Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Altius Minerals Corp. Q2 2020 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to now hand the conference over to your speaker today, Flora Wood, Director of Investor Relations. Please go ahead, ma'am.

[Flora Wood, Director of Investor Relations]

Thank you, Joanne. Good morning, everyone, and welcome to our Q2 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 replay along with the presentation slides that have been added to our website, which is www.altiusminerals.com. Brian Dalton, CEO; and Ben Lewis, CFO, will both be speakers on the call, and then we'll open it up for Q&A. The forward-looking statements on Slide 2, applies to everything we say both in the formal remarks and during the Q&A. And with that, I'd like to turn it over to Ben to take us through the numbers.

[Ben Lewis, Chief Financial Officer]

Thank you, Flora, and good morning, everyone. Q2 royalty revenue of $13 million or $0.31 per share was down 20% from Q1 primarily on lower prices related to demand concerns associated with the COVID-19 pandemic, lower power consumption in Alberta and IOC's decision to maintain cash on its balance sheet rather than pay dividends. Q2 EBITDA was $10 million compared to $12.7 million in Q1 with the decline -- following the decline in revenue. General and administrative costs of $1.9 million this quarter are consistent with last quarter and the previous year. Adjusted operating cash flow was $13.4 million this quarter, an increase over the $13.2 million last quarter despite the drop in revenue and EBITDA. The higher adjusted operating cash flow reflects the timing of corporate income tax payments and lower interest payments due to lower debt costs. Interest payments this year were lower than last year on a 6-month basis, despite the higher borrowing amount, reflecting the drop in base interest rates. Corporate taxes have not yet been paid for 2020, as government relief due to COVID-19 allows for an extension. We expect these payments to be made by the end of September. The quarterly net earnings amount of $4.1 million or $0.10 per share includes a number of noncash adjustments that are identified in the waterfall table and slide. These include a gain on foreign exchange and on the fair value adjustment of derivatives, $0.07 per share combined, offset by a smaller loss of $0.01 per share through share of loss in investments in associates. The adjusted earnings are $0.04 per share. The Board of Directors declared a $0.05 per share quarterly dividend, and I'll take this opportunity to remind you that this dividend is eligible for our dividend reinvestment plan, which we announced last quarter for shareholders who are interested in receiving common stock instead of cash. For those who are interested, please visit our website or contact Flora for instructions. Finally, looking at the balance sheet and capital allocation, we ended Q2 with $48 million in the value of the Project Generation equity portfolio and $70 million in LIORC shares. As of yesterday, these amounts stood at $55 million and $78 million, respectively, as the markets continue to recover. After payment of our preferred security distributions and common share dividends and a further $3.2 million spent on normal course issuer bid repurchases, we ended the quarter with $30.6 million in cash and cash equivalents. After quarter end, we drew on cash reserves to pay the approximate $9 million net purchase consideration for the recently announced acquisition of Liberty's interest in certain coal partnerships. We also made a USD 3 million milestone payment to TGE to bring total funding to USD 22 million out of the $30 million commitment, with first royalty expected at the end of next year. During Q3, we intend to evaluate the carrying value of our royalty interest in light of the new average book value. The carrying value of our 5 coal royalties post-closing of the Liberty transaction is approximately $80 million. We have $80 million outstanding in term debt, and we are scheduled to repay at a rate of $20 million per year and a final maturity date of June 2023. We also have approximately $65 million drawn against our revolving credit facility with $35 million in undrawn availability. We have continued to be active on our normal course issuer bid as we repurchased 361,900 shares this quarter to bring our trailing 12-month total to 1,353,500 shares. Brian has more to say on macro conditions and the recent acquisition, and I'll now turn it over to him. Brian, are you there?

