply projections, and then the next downturn, all as pretty usual stuff.

The growth investments have remained elusive a year later, however with actual growth spending actually forecast to decline this year, which is particularly surprising since the demand side of the narrative continues to build around positive data related to initiative requirements.

We have some thoughts on why this might be and how it should inform our cyclical position views, which we'll share at our upcoming Investor Day later in the month. But suffice it to say for now, that it is difficult for us to believe that the market has peaked before the wave of investment and supplies even begun. We've said this before and still think it's true, the longer it takes to get going, the more dramatic the response will have to be.

Mining industry can't give the world the things it needs just by snapping his fingers. It is therefore hard not to be bullish about the next several years for our sector, at least once you cut through all of the short term volatility and noise.

Thank you. And with that, we'll open up to questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Carey MacRury with Canaccord.

[Carey MacRury, analyst]

Obviously, you saw the Sandstorm BaseCore transaction. Clearly not a lot of companies in the base mineral royalties space. Just wondering your thoughts on that? I assume you've had a look at that portfolio. And I guess, there's a change in the competitive landscape for what this stuff -- this type of stuff you're looking at?

[Brian Dalton, executive]

Yes. I mean, I guess in some ways, it confirms what everyone was expecting had to happen and that's just broader consolidation, particularly amongst -- on the precious metals sectors. So I think it's obviously very healthy to see. There's -- obviously, it's been too fragmented for the last several years. I mean, obviously won't comment on the transaction directly. And quite honestly, we've been so busy getting ready for the quarter and our strategy session and upcoming Investor Day that we haven't really needed any kind of really serious analysis. But broadly speaking, I think it's a really great time of the royalty space consolidating. And hopefully that has positive implications for just the competitive environment going forward.

[Carey MacRury, analyst]

And just maybe secondly, on potash. I mean, it seems, prices continue to strengthen. Obviously, there's this lag that we're trying to catch up to. And then you've got the Mosaic K3 project coming online. This may be difficult to answer. But you did $10 million in the quarter, like have prices sort of normalized here, just given the catchup. And the volumes, do you have a sense of what potash revenue number you generate on a go forward basis?

[Brian Dalton, executive]

A good one. It looking like a pretty strong year for sure. Again, the price that we received in Q1 was really the price that the market or more or less the market was pricing in previous quarter. So next quarter and the one after, it'll be closer to what the past quarters looked like, which obviously had more dramatic impact around Eastern European supply challenges.

I'm just astounded really that we're actually looking at a potash market this year that will be -- that overall global demand will be significantly unmet. I mean, I haven't heard that kind of talk about any commodity in well over a decade now. So I mean, it's -- yes, it's obviously shaping up to be a really strong year.

I mean, you still got weather factors and everything else to consider which are always variable. And then there's the general seasonality of sales. But, look, our operators and sell at very high prices whatever they can produce this year, that much is obvious.

And with potash, sure you can under supply soil for the year or so, but it's still -- the nutrient is still gone. It ultimately has to catchup at some point and has to be replenished. So I think what you're seeing right now actually has implications for a bit of a longer depricing environment than we would have guessed even 5 or 6 months ago. We certainly didn't envision an under supplied global market.

I really hope it doesn't translate into food crises situations, but it's starting to look more and more like that. So it's hard to feel good about circumstances that actually could see people suffering from famine. But overall, I guess we're pretty happy to be exposed to Canadian potash. And we think it has a real big role to play short, medium long term, more than it's ever -- more important than it's ever taken on and keeping the world fed. We love our potash royalties, if you haven't heard me say that at least 500 times in the past 10 years or 7 years.

[Carey MacRury, analyst]

I guess, part of the question was, based on the volumes, you guys report, we haven't really seen -- volumes have ticked up a bit, but we've seen quarters with higher volumes historically. So I guess, I think we should expect maybe not only a price catchup, but I think there's a bit of a volume pickup, particularly, again, given Mosaic and sort of Nutrien increasing their guidance. Obviously, you don't get guidance by mine, but...

