Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Altius Q2 2021 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Flora Wood, Director of Investor Relations. Please go ahead.

[Flora Wood]

Thank you, Carol. Good morning, everyone, and thank you for joining our Q2 conference 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 our website. Brian Dalton, CEO; and Ben Lewis, CFO will both be speakers on the call, and we'll then open it up for questions. The forward-looking statement on Slide 2 applies to everything we say in our formal remarks and during the Q&A session. And I'll remind you that if you have any questions, you'll have to dial in to the conference call as the webcast is audio-only. 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, and thank you for joining. Q2 royalty revenue of $21.9 million or $0.53 per share was up 23% from Q1 and just under our $22 million record quarter in Q4 of 2020. Q2 EBITDA was $17.7 million or $0.43 per share compared to $14.6 million last quarter consistent with the change in revenue. The EBITDA margin was 81% this quarter compared to 82% last quarter. G&A expenditures of $2.0 million in Q2 are consistent with expenditures of $1.9 million in Q1. Adjusted operating cash flow was $5.8 million or $0.14 per share and is down 34% from Q1 levels and down 56% from its comparable quarter last year, reflecting the timing of corporate tax installment payments as the corporations were granted flexibility in deferring payments last year due to COVID. In addition, changes in working capital impacted cash flows this quarter, and we expect that to reverse in future periods. The quarterly net earnings of $14.5 million (sic) [$14.6 million] or $0.38 per share include $0.13 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 $0.25 per share. The main adjustment item is a $0.16 gain from reclassifying the investment in Adventus to mining and other investments rather than previously being equity accounted for given that we no longer hold Board representation. Our equity ownership in Adventus currently stands at 12%, and we hold a 2% NSR royalty on its flagship Curipamba copper-gold project located in Ecuador. We, of course, continue to remain strong supporters of the business. We had additional gains of $0.02 relating to the disposal of mineral properties that were partially offset by noncash impairment charges on the write-down of mineral properties as well as a $0.01 per share charge related to the fair value adjustment of the derivative and foreign exchange. In April, we received 600,000 shares of Champion Iron as a result of Champion's acquisition of the Kami project through a receivership process and the settlement of debt and interest obligations incurred by its owner to whom the corporation was a lender. We recorded interest income of $636,000 during the quarter after recognizing the value of the shares received. It's also worth noting that we continue to hold a 3% GSR royalty on the Kami project. You saw in our press release that our Board of Directors has once again increased the dividend by $0.40 -- 40%, I'm sorry, from $0.05 per share quarterly to $0.07 per share. The dividend will be paid to shareholders of record on August 31, and the payment date is estimated to be September 15, 2021. Now I'll turn to balance sheet and capital allocation. The cash position increased from -- increased to $115.9 million at the end of the quarter with $96.7 million being the ARR cash balance, which we consolidate by virtue of our 59% ownership interest in ARR. The cash position, excluding ARR, is $19 million at the end of Q2. We also announced that we intend to refinance our debt facilities that will result in a slight decrease in interest rates and also increases our available credit to $225 million and extends the turn from June 2023 to August 2025. This change also gives us additional capital allocation flexibility as the quarterly principal repayment will decline from $5 million to $2 million per quarter and certain other covenant restrictions will be eliminated or reduced. Outstanding debt as of today is [ $117 million ], which means we will have approximately $108 million available liquidity under the new facility, which compares to $43 million at June 30. The credit facility improvements reflect our lenders and management's recognition of a general strengthening of our business as the previous countercyclical period of M&A-based growth is behind us and will bear fruit as we move forward into this next part of the commodity cycle. This viewpoint is also reflected in the confidence demonstrated by our Board of Directors this quarter in electing to increase our regular dividend. That's my main remarks today. And now I'll turn it over to Brian.

[Brian Francis Dalton, Co]

