Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by, and welcome to the Altius Minerals Corp. Q2 2022 Financial Results Call. [Operator Instructions] I'd now like to turn the conference over to Flora Wood, Director, Investor Relations. Ms. Wood, please go ahead.

[Flora Wood, executive]

Thank you, Jack. Good morning, everyone, and welcome to our Q2 conference call. Yes, we did get the quarter out. Okay, some of you that we saw on the weekend are wondering about that. Good to see everybody.

Our press release and quarterly filings came out yesterday after the close, and are available on the website. This event is being webcast live, and you'll be able to access a replay of the call along with the slides that have been added to altiusminerals.com.

Brian Dalton, CEO; and Ben Lewis, CFO, are both speakers on the call, and then we'll open it up for questions.

The forward-looking statement on Slide 2 applies to everything we say both in our formal remarks and during the Q&A session.

And with that, I will turn over to Ben to take us through the numbers.

[Ben Lewis, executive]

Thank you, Flora. Good morning, everyone, and thank you for joining. Q2 attributable royalty revenue of $28.6 million or $0.61 per share was up 31% year-over-year. And year-to-date royalty revenue of $54.1 million or $1.23 per share is up 36% from the same period in 2021. Both the quarter and the 6-month periods represent revenue records, mainly thanks to higher realized commodity prices.

Q2 adjusted EBITDA of $24.4 million or $0.52 per share was up 38% year-over-year. EBITDA margins of 85% are up from the 81% a year ago. The Mineral Royalties EBITDA margin was 91% for the quarter. For the year-to-date period, adjusted EBITDA of $48 million is up 49% from its comparable period in 2021. The increase follows the revenue trend, partially offset by an increase in public company-related expenses as Altius Renewable Royalties Corp. completed its IPO in March of 2021.

Q2 adjusted operating cash flow of $16.6 million, is up 186% year-over-year. On a year-to-date basis, adjusted operating cash flow of $30.8 million is up 111%, again, following the revenue trend, and is reported net of $9.9 million in cash taxes paid. Adjusted earnings for the quarter were $10.6 million compared to $9.5 million in the same quarter last year. Adjusted EPS was $0.23, after factoring in losses on derivatives of $1.9 million and foreign exchange revaluations of $1.1 million.

The Board of Directors has declared a quarterly dividend of $0.08 per share, which is a 14% increase over the previous quarterly dividend rate of $0.07 per share. We last raised the dividend in August of 2021 when we increased it from $0.05 to $0.07 per share. So within a little over a 12-month period, we've increased it by 60%. The dividend will be paid to shareholders of record on August -- shareholders of record on August 31 with a payment date of September 15.

And now to the balance sheet. On April 14, Fairfax exercised their 6.7 million warrants with the proceeds used to redeem $100 million in preferred securities that had also helped. As a result, Fairfax has become our largest shareholder, and we have eliminated $5 million in annual preferred distributions. We funded another investment of USD 10 million into Invert Inc. following previous investments made in Q1 of this year and Q4 2021. There were scheduled debt repayments of $2 million, and we paid $3.2 million in dividends during the quarter. We purchased and canceled an additional 100,000 shares at a cost of $1.9 million during the quarter under our normal course issuer bid, which we hope to renew for another year when we reach the renewal anniversary date.

During the quarter, we drew down $10 million on our revolver facility to acquire other investments. We ended the quarter with $28 million in cash, excluding the cash held by ARR, and $96 million in additional liquidity on our revolver. We also continue to see the revenue ramp up at ARR, and are pleased with the second quarter of positive cash flow for ARR's underlying GBR joint venture business. Revenue growth is expected to continue in the second half of this year as more renewable energy projects reach commercial operations.

In June and July, GBR completed 2 new royalty investments, including a USD 32.5 million investment in Bluestar Energy Capital, and a $40 million investment agreement into Hodson Energy LLC subsequent to the quarter.

And with that, I'll turn it over to Brian to talk about the environment and the outlook.