[Brian Dalton, executive]

Well, some of that -- some of that's the lag, obviously. But I mean, Mosaic just this quarter, and probably closer to the end of the quarter finished ramping up K3 to replace what was lost mid last year, when K1 and K2 went down early. Later part of last year, there were higher, unscheduled or longer than planned maintenance weeks at Rocanville. Nutrien is going to deliver extra million tonnes this year over what they delivered last year. Rocanville obviously has to be a big part of that. So I think that's a fair guess. But we don't have perfect visibility on that. But if everyone's going to run at the rates they are trying to run at -- the world fed here and that'd be pretty positive on our volume side as well.

[Operator]

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

[Craig Hutchison, analyst]

Just with regards to your -- you touched on your investment in Invert Inc., I'm just curious whether you see this as a big growth driver for Altius. And just curious why it was acquired within Altius and maybe not in Altius Renewable Royalty Corp?

[Brian Dalton, executive]

I guess, where we see it right now it's early days. But it has elements of thinking behind it that I would say would look like where we were thinking about ARR from 4 or 5 years ago. And a little bit more recently LRC. The similarity with LRC is that in this case, we're choosing basically to partner with a team that will lead and that we will be supporting and contributing participant we hope going forward.

So it will be somewhere in between those 2 pieces. As for why it's not in ARR. ARR is very focused on royalties for the renewable energy space without going off in different directions. As for minerals really when you think about it, it's -- all of its exposures are sustainability linked. And I don't know if you can epitomize that any more than through what we think is going to happen in the carbon market. And it has those overlaps with what we're seeing in mining.

There's linkages here to price of carbon really will drive the price of the premium for high quality iron ore inputs and those and those sorts of things. So that broader Altius is natural resource sustainability focus, made it a good fit for us. But again, I don't want to suggest that we're all in here at this point. It's a really intriguing market and we think we've partnered with a great group. And we're going to follow it along and continue to learn and hopefully see it emerged as something that's an important part of our business in the fullness of time. But at this point, it's a relatively early stage investment, and we'll see how it goes.

[Craig Hutchison, analyst]

And another question for me. I know it's not a very material royalty for you guys, but just Gunnison. Any kind of sense in terms of how that ramp up is going, and when that can become a more material royalty pair?

[Brian Dalton, executive]

We don't have any more visibility really then I guess that the company has stated publicly. Obviously, they've had significant problems with just having low rates through the well field materialized to plan. There's been some issues with clogging and just flow rates. So I know they've been working very hard at finding solutions to that and just changing sort of a mix of fluids that they put in. But I don't really have much more to add.

Again, I know they're working hard at it and we're watching it closely, but we don't have -- and we couldn't even really speak to it if we did any bit of better visibility than what the company itself is projecting. But they are very focused on getting things sorted out there for sure.

[Operator]

[Operator Instructions] We have a follow-up from Carey MacRury with Canaccord.

[Carey MacRury, analyst]

Yes. Maybe just one follow-up, I guess with Fairfax, during the preferred, obviously that saves up preferred dividends. Any thoughts of allocating that to the regular dividend? Or just talking about capital allocation here?

[Brian Dalton, executive]

Certain thoughts on reallocating that money. But we have a Board level sort of long term strategy session coming up following -- later this week or the end of this week. So that's definitely a topic the longer term capital allocation strategy and whether or not that's preferred. Suddenly it finds its way in the hands of -- distribution finds its way into the hands of the common. That'll certainly be part of -- but it'll be part of a much broader look at what we see in terms of growth investing initiatives and returns of capital. We remain very committed to growing returns of capital. But you have to stay tuned for further results in our long-term Board level planning session. I don't want to put -- I don't want to prejudge what the Board decides there.

[Operator]

I'm not showing any further question. At this time, I would now like to turn the call back to Flora Wood for closing remarks.

[Flora Wood, executive]

Thank you, Mary. And thank you to everybody who joined in for the questions. We have our AGM coming up on Friday and the Investor Day that Brian alluded to is May 25, so lots of opportunities to talk to you in the near future. Thanks for joining.

[Brian Dalton, executive]

Thanks, everybody.

[Operator]

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