[Brian Francis Dalton, Co]

Sorry, everyone. Thank you all for joining. I'll begin by addressing the recently announced acquisitions from Liberty Metals & Mining and its partnership interest in Alberta Coal royalties and how we intend to allocate the additional cash flow towards continuing royalty investment in the renewable energy sector. Altius has been actively working to align its assets with major global sustainability trends for several years now since before we knew what the ESG acronym even stood for. Increasing our near-term coal exposure may seem odd therefore, however, it is not at all when you consider that the underlying goal of sustainability or impact investing is to speed positive change in transition. In that regard, buying out our partner in coal royalties is quite consistent with our goals and broader sustainability objectives. Since what it really represents is not a doubling down on coal, but a doubling down on renewable investment. We see a certain elegance in using this residual revenue from coal power generation plants that are on an absolute path to close into supporting the global renewable energy transition as well as enhancing our own portfolio of sustainability alignment objectives. The fact that coal is so out of favor that we were able to achieve a price that will ultimately result in a significant leveraging of our renewable royalty investment dollars is a nice bonus.Further on that front, it has been an extremely busy quarter for Altius Renewable Royalties, which is being led by Frank Getman and his team in new offshore. Towards the end of Q1, we announced a new royalty investment with Apex Clean Energy. Apex is a leader in the U.S. renewable energy development space in terms of overall portfolio size, projects developed and also in connecting corporate and industrial users directly with renewable source energy. I think it is worth every Altius shareholders' time to check them out. With this transaction, we added a second top 5 renewable energy developer in addition to Tri-Global Energy to our investment portfolio, and the impact on our recognition and acceptability within the broader sector has been quite amazing. For the first time in almost 3 years of business development at ARR, the deal origination market has become inbound dominated. We are seeing lots of attractive opportunity as a result when several sets of discussions and negotiations are advancing. The other major activity within ARR during this quarter has been an effort to attract strategic investment partners to help upscale the business and maintain our leading role in innovating royalty financing for sector. Our efforts in this regard have been productive, and we feel we're getting close to selecting a partner or partners that can not only augment our capital availability, but also bring other value-adding attributes to the table. We also continue to explore the possibility of bringing ARR public as a pure-play spin out and are being met with enthusiasm in this regard. It should be noted that these are not mutually exclusive fronts. There's a commonly cited lack of public investment opportunity in the renewables sector presently, at least relative to the amount of capital that is masking to invest in sustainability thematic generally and renewable energy specifically. As a slight aside, the prospect of the democratic presidential win in the U.S. is expected to be very positive for the renewable sector. And we are noting significant uptick in the number of investor inquiries regarding our renewables initiative that reference this possibility. Switching now to base metals and copper, in particular, which is our largest commodity exposure, prices have rebounded beyond pre-COVID levels, and they remain longer-term bulls. Factors that excite us, including -- include the expectation that much of the world, led presently by China, is turning to infrastructure-based stimulus as a means to offset the economic damage inflicted by the pandemic. This is generally bullish for copper and other base industrial metals, but it has the potential to be particularly profound during this cycle as the specific type of infrastructure stimulus most commonly being discussed, relates to speeding up of electrification and renewable electricity growth. Most grids systems globally are inadequate presenting to support the shift to increasing consumer energy usage coming from electricity at the expense of fossil fuels. Fixing that problem will require an incredible amount of new copper and other base metal production. Not only that, but in the regions where this copper will come from, there is an issue with maintaining current levels of production, never mind bringing on needed increases. Major capital investments are needed. However, this year has not been a good one for executing on these capital projects for obvious reasons. One absolute impact of COVID will be a setback in the time frame for much of the planned production replacement and growth that might have been expected otherwise. This is a bit double edge for us. It has also pushed back some of the preliminary work that Lundin has been doing with respect to a potential expansion of the Chapada Mine. But we considered this mine already in the bigger picture and commend Lundin for the responsible management of COVID risks at mine and within the surrounding communities. Potash volumes have shown a gradual recovery in the first half of the year relative to late last year, and operators are predicting a significant year-over-year improvement. Prices remain relatively weak but do appear to have stabilized since the signing of India-China supply contracts in May and as inventory built during last year generally for growing season has drawn down. It seems the world has kept eating to the pandemic. Iron ore has been a star performer in 2020, and it is another commodity whose demand is expected to benefit from broad-based infrastructure stimulus. IOC has been performing well operationally and benefiting from the strong pricing environment. However, our revenue related to this operation flowing from our holding Labrador Iron Ore Royalty Company was down considerably in the first half of the year as IOC elected to maintain increase on its balance sheet rather than issue dividends. LIORC has noted that this decision by IOC stems from COVID-19 related economic uncertainties. And if so, this likely represents a deferral rather than a loss of dividend income, given IOC's continuing success in handling the risk to its operations and its workforce and communities. On coal, the Cardinal River met coal royalty contributed $0.5 million in the quarter and $1 million for the first half of the year, but it is now closed after 51 years of mining. Thermal coal royalties were also negatively impacted during the quarter as power demand declined sharply in Alberta with the oil industry slump and more general lockdown impact. A gradual recovery appears underway now, however. Last but not least, we are seeing great progress within our project generation business as the junior sector -- junior resource sector has returned to favor. As Ben noted, the portfolio value was more than fully rebounded from pandemic driven loads, and many of our portfolio companies have been able to considerably strengthen their balance sheets through equity raises. This is driving the strong second half exploration effort with several large-scale drilling programs from within our portfolio announced. Notable highlights in this regard include announcements from Adventus, AbraPlata, Sokomon, CANEX and Wolfden among several others. In addition, Renaissance and Evrim have announced a merger to form a new precious-metals focused royalty and project generation company, anchored by royalties relating to First Logistics San Antonio project in Mexico, and AngloGold Ashanti's silicon project Gold Discovery in Nevada. Altius will be the largest shareholder of the merged company, and it also owns a direct 1.5% NSR royalty related to the silicon project. Thank you. And I now open the call to your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Orest Wowkodaw from Scotiabank.