[Brian Dalton, executive]

Thank you, Ben. Thank you, Flora. Good morning, everyone. Our business has continued to perform well over the first half of the year in spite of a very unsettled geopolitical and macroeconomic backdrop. Our position as an inflation hedge [indiscernible] continues given our lack of exposure to the higher operating and capital costs being widely experienced across our sector exposures. In other words, while operating margins have compressed for many recently, our top line revenue-based exposures have been significantly less impacted. The war in Ukraine has resulted in considerable disruption to global supply for a host of the commodities that we have royalty exposure to. With the 2, we are perhaps watching most closely being potash fertilizers and iron ore pellets.

Given the high percentage concentration of pre-war production of these from Russia, Belarus and Ukraine, it is an obvious open question as to when and how global trade flows might adjust to bring these currently constrained supply sources back into the global mix. But it does feel quite certain that the relative value of sources of these materials in places such as Saskatchewan Potash Basin and the Labrador Trough Iron Ore District has been clearly enhanced in the market. We, therefore, see benefits not just for near-term price support due to the current supply constraints, but also in the form of dramatic shifts in the cost and availability of capital to bring on new global supplies in the future. This has long-term implications that heavily favored growth of market share from the production regions that we are positioning.

The evidence of this long-term benefit is already manifesting as both of our potash operators, Nutrien and Mosaic, have made recent capital investment commitments to activate all available production capacity from their mines. In Labrador, we are seeing a renewed commitment by Rio Tinto [indiscernible] iron ore mining complex in the form of higher sustaining and growth capital spending after a prior period of underinvestment. This represents a significant change in direction from a few years ago when Rio was reportedly looking to divest the assets.

As our exposure to IOCs through LIORC, which is both a royalty holder and equity owner, the equation is a bit more two-sided than [indiscernible] potash, at least in the short term. The royalty benefit fully from any improved production that results in your capital spending but dividends flowing through from the equity component will be limited as they compete directly with the capital spending amounts. As long-term investors, we see near-term equity-based dividend constraints as opportunity, however, and added to our position in LIORC during the quarter in the belief that the operations will ultimately be stronger and more durable a few years out from now.

We are also keenly anticipating Champion's updated feasibility results in the Kami project. We announced a slight delay to the publishing of these results into next year as they await detailed metallurgical confirmation that the project can deliver a direct reduction pellet feed grade material and support the relatively outsized growth of [indiscernible] steelmaking capacity. This is being invested in throughout the world as part of decarbonization commitments. This transition to EA from BF, or blast furnace steelmaking, is quite real with serious amounts of capital being invested in. And in our opinion, it is a very undertold story by those who comment on iron ore, metallurgical coal and steelmaking trends.

Iron ore is not a single linked market anymore, but instead well on its way to structural segmentation by relative product quality and end-user technology preferences. In base metals, we saw the closure of the 777 mine during the quarter as per plan and expectation. We acquired this royalty through a merger with Callinan Royalties back in 2015, and it has worked well despite seeing a bit of an anomaly for us given our focus on long-life assets. That deal ultimately shored up our balance sheet at a time of wonderful opportunity and allowed us to acquire the Chapada Copper Stream the following year. It also brought up the royalty on the silicon project in Nevada that AngloGold has gone on to make a major new gold discovery on, more on that a bit.

Lundin continued to report excellent results [indiscernible] discovery at Chapada, with the footprint of the mineralization further expanded. We also announced that I will publish a maiden resource for the discovery early next year, and most importantly for us, perhaps that it will now begin to consider the discovery as part of its ongoing expansion plan. The new deposit is showing signs of being considerably higher grade than the current material being mined at Chapada. So there are obvious implications for copper production levels [indiscernible] moves into mine plan sooner. This is in addition to the overall mine life extension implication.

