Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Altius Q2 2019 Financial Results Conference Call. [Operator Instructions] Thank you. Flora Wood, you may begin your conference.

[Flora Wood, Director of Investor Relations]

Thank you, Casey. Good morning, everyone, and welcome to our Q2 conference call. Our 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 the replay of the call, along with the presentation slides, both on the webcast and on our website.In the room this morning, we've got Brian Dalton, CEO; and Ben Lewis, CFO. Normally, both are speakers. Brian will be speaking, and Ben is unable to speak, but that's nothing to do with our quarter. And Stephanie Hussey, Director of Finance, will have Ben's remarks and be available for questions in the Q&A. Also for the Q&A, we've got Chad Wells, VP Business Development, with us and available to take questions.To get started, the forward-looking statement is on Slide 2 and applies to everything we say, both in these remarks and during the Q&A session.And with that, Stephanie will take us through the numbers.

[Stephanie Hussey, Director of Finance]

Thank you, Flora, and good morning, everybody. We had another great quarter. Altius generated $19.5 million or $0.46 per share in royalty revenue, a very good follow-through to Q1's record $0.51 per share when Chapada stream payments caught up with their Q4 2018 production and LIORC released a catch-up dividend related to prior year cash flows.Adjusted EBITDA of $16.3 million or $0.38 per share compared to $17.4 million or $0.41 per share in Q1. This represents an EBITDA margin of 84% in the second quarter and 81.4% on a 6-month year-to-date basis. The higher margin in Q2 compared to Q1 shows the effect of lower contribution from Chapada, which is our oil stream, and has a 30% cost of sales compared to royalty revenue with no associated cost of sales.On an adjusted basis, earnings per share totaled a positive $0.15 per share for the quarter. The unadjusted net loss of $1.9 million in the quarter or $0.05 per share is mainly due to 2 impairment charges. The first impairment of $6.8 million, after tax, relates to an exploration stage export thermal coal property in Alberta that we acquired as part of shared royalties acquisition in 2014. The other relates to a reduction in the carrying value of the Cheviot metallurgical coal royalty of $4 million following Teck's recent decision to not extend the mine life beyond 2020. Offsetting the impairment, we had a deferred tax recovery as a result of the change in tax rates in Alberta of $1.2 million. Other minor noncash adjustments are detailed in Slide 4 within the presentation that accompanies the call.G&A for the current quarter was in line with the year ago comparable period at $1.9 million. Although revenue was higher in Q1, G&A was also approximately $1 million higher as it included transaction-related costs for the establishment of Altius Renewable Royalties and the TGE renewable energy royalty acquisition.Revenue guidance for the year remains at $77 million to $81 million as challenges and headwinds, such as weaker base metal prices, are being offset by continuing strong production volume growth in potash and iron ore prices that remain very strong compared to early year expectations.We ended the quarter with $24 million in cash and cash equivalents and $190 million in the value of public equities comprised of the junior equity portfolio and Labrador Iron Ore Royalty shares.Sales net of new purchases in the junior equity portfolio generated proceeds of $7.7 million in Q2, adding to net investment proceeds of $7.5 million in Q1. These include the sale of part of our position in Champion, which is noncore due to the lack of royalty component as well as certain other small noncore positions as liquidity opportunities arose.Uses of cash in the quarter were primarily debt repayment, common share dividends and preferred security distributions of $2.1 million and $1.2 million, respectively, and $803,000 invested under our normal course issuer bid.Total debt at quarter end was $119 million compared to $135 million at the end of quarter 1. The current cash position has increased and now stands at $31 million, leaving us well positioned to meet our capital allocation target throughout the year.We'll be happy to take questions later, and now I'll turn it over to Brian.