Thanks, Ben, and Flora. Thanks, everybody, for joining us. Q2 was a good one overall for Altius, mainly on the strength of improved prices across most of the commodity areas we have exposure to. We came close to a new quarterly record, even though it wasn't a particularly strong one in terms of royalty volumes due to a variety of factors ranging from lower mine grades and base metals, the accelerated closure of 2 production shafts at the Esterhazy mine and port issues for iron ore. Volume improvements are expected in the back half of the year, however, with IOC expected to make up lost shipping tons, Nutrien planning to significantly ramp up production and Lundin planning to mine better copper head grade material at Chapada. The strong prices being experienced are a result of a combination of continuing cyclical as well as structural shifts for the prior period of low capital investment within the sector as being met with expectations of global demand growth.Much of this growth relates to widespread infrastructure spending plan, that are generally focused around several important macro trend transitions that we have been aligning your business with over the past number of years. So all the benefits being felt to date this cycle are still largely price driven, we continue to believe that current incentivization conditions are translating into an upcoming period of operator-funded organic growth for our business. This is expected to come through a series of expansions and new builds across much of our long life, low-cost portfolio. The most widely recognized macro trends we have aligned with is the clean energy transition, and in particular, within that broad consumer and industrial level electrification. Electricity generation is moving decidedly towards renewable sources at the expense of fossil fuel with relative growth rates still widening in most markets. This is providing tailwinds for several of our exposure areas. Our own energy transition goals continue to be strongly executed upon as ARR, now a public subsidiary has to date created royalties on 10 projects through the operating stage, utility-scale renewable power projects in the United States. Associated revenue will begin to ramp up in 2022 sooner than expected even a quarter ago. Our coal-based electrical generation exposure on the other hand now includes only 1 remaining plant in Alberta that produced less than 10% of revenue this quarter and which represents much less than that on a net asset value basis. At its peak, in 2016, coal-based revenue accounted for more than 46% of our business. The renewable energy sector still has yeoman's work ahead to power increased electrification requirements, including perhaps most profoundly as it relates to transportation. What are considering the renewable energy installations themselves, the transmission overhaul requirements, the charging infrastructure or the vehicles, common supply chain challenge relates to commodities such as copper, steel, lithium and nickel, all of which we have been working to increase our exposure to for almost a decade now. Prices across this complex have responded accordingly. And while incentivization levels are generally present, the mining sector is yet to really respond with much needed investments in supply. The talk has begun, but the capital commitments have yet to materialize. The reality is that the collective cover for new major projects is pretty bare. And what does exist is being challenged once again by increasing cost risks stemming from resource taxation pressures in several major producing regions, labor costs and availability, energy costs and more just general inflation -- inflationary factors. The investments will come, they must. However, we believe that the incentive price structures that are needed are moving further upwards. In reading the Q2 report of the world's mining houses, evidence of cost inflation is a very common takeaway. This is feeling reminiscent of what occurred in the mid-2000s when, for example, the incentive price for copper moved from the $150 range to the $350 range. In the transitory versus structural inflation debate, you can put us in the structural camp, at least as it relates to the cost of winning metals to what remains in the world's ore deposits. There are 2 key points to note from this for Altius shareholders. First, royalties love inflation, no share of the higher costs, but full beneficiaries that result in higher prices. And secondly, we have been carefully building exposures to those select deposits that can be built or expanded competitively as demand and depletion pressures continue to build across the sector. Voisey’s Bay has just begun production from the first of 2 new nickel deposits being developed, a second to follow shortly. At Chapada, work is underway to determine the scale and scope of potential copper expansion. A feasibility study is nearing completion for Adventus' Curipamba project in Ecuador. Sigma is moving ahead with development to the new high-grade lithium mine, and LRC continues to add several other new royalties. And last but not least, Champion is busy with a feasibility study to evaluate the Kami iron ore projects potential as an ultra-high purity producer capable of meeting increasing relative demands for cleaner steel production in the world. We're expecting a lot of positive news on these fronts through the back half of '21 and into early 2022. The other major macro trend that we are aligned with relates to food production within an ever more uncertain climatic agricultural backdrop. The topic of food security has regained global attention and crop prices have generally moved sharply upwards. This has in turn driven demand and pricing for potash fertilizers and we are exposed to the best mine sources in the world in Saskatchewan, Canada. So far this year, it seems as if the limited demand in potash has been available to supply which is in remarkable contrast to the narrative that has prevailed over the past several years. Spot prices for potash have more than doubled year-over-year, and perhaps more importantly, our royalty mines uniquely at remaining capacity from expansions commissioned during the previous cycle and that are now accelerating ramp-ups in order to meet the higher demand. While we caution that there is an inherent short-term lag effect between spot price increases and realized prices, and fundamental constraints to the pace that increased capacity utilization can occur, the outlook for our potash royalty portfolio is becoming very bullish over all-time frames. We further believe that the next general wave of investments in the building of new potash capacity, including for several of our royalty mines is closer than the market is anticipating. These are seriously long lead projects, and we are approaching the time as a sector to make calls on new investment in order to keep pace with future projected demand growth, which, by the way, is compounding against higher and higher base level. Turning now to our project generation business. Our junior equity portfolio continues to perform well and liquidity opportunities have been increasing generally as other capital providers increased exposure to the exploration and development subsectors. Our pace of new project sales and exchange for equity positions and royalties has remained strong and is experiencing almost insatiable demand. This is coming from producers looking to replenish exploration pipeline after years of underinvestment as well as the now better funded junior exploration sector. From the more advanced holdings in our PG equity and royalty portfolio, we are also anticipating a lot of news flow in the coming months. Feasibility study results is coming for Adventus' Curipamba project from which incidentally, discovery of a new mineralized zone was announced just yesterday. AngloGold Ashanti also revealed this quarter that the Silicon gold deposit discovery in Nevada is moving into economic studies, with a first stage review expected to be completed in the second half of this year. It also noted that it encountered positive gold intercepts and widespread drilling from a secondary within the project footprint that are reversed with the Merlin Target. Recall that we hold a direct royalty on silicon and our major shareholders of Orogen Royalties who hold a second royalty there. Resource updates and other advanced stage work programs are underway for several additional projects within our portfolio, including [indiscernible], Wolfden and Pickett Mountain, [indiscernible] Labrador West and [indiscernible] projects. Beyond that, the companies within our portfolio continue to meet with great capital raising success, and this is translating into an unprecedented level of exploration drilling exposure and discovery optionality for our shareholders. And with that, I will turn the session over to questions.