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

Just a question about the coal royalties. Wondering if you could give us an update on the, I guess, litigation with respect to claims against the Alberta government, and then I was also wondering whether via your increased ownership of the royalties, whether you also effectively inherit Liberty's claim to their share of any compensation?

[Brian Francis Dalton, Co]

Yes. The litigation process plods along, I guess, is the best word I can use to describe it. There's been obvious delays as far as discovery gold because we haven't been able to get together to complete that process and the other side has declined our invite to do that remotely. So still -- we're still at that stage working right now actually to try to build a new schedule around that. But obviously, there's uncertainty there. And yes, we do have entitlement to the full claim related to the limited partnership interest -- to full limited partnership interest, so the full $190 million claim with the exception of the remaining minority shareholders.

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

I see. Do you expect to -- that this will go to court in 2021? Could this be -- take even longer?

[Brian Francis Dalton, Co]

It's a hard one to predict. There's not a whole lot of issue, quite frankly. I mean, there's actually very little dispute around the fact. Really, the -- what the question is, what do those facts represent or do these represent the taking or an effective expropriation. Hard one to call. It doesn't seem the other side is in any great hurry, but we'll -- well, I guess we'll update as we know more. We should know more as we go through the autumn.

[Operator]

Your next question comes from the line of Jacques Wortman from Laurentian Bank.

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

Could you please provide some color on the timing of the receipt of stream revenue for Chapada? Production and sales volumes reported by Lundin were significantly higher than the attributable royalty revenue that was reported by Altius. So I just want to get a bit of color on that. Secondly, Ben, if you could just repeat again, what is the carrying value now for the total coal royalty portfolio, did you say $80 million?

[Ben Lewis, Chief Financial Officer]

Yes, that's correct. That would include Liberty as well, our acquisition of Liberty's portion.

[Brian Francis Dalton, Co]

And as for the Chapada question, Ben can probably fill in better. But yes, there is a slight lag from sales to when our copper warrants are received, we'd expect to catch up in the current quarter.

[Operator]

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

[Brian MacArthur, MD & Head of Mining Research]

Sorry, just a follow-up on Jacques' question. So carrying value is $80 million, but you bought Liberty stake for $9 million. Does that imply that transaction value is what you're going to have to use to write-down the book value? Or are you going to do an NPV thing? I'm just trying to get the magnitude because if you buy it for 9, which is a good price, it implies the whole value maybe close to $20 million than $80 million . Am I thinking about that right? Or how will you proceed through that process?

[Ben Lewis, Chief Financial Officer]

Yes. I think the first thing you do is basically consider averaging down, if you look at it that way. So it won't be if there's any adjustment, and we've got to do a lot of work on this. We got to look at the mine plans or try and get new mine plans. Basically considered the purchase price, we've got to crack open net present value calculations, mine plans, look at the latest and greatest on coal-to-gas conversions and talk to operators and look at demand for electricity in Alberta as well. So there's a lot of work to do. So I can't give a range at this point because there's a lot to do, but no, it won't be close to the $10 million. It will -- if at all, consider the average, the worst case, I would say and we may conclude that there's no adjustment. So it really depends on -- this just means we've got to crack open the valuation and do some work on them, and we'll have that done in Q3.