[Brian Francis Dalton, Co]

Thank you, Stephanie, and thank you all for joining us this morning.The quarter was a good one overall, with royalty revenue up nicely year-over-year and in line with a record first quarter after adjusting for some timing factors that contributed to higher revenue in that period.Once again, our diversified commodity and asset platform helped to balance headwind in some segments against growth and others.Our longer-term strategy of aligning our portfolio with major global thematic trends, such as greater food production per unit of arable land, the shift from hydrocarbon to renewables and power generation, the copper- and battery-intensive electrification of transportation and practically everything else and the increasing usage of lower coal requiring grades of iron ore and steelmaking, continued to play out well at the macro level in spite of more immediate economic concerns.Base metal revenue of $6.4 million was down 16% from Q1 mainly due to lower Chapada sales volumes, which lagged actual production volumes, and lower realized prices at both Chapada and 777. We note the recent closing of the sale of the Chapada mine from Yamana to Lundin, which has had no impact on our stream entitlements.We are also encouraged by comments from Lundin about their potential copper-focused growth plans for the mine that is deemed warranted when technical reviews are completed, it has ample capital capability to effect. Reflecting on our own due diligence findings at the time of our stream purchase, we echoed his enthusiasm for the ultimate potential of the project.Both Chapada and 777 enjoy healthy margins even at current prices, but several other mines within the sector are now beginning to stream. The factors that have driven copper prices lower recently are generally cited as being related to demand pressures from trade disputes and other geopolitical factors. For the time being, these immediate factors are overshadowing the bullish longer-term supply side picture, which continues to gain support from prices that are not only too low to incentivize new development at a needed pace for growth and replacement, but are once again close to causing the curtailment of marginal existing capacity.Other bullish developments of late include the recent reversal of a permit for a large project that was previously wide expected to soon begin. And perhaps more significantly, reported massive capital cost escalation at a block cave-type mine development that is being advanced by a large and credible operator. This is likely to have ripple effects throughout the industry as many large open pit mines begin to exhaust and the copper sector collectively prepares to bank its future on underground block cave mining to fill the void.Vale's nickel production was 17% lower than in Q1, which was mainly due to maintenance shutdowns at the Long Harbour refinery. The refinery has since returned to normal operations, but we caution that production levels are expected to remain subdued from Voisey's Bay while construction of a new underground mine proceeds and as open pit ore exhausts.Nickel prices have been faring better than most of the other base metals. The catalyst there appears to be fresh concerned -- concern around supply curtailment emanating from policy decisions in Indonesia coming at a time when nickel usage in EV batteries is rapidly increasing.Revenue from our 6 producing potash mining operations in Saskatchewan continued the trend of steady growth and made up 20 -- 26% of total revenue this quarter. Prices have held last year's strong gains despite Nutrien, our largest Potash Royalty counterparty, in their Q2 earnings release calling the first half of 2019 the worst U.S. planting season in history, which prevented some crops from being planted and reducing North American potash and other fertilizer sales.Our global sales guidance has also been reduced slightly as a result. We don't expect any material royalty revenue impact as Nutrien and Mosaic as operator of Esterhazy will likely continue to optimize capacity to operations that are the most efficient and lowest cost and where our royalty rates are higher.Bigger picture, we happily noted comments by Nutrien regarding its intention to further ramp production volumes by up to 30% over the next few years from existing capacity. Following which it also believes it is competitively advantage to expand capacity even further with the global demand growth.Turning to iron ore. Our revenues reflect the lower dividend from Labrador Iron Ore Royalty Corporation in Q2 of $0.90 per share compared to $1.05 per share in Q1, but is much higher than the strike-impacted comparable quarter last year. The lower results compared to the prior quarter is reflective of the distribution of previously withheld cash during Q1, a slightly lower share position as we took some profits on part of the increment of shares purchased in Q1 and on a maintenance issue-based production shortfall at IOC.Iron ore prices were very strong during the quarter but as more liquid benchmark prices increased on speculative activity, premiums for high-quality material compressed. Benchmark prices have since retreated significantly, but are still quite strong, and we expect that as prices reset to