[Operator]

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

[Carey MacRury, Analyst of Metals and Mining]

Maybe just first on the credit facility. You bumped it up there. Should we think of that as just taking advantage of better credit conditions? Or are there opportunities that you're seeing out in the market that you can deploy into?

[Brian Francis Dalton, Co]

I guess the first comment I'd make there is, generally speaking, you do these things when you don't need to. But there's a reflection here of previous credit facility that we had in place which was worked through that period of pretty aggressive M&A for us. A small company, we did lots of different sorts of things, which require tons of different amendments to the agreement. So it was starting to get really messy. So it was time just to do a bit of a reset and to talk to our lenders about how the business evolved and changed. And so Ben and the team did some great work, I think, in just cleaning things up and putting us in good stead. I wouldn't try to read through that there's immediate plans for the use of that additional liquidity. But obviously you never know when you need liquidity and when opportunities come along. So you want to have it done in advance. But again, great credit to the team. It's a really nice clean structure, and I think it better matches where the business has gone over the past few years.

[Carey MacRury, Analyst of Metals and Mining]

And then maybe just trying to understand the renewables business. So you got, I guess, active project now in 2.5 gigawatts. And I think you targeted -- you expect about 4 gigawatts once all the capital that's been deployed is deployed. Is that the way to think about that?

[Brian Francis Dalton, Co]

It's -- I wouldn't get too precise around that just because like you saw and ARR just announced that it had deployed $35 million in an operating stage project that -- so it's a larger ticket size. So it won't bring as many headline megawatts into our portfolio, but from a percentage of -- royalty percentage and percentage of portfolio, it's obviously very substantial. So if we were to take all of the remaining capital within ARR and buy projects of that type, there would be less megawatts at higher royalty rates and if all of the capital came -- was deployed with developers where we have lower royalty rates, there would be more megawatts, but I think the takeaway for what's been happening with ARR that at the time of the IPO, it's set for itself 2 key objectives that were critical. A, it was to see the investments that have been made with existing developers continue to result in a strong sales pipeline that was resulting in new royalties on our behalf. So that was an exceptional quarter in that regard. And then the other was regarding the pace at which we could deploy capital at the types of returns that we've been targeting. And yes, over the quarter, there was almost USD 55 million deployed. So we feel really good about how ARR has been progressing. It's only 6 months post the IPO, but against those 2 major execution-type objectives, it's going gangbusters.

[Carey MacRury, Analyst of Metals and Mining]

Great. And maybe just one last one from me and I'll pass it on. But just in terms of Apollo's position, how much more capital do they need to commit to get to their 50%?

[Brian Francis Dalton, Co]

Ben, you might have to help me with the exact number because this was the latest acquisition within an operating stage project, we had to redo some of the structuring a little bit and it resulted in ARR contributing to the investment despite the fact that Apollo hasn't completed on the earnings. So their original commitment would have been $80 million, and that's now been bumped up to $91 million against which Ben or Flora maybe you can help you with how much, how far along they are on that now?