We ranked this news as well in the category of stories that are being underappreciated currently. Advances in Salazar continue to make solid progress in advancing Curipamba to a construction decision with positive news coming in throughout the quarter regarding the securing of project finance and social and environmental approvals. Lithium Royalty Corporation over an approximately 12% shareholder, made another advanced age royalty acquisition relating to the Mariana project in Argentina. This project recently began construction by Ganfeng Lithium as prior to planned $600 million development. Altius has elected to exercise its 10% participation rates for total 0.5% NSR royalty acquisition.

LRC now with more than 20 royalties in its portfolio, including several leaders the operating or construction stage, also continues to evaluate strategic alternatives, including an IPO or corporate transaction, and has recently engaged advisors in Canada and U.S. -- and the U.S. to support this effort. Lithium prices have been holding at strong levels despite the broader market turmoil as EV adoption continues at pace globally, and as renewable energy-based battery storage looks set to dramatically accelerate.

Our electrical coal royalties in the Genesee mine in Alberta continue to come in higher than we might have expected a year or two ago on the strength of very strong electricity demand in Alberta and high plant utilization rates. These royalties clearly remain on a path to phase out however, with the operator remaining committed to the gas conversion investment. We saw this coming and acted proactively however, with our creation of Altius Renewable Royalties. There, we are seeing an excellent buildup in our portfolio of wind, solar and increasingly storage-based royalties. Frank and the team in New Hampshire has secured deals in the first half of the year totaling more than USD 70 million. This pipeline of opportunities continues to expand rapidly as its royalty financing gain sector adoption as an attractive and partner like alternative source of capital.

Passing over the weekend of new legislation in the U.S. provide strong commitments and certainty to the renewable sector, is expected to add even further tailwinds for ARR. Finally, as the year progresses and considering lag effects, ARR expects to benefit from increasing market prices for electricity and the royalties it holds that have maintained components of market pricing exposure.

In project generation, the value of our equity holdings declined, in line with [indiscernible] markets generally during the quarter. However, our portfolio of companies have continued to execute well. Funded exploration programs across our equity and royalty holdings are on track to result in record drilling meters this year, numbering in the hundreds of kilometers, and providing incredible free option value for Altius shareholders. As an example, Abra Silver announced a new high-grade discovery nearby to its existing Diabillos deposit resource that looks quite exciting. AngloGold also continued with its very aggressive drilling campaign across multiple discoveries on the silicon project. For Silicon Central, a pre-feasibility study is underway in addition to further delineation and expansion focus driven.

At Merlin, located immediately south of Silicon Central, a first resource is expected in early 2023. We noted with interest this past few months as consolidation and M&A activity amongst the precious metal royalty and streaming companies began to really ramp up. A particular note was the takeover of Great Bay Royalties and the acquisition of an existing royalty on the [indiscernible] project in Nevada. Both of these have elements that provide comparable benchmarks for the potential value of our silicon royalty as we continue to explore strategic alternatives there.

With that, I will turn over to questions.

[Operator]

[Operator Instructions] Craig Hutchison with TD Securities.

[Craig Hutchison, analyst]

The first question is on the Potash segment. Obviously, it's encouraging to see that Esterhazy's K3 mine is now operating at a run rate of 5.5 million tons at the end of the first quarter. With the plans to optimize the mining complex and bring on an additional 1 million tons of production capacity over the next year or so. Would Altius have full exposure over those incremental tons, i.e., can we assume that there's a constant unitization ownership percentage with that additional 1 million tons?

[Brian Dalton, executive]

Yes, Craig. We have -- all of that production is from the K3 area. So it would be basically at the same royalty rate that we've been receiving since K1 and K2 went down mid last year. And the royalty rate that we would have held on units 1 and 2 and on unit 3 are actually all fairly similar. So it should be very straight math.

[Craig Hutchison, analyst]

Okay. Great. And then at Genesee, obviously, it's encouraging to see the strong revenues for the first half of this year. And it looks like we're setting up for a very strong Q3. And you touched on in your opening commentary, but any insight you could provide just in terms of the transition from coal to gas as we move into 2023? And how do you think about the revenue outlook for the next year or 2 would be appreciated.