fundamental levels that the inherent benefits of high-quality ore usage will cause premiums to rewiden.Production volumes related to our tonnage space electrical coal royalties in Alberta were stable during the quarter and provided consistent revenue. We continue to hear reports from operators about modest planned investments to increase their flexibility to fuel with either coal or natural gas as future economic conditions dictate and expect this activity to accelerate as preparations to completely discontinue coal burning by 2030 become more pressing. We do, however, view the recent Alberta decision to maintain an energy-only market versus shifting to a capacity market as economically supportive of continued preferential coal usage nearer term.Our litigation against the Alberta and Canadian governments related to the uncompensated effective expropriation of our royalty entitlement at the Genesee mine after 2030 continues to progress to the document production stage.Royalty revenue from Teck Resources Limited's Cheviot or Cardinal River metallurgical coal mine was $982,000 in the quarter compared to $1.2 million in Q1 and around $680,000 in Q2 last year. Unfortunately, Teck made a decision during the quarter to not proceed with an investment that would have seen a life extension at the mine and so now expects to close the mine in the second half of 2020. Note that as a royalty holder, we will not share in any of the costs of reclamation for the mine.Since we announced our first renewable energy royalty investments in Q1 through newly formed Altius Renewable Royalties, we have become very busy assessing additional opportunities in both US-based wind and solar as developers and operators begin to better understand the potential benefits of the royalty financing model to their businesses. We are fairly optimistic that we will have additional royalty purchases to announce toward the end of the year as a result.We are also very pleased with the progress that TGE, our current royalty development partner, is making with advancing its pipeline of projects towards sales to operators with several under negotiation presently and in adding new projects that are encompassed by our royalty structure.Our shareholders will recall that these renewable royalty financings are intended as replacement-type reinvestments of our electrical coal royalty revenue as it is phased out over the next decade.Our confidence is growing that the scale of the opportunity that has been innovated by the team at Altius Renewable Royalties is not only sufficient to meet this objective, but likely much larger. As such, we have begun discussions with select potential co-investment partners and also begun the process of assessing the merits and potential timing of a public listing of ARR.The corporation's junior equity portfolio had a market value of $53.7 million at June 30, which is down nominally from the $60.7 million value at March 31, 2019, but actually up slightly when recognizing that roughly $7.7 million in net sales were realized in the quarter.We released our quarterly project generation update earlier in July and since then have had some continued developments in the portfolio. It should also be noted here that several of the holdings within our portfolio are precious metal-focused, and this sector generally has been experiencing strong momentum of late.On July 29, Aethon and AbraPlata Resources announced an agreement in principle to enter an agreement whereby AbraPlata would acquire all of the issued and outstanding common shares of Aethon in an all-stock transaction. Upon closing, the Aethon CEO, John Miniotis, will become the CEO of AbraPlata. AbraPlata has a large undeveloped silver resource in Salta, Argentina, with 81.3 million contained ounces of silver and 755,000 contained ounces of gold in indicated resource categories, as estimated by RPA 2016. The combined entity will also retain the large [ Arcos ] copper project in Chile.Adventus announced strong PEA results during the quarter and followed this up with 2 significant equity raises from institutional and strategic investors that leave it in an excellent financial shape to continue to advance its El Domo project towards development and to build additional value through exploration.One of the placements included new strategic investor, Nobis Group, which is an extremely well-respected Ecuadorian conglomerate that has chosen Adventus for its first mining investment in the country. Our position in Adventus will be approximately 16% after closing of the second financing.In May, Adia Resources announced completion of a successful winter drilling program at the Lynx Diamond Project in Manitoba. Drilling results combined with gravity survey results support the interpretation of a diamondiferous ultramafic unit at least 3 kilometers long and up to 315 meters wide, suggesting very large tonnage potential. Adia is a private company that was founded by Altius, includes several strategic shareholders, including DeBeers Canada, Inc. Micro diamond analytical testing of the drill core is currently underway at the DeBeers processing laboratory in Johannesburg.That concludes my remarks for the call, and we're happy to take your questions. Operator, would you please open up the Q&A session?