[Benjamin Gerard Lewis, Chief Financial Officer]

There about 32 remaining.

[Flora Wood]

Yes.

[Benjamin Gerard Lewis, Chief Financial Officer]

And I expect to have that invested by December 31 of this year.

[Operator]

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

[Craig Hutchison, Research Analyst]

In terms of your potash royalties, you noted that Esterhazy shafts, K1, K2 were closed in the quarter and K3 is ramping up. Is your understanding that volumes from Esterhazy will be flat? Or do you expect them to be higher over the back half of this year?

[Brian Francis Dalton, Co]

Yes. So obviously, the K1, K2 closure came earlier than expected. That was in the cards. Obviously, Mosaic has been investing pretty heavily in the K3 production area with a view towards bringing down 1 and 2, but I think water flows accelerated in the 1 and 2 area, which resulted in that early closure. So they're not quite at full ramp-up from K3 yet in order to replace some of those lost tons. But I believe, and you can correct me in their own reporting, I believe they expect to have K3 fully ramped up somewhere in the first half of next year.And so it's the shaft period obviously just how much material can you get to serve with. Once it gets the surface through K3, the plant or the topside facilities that would have previously serviced K1 and K2 can be utilized. So there will be higher production rates from K3 to offset the loss from 1 and 2 and then there's no bottleneck at top because it just hauls up from K3 now instead of K1 and K2. So generally speaking, I think the plan is to be at the same sort of level once K3 fully ramps up. But there's a few -- there's a couple of quarters of lower production from Esterhazy ahead for sure. And of course, that's also being offset now by -- actually more than offset by their neighbor, Nutrien announcing in the quarter 2, 500,000 tonnes ramp-up. So whatever Mosaic loses in the short term, Nutrien has more than made up for.

[Craig Hutchison, Research Analyst]

So net-net higher volumes in the back half of this year and obviously higher prices as well.

[Brian Francis Dalton, Co]

Yes. And bear in mind that we own varying royalty rates by mine. So we don't have great color at this point as to where that increment of new production from Nutrien will come from. So some of it might be from lower royalty rate or higher royalty rate lines. But generally speaking, we'll be beneficiary there.

[Craig Hutchison, Research Analyst]

And great to see the dividend bump. Is there a sort of target payout ratio that you guys have? And how is that measured? Is it based on free cash flow or kind of operating cash flows?

[Brian Francis Dalton, Co]

The way we approach that in doing the research for the Board was just the toggle around different dividend levels in the near term and then to compare that against ongoing free cash flow level. So it's not a precise -- exactly this percentage of payout, it's based more on an outlook across the portfolio. And there's still a fair bit of uncertainty there. There's a lot of optionality, if you will, in our portfolio with announcements still pending on expansions and new builds and those sorts of things. So I would say it's a conservative -- with a conservative bump at this point relative to current free cash flow levels, but as we get more color in the future on just portfolio dynamics longer term here, we will just make continuous assessments of our capital allocation flexibility. But again, for our shareholders, I think there hasn't been a dividend increase in a couple of years. We've been going through period of pretty rapid growths first through the mining M&A and then investments in the Altius renewables platform prior to its IPO and those things are behind us right now. So it was just a bit of time to see shareholders begin to reap rewards with these better prices and better conditions and the fact that our bets are largely in now. It's a long way to say no, it's not a specific payout ratio, it's more of a longer-term outlook on business profile and the conservative approach that hopefully, we can continue on this trend with -- for considerable period forward.

[Craig Hutchison, Research Analyst]

Okay. Great. Just are you guys thinking about share buybacks still in the second half of this year? Or is that sort of put on pause for a bit?

[Brian Francis Dalton, Co]

With the assessment we made around capital allocation, buyback remains something that we're very keen on and focused on, but it will be opportunistic for the most part. We've maintained capital allocation flexibility for growth opportunities that they should arise, special situations, those sorts of things as well as just opportunistic actions around the buyback. But yes, we're still keen on bringing down share count longer term.

[Operator]

There seems to be no further questions at this time. So I'll turn the call over to Flora Wood for closing remarks.

[Flora Wood]

Thank you, Carol. And I know the 9:00 a.m. conference call slot was a busy one this morning with analysts on different calls. So thank you to everybody who joined and we'll look forward to talking again on the Q3 call.

[Operator]

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