[Brian MacArthur, MD & Head of Mining Research]

Great. And Brian, just a follow-up on your comment that you -- this is an alternative financing, if you want to look at it that way for your renewable business. I guess you feel you've got a pretty good -- a reasonable deal on this coal thing. And that cost of funding is probably cheaper than you can get cost of funding some other ways for the ARR. Is that a fair statement?

[Brian Francis Dalton, Co]

Sure. I mean, just think about the same dollar that we spent here being invested directly into the renewables project. But this is a renewable opportunity. This is a way to take a dollar, buy this coal and invest multiples of that dollar in renewable energy. So it's obviously, if you want to look at it that way, it just represents an extremely low-cost of capital for future investments when you back calculate the expected IRR on the coal investment.

[Operator]

Your next question comes from the line of Carey MacRury from Canaccord.

[Carey MacRury, Analyst of Metals and Mining]

Just Q3 is shaping out to be a lot better, obviously, with copper prices and iron ore prices rebounding. Just wondering how we should think about coal revenue in the back half of the year, just given -- relative to Q2, given the expectations around that?

[Brian Francis Dalton, Co]

I mean I take a peak usually every day at -- you can look every day on an Alberta website that shows total generation from every source that they're -- what I can speak to is that over the last few weeks, at least, things have been running really strongly out there. So Genesee, in particular, every day, each of the generators looks to be running at full capacity. Sheerness would be probably running at around 40%-ish, which is in line with where that's been through the first half of the year. And it's never been a 100% producer, an older, less efficient operation. So from what we can see, looking at what everyone else can look at it, looks pretty reasonable. Now let's not forget that it's midsummer in Alberta as well. So power generation is going to peak -- there's a peak period for consumption in any event. There is certainly improved industrial demand as well as certain oil industry or oil sector operations rebound. But we don't think it will be not going back to -- not going to go back to 2019 overnight because of slower price. I expect a bit of a bump, I guess, in Q3 -- Q2. It's looking like a better quarter in Q3 as far as overall energy consumption in Alberta goes relative to Q2 for sure.

[Carey MacRury, Analyst of Metals and Mining]

Okay. And then maybe just the remaining funds for the renewable business, just what you're expecting when that would be deployed? Is that 2020? Or some of that can be in 2021?

[Brian Francis Dalton, Co]

Is that regarding the remaining milestones with TGE?

[Carey MacRury, Analyst of Metals and Mining]

Yes, exactly.

[Brian Francis Dalton, Co]

I think, this year. We expect that they'll be able to sell enough projects in the remainder of the year to completely meet all milestones under our agreement and the best I've seen in a full entitlement of royalties based upon the current interest in their portfolio.

[Operator]

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

[Craig Hutchison, Research Analyst]

A question on the iron ore business and your position in LIORC. And I feel in the past, you guys have been pretty nimble and you've added to your position during kind of downturns. We obviously saw a sharp downturn and decline in the share value of LIORC in the beginning of the Q2, but you guys didn't add to your position. Can you maybe just talk about that, whether you guys feel like you've got a sizable position at this point? Are you seeing better opportunities, and that's why you didn't kind of add to your sizable position later?

[Brian Francis Dalton, Co]

Well, it was quite the opposite. In fact, we ended up selling some because we wanted to make sure that our balance sheet was bulletproof because it was such a busy time. We didn't know by this time it will -- by fall of 2020, we'd be facing half of the mines in our portfolio more shutdowns. So it was more of a balance sheet-driven decision. And it was also -- there was a waning that went on around -- is that dollar better left in LIORC or deployed in LIORC, to buy more LIORC or is this better deployed buying Altius shares and that was kind of an easy call. So in a different world, if we were -- if we had unlimited capital, we probably would have bought it all. But there were choices to be made.

[Operator]

[Operator Instructions] There are no further questions at this time. I will turn the call back over to the presenters.

[Flora Wood, Director of Investor Relations]

We'd like to thank everybody for joining. That was a good set of questions, too, and we look forward to talking to you on the Q3 call.

[Brian Francis Dalton, Co]

Thanks, everyone.

[Ben Lewis, Chief Financial Officer]

All right. Thank you.

[Operator]

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