[Operator]

[Operator Instructions] And your first question here comes from Jacques Wortman with Laurentian Bank Securities.

[Jacques P. Wortman, Director of Research & Mining Analyst]

Very good quarter and thanks for the overview, Brian. I guess 2 quick questions. One is on the potash side. You mentioned an increase of up to 30% on the production side on the potash mines. Can you give me just a better sense -- I haven't gone through the Nutrien or Mosaic guidance, but what is the timing of that increased production? And is the higher production specifically at the mines you hold royalties on? That's the first question.The second one was I just -- for housekeeping, I just want to know how many more shares of Champion you still own at this point.

[Brian Francis Dalton, Co]

Okay. On the first question, the comment from -- this was specific to Nutrien, we're not really referencing Mosaic and Esterhazy, but they talked about bringing production level from 12.5-ish million now to 15 million to 17 million by 2023, and that will be all ramp-up of existing build capacity, just basically growing into market demand and presumably also some market share growth as well.

[Jacques P. Wortman, Director of Research & Mining Analyst]

Those are million tonnes, right, Brian?

[Brian Francis Dalton, Co]

Yes. That's right. And that -- you can find references to this from the materials that Nutrien published as part of its Investor Day.

[Jacques P. Wortman, Director of Research & Mining Analyst]

Okay. So 2023, Investor Day.

[Brian Francis Dalton, Co]

On the second question, we hold 1 million shares of Champion currently. We talked about this in the last quarter. The original investment there was done on the basis of there being a convertible option into royalty. And that was a conditional option that basically due to Champion's great success, never came to fruition for us, so it became ultimately a pure equity holding. And while we are obviously very positive on the asset and the company, we're not pure equity investors and fund managers. So once it became nonstrategic, we decided to harvest some of the very great profits and put it to work and pay down some debt. But we still hold 1 million shares and are very positive on the company and what it's been doing.

[Operator]

Your next question comes from the line of Craig Hutchison, TD Bank.

[Craig Hutchison, Research Analyst]

Just a question more on your strategy. I feel like, last quarter, the focus was on your debt reduction and you bumped the dividend as well. Obviously, in that last couple of months, we've seen the base metals prices really retreat here and the equities as well. Has that strategy changed at all? Are we too early? Are you guys thinking there's more opportunities now to do further deals? Or you guys are sticking with the sort of philosophy of kind of debt reduction?

[Brian Francis Dalton, Co]

They're not really mutually exclusive in that we pride ourselves on being nimble. I mean when we pay debt, we really just create comparable amounts of liquidity on our revolver. That said, we're not seeing a big uptick in the number of opportunities for new royalty purchases. So for the time being, we wouldn't make a change, but we're still looking at everything that comes across our table, and we're poised to jump when something really juicy shows up. But I think what you heard from us last quarter would be more or less the same today, but again remaining nimble. From my remarks, you might have also gathered that we do feel like we're building momentum on the renewables front. So that could also have impacts in terms of how -- just capital allocation prioritization going forward through the year. But again, I'll make the point that when we pay down debt, the liquidity doesn't disappear.

[Craig Hutchison, Research Analyst]

Right. Can you give us a sense of what the size of that royalty purchases would be on -- in terms of the renewable business in the next sort of 12 months?

[Brian Francis Dalton, Co]

Make sure I don't compromise anything negotiations-wise, but think in terms of $20 million to $50 million bites and I think you'd be about right that, that works for us, for the counterparty in terms of how we manage our location risk and operator risk and that sort of thing. But we'll see how that plays out. And again, we have got strong appetite for co-investment opportunity, so that's not really a limiting factor based on capital. It's more about the size of these projects and to be at -- and how much royalty burden we think they can bear. So that's starting to feel like a bit of a comfortable number for us.

[Craig Hutchison, Research Analyst]

Is that bigger than your original estimates? I think your -- was it originally targeted to run at $30 million or has it grown? Has the opportunities increased in the last few months?

[Brian Francis Dalton, Co]

Well, the first deal with TGE was actually a $30 million investment and so that scale per new counterparty and new opportunity would be still similar. But overall, the opportunity set has certainly increased. I think it's more than anything just an impact of hard work that the team has been doing on the ground, educating counterparties about potential benefits. The first -- getting the first deal across the line, that was well noted throughout the sector. And that counterparty is quite a credible operator, so I think it's done a lot to create acceptance within the space that this could be something really neat and innovative that the space has been looking for, for a while. So it's a combination of things, but mainly an awful lot of really good legwork by that team that are working their buns off.

[Operator]

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

[Brian MacArthur, MD & Head of Mining Research]

I just wanted to maybe get a little more color on your thinking. I get the selling down of Champion because it's not a royalty, but you sort of bought some lifts and then sold some lifts within a 6 months period, which I would argue is maybe not common for what you do. Was that just it got too big in the portfolio? Was it, as you said, you see better opportunities in the renewables? Or -- just kind of curious because that was a fairly short period of time where you increased then decreased. And as you said, you're not normally portfolio manager traders.

[Brian Francis Dalton, Co]

Yes. I touched on this a little bit in the last call. Look, there is -- a bulk of what we own in Labrador is what we consider a core position and we look at it just like we would any other royalty asset. But there is -- we follow that asset so closely that it does make some sense for us to have a little bit of, what I'd call, a trading position there as well. So we bought when it really looked stupid in January. And things -- obviously, a whole bunch of events transpired and it shot up. So we bought, I believe, from around maybe close to 0.5 million shares in January. And we sold 250,000 at a 40% gain in short order. So we still hold a net larger position at a lower cost base as a result. So it's just -- we think we have an edge in terms of that asset over most of the market and we're just making it work for shareholders.

[Brian MacArthur, MD & Head of Mining Research]

Right. So there's no change in philosophy about, as you said, the structure, the whole Labrador Iron Ore troughs or whatever relative to competitive advantage long term?

[Brian Francis Dalton, Co]

No, we just saw an opportunity to increase our net position, essentially. We're ahead in terms of number of shares at a -- and we brought our cost base down at the same time. But it's not an active activity for us, it was just special circumstances, an opportunistic purchase in January. And the move came fast and hard very quickly thereafter and we just reset our cost base a little bit [indiscernible] asset or extremely long net assets, like 80 years long.

[Operator]

Your next question comes from Carey MacRury from Canaccord Genuity.

[Carey MacRury, Analyst of Metals and Mining]

Brian, maybe you could -- back on the renewables business, you do have the option on that $30 million. Do you expect to deploy more capital to that this year or is that more of a 2020 and onwards? And how is that business evolving relative to your expectations?

[Brian Francis Dalton, Co]

Are you referring specifically to the TGE investment that had tranches attached to it?

[Carey MacRury, Analyst of Metals and Mining]

Yes.

[Brian Francis Dalton, Co]

Yes. The way that worked is that they had certain milestones to meet before they could draw or request additional tranches. And the milestones generally were related to progress in moving projects onto operators and in continuing to fill the front end of the pipeline. And the most recent report we've had from TGE is that they are full guns on meeting all of those objectives. So yes, we would expect, probably in Q4, to deploy the next tranche of investment there. I don't know the numbers specifically. Ben, maybe you could help? If you could get the words out there?

[Ben Lewis, Chief Financial Officer]

The next payment will be $5 million when they sell one project and that will follow pretty quickly by another $5 million payment as well.

[Brian Francis Dalton, Co]

So roughly $10 million, we're kind of earmarking before year-end in further investment in the TGE transaction. Probably...

[Carey MacRury, Analyst of Metals and Mining]

And can you just remind us, what that sort of investment, what sort of royalty revenue would be associated with that once it's sort of up and running?

[Brian Francis Dalton, Co]

Fully invested, so we're investing USD 30 million and we'd expect, once all of the projects are built out, there's a bit of a lag on that, somewhere in the ballpark of $4 million to $4.5 million a year in royalty revenue.

[Carey MacRury, Analyst of Metals and Mining]

So you can use that on a pro rata basis?

[Brian Francis Dalton, Co]

Per millennia. What was that, sorry?

[Carey MacRury, Analyst of Metals and Mining]

So we can assume on a pro rata basis what you've invested relative to that number, I guess?

[Brian Francis Dalton, Co]

No don't forget that this investment is on a development stage portfolio. We are also looking at investments in currently operating assets and we would expect a slightly lower IRR as a result. But for a development stage, yes, this is very competitive. We think that what we're offering developers is quite competitive money and that's pretty much market here for the structure we've created.

[Operator]

Your next question comes from Joseph Levatino from Jalaspen.

[Joseph Levatino]

Yes. Considering the cluster of activity in the trough and now the quiet success of [ Decora ] and the Scully Royalty Corporation, in your opinion, how does that impact on Kami's eventual success?

[Brian Francis Dalton, Co]

It's not -- it's certainly not bad news. Every operator in the trough is doing fantastic right now. It doesn't change the fact, though, that broader market interest in the sector, other than some retail quarters, has been pretty tepid and it's still a very big number that they've got to raise to get that project off the ground. I don't have really anything more specific, but I know that the team there is working very hard to overcome that challenge and not just through market-type solutions but also strategic-type solutions. So I can't really preempt any more there or predict any more there, but you're certainly right.Backdrop, I think everybody recognizes right now that the Labrador trough is not the marginal iron ore tonne in the market anymore. It's become some of the most sought after resilient and top-quality material that sits in the market today. And I think that broader trend -- it's been a really noisy time to watch iron ore prices and a lot of speculation has driven the benchmark price up and down and it's sort of quieted the whole story around premiums. But that story is alive and well. Getting less resulting pollution from steelmaking is still a massive global objective, and Labrador trough is in the right spot. But as it goes to any specifically, we're certainly there to help Alderon as much as we can and acknowledge that if that project is successfully brought across the line, it can have an enormous impact for us, but I guess time will tell. Backdrop is good, fingers crossed.

[Operator]

And your next question comes from Jacques Wortman with Laurentian Bank Securities.

[Jacques P. Wortman, Director of Research & Mining Analyst]

Just one quick follow-up. I just wanted to make sure I heard correctly when you're speaking with answering Brian's question. Did you say that you bought 500,000 shares of the lift in January and you subsequently sold 250,000? So do you currently hold about 3.75 million shares?

[Brian Francis Dalton, Co]

Detailed questions, you're better off -- I'll let Ben answer. I can be a little sloppy when it comes to that.

[Stephanie Hussey, Director of Finance]

3.7 million, 3.8 million.

[Brian Francis Dalton, Co]

I'm punching the numbers for you right now.

[Flora Wood, Director of Investor Relations]

It's disclosed in the note to the statements, too.

[Stephanie Hussey, Director of Finance]

We have the actual number there.

[Brian Francis Dalton, Co]

Okay. 3.7 million.

[Stephanie Hussey, Director of Finance]

Yes, you can go with that.

[Brian Francis Dalton, Co]

3.7 million roughly today. So it looks like we bought just over 400,000 in January and we sold 250,000. So we're pretty much whole on the original investment. Don't forget in January when we jumped in on that we also used a revolver for it. So we borrowed to buy opportunistically and then we sold a lesser number to pay it off and hold a bigger position at the end of it all.

[Operator]

[Operator Instructions] And I'm showing no further questions coming into the queue at this time. I would turn the call back over to Flora Wood for any closing remarks.

[Flora Wood, Director of Investor Relations]

Okay. Thank you, Casey. And it sounds like we've answered everybody's questions, and we'll look forward to talking again in a quarter. Thanks.

[Brian Francis Dalton, Co]

Thanks, everyone.

[Stephanie Hussey, Director of Finance]

Bye.

[Operator]

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.