[Brian Dalton, executive]

It's not that easy actually to get that information. I did note that some of that capital spending looks like it was deferred in the current quarter. I don't know if that was market-based, and not wanting to drop such strong market backdrop or due to supplies or just other -- more practical constraints, but don't really have that information other than what we can all read from some capital to power is published on these remarks. But again, we're looking at it over the next couple of years is fading now.

[Craig Hutchison, analyst]

And maybe last question for me. At your Investor Day and earlier in commentary, you talked about the potential divestiture of your precious miles business. Have those conversations increased over the last quarter or so?

[Brian Dalton, executive]

So thus far -- we basically put it out there that were open to concepts and ideas, and we're looking at that very broadly, whether it be straight up sale. And primarily, we're talking about the silicon policy here or some type of corporate transaction, even potential royalty swaps for non-precious metal royalties. So it's still relatively early stage, but we've had conversations, I suppose, with all of the usual suspects, and there does seem to be a lot of appetite. Obviously, the project is still early stage, and there's going to be a lot of key data points over the next number of months. So there's no real urgency here, but we are opening the door [indiscernible] interesting ideas that people might have. But as we get into later part of the year and early next year, we'll ramp that process up a little bit and probably formalize it. But for now, it's more conversational.

[Operator]

Brian MacArthur with Raymond James.

[Brian MacArthur, analyst]

It also has to do with potash, but more to the Nutrien announcement. Again, they've announced a fairly big expansion. But a number of those tons, I think, are at like [indiscernible]. Can you just go through again roughly how that would ramp up because I think there's different -- if I remember correctly, there's different royalty percentages on each of those mines. And I guess the second question is, I assume they would ramp Rocanville, they'd do this capacity first. So in the near term, you continue to get similar royalties. Any help on that would be appreciated.

[Brian Dalton, executive]

I guess the best resource for that would be in our Investor Day materials where we kind of went through what the current production level is relative to nameplate capacity. I mean that's not even going to be a perfect guy, but it's something that just gives you an indication of where the bigger picture infrastructure at the individual mines has capacity of mining machines, both kinds of things are right. And you're absolutely correct. Our royalty rates vary by operation. But again, I'd have to go back and look at if I recall, if they go to the full extent file, they complete the full expansion -- it feels like it will be relatively proportional against our recent production levels. But the timing of that could be different. For example, we have relatively low exposure to the Vanscoy mine, which is the one that came in on the merger with [indiscernible]. So to the extent that first production has ramped here, you wouldn't see that much benefit until it got round to the ones where we have higher exposure. So Nutrien hasn't actually provided that guidance. on a mine-by-mine basis. But collectively, if all of the expansion that's been signaled occurs, we'd have a relatively proportionate impact in terms of production volumes.

[Brian MacArthur, analyst]

Great. That helps. And my second question...

[Brian Dalton, executive]

Again, to point you right back to the Investor Day, we did go -- get quite extensive in terms of just, here's the current production here is nameplate and it's a guide. But not a perfect point.

[Brian MacArthur, analyst]

Yes. No, just focusing more on the relative rate of the different mines, but that's very helpful. So Vanscoy is the one that you're really not going to get a whole lot on is the bottom line.

[Brian Dalton, executive]

[indiscernible] is a relatively small exposure for us, whereas Rocanville, Esterhazy, which are the, I guess, the 2 top mines in the district, we do have very significant exposures to. But we do in Investor Day materials, we do actually publish the relative royalty rates as well.

[Brian MacArthur, analyst]

Great. I'll check that. And my second question just goes to the -- it looks like the invert loan receivable, what's your first investment there. It's in current assets. So I'm kind of curious, does that mean something will happen and 12 months on that loan receivable within [indiscernible] or is that just accounting and I don't need to worry, but I was just surprised within current assets to both the long-term assets.

[Brian Dalton, executive]

Over to you, Ben.

[Ben Lewis, executive]

Yes. I think the -- we look at that and if it's -- we expect it to mature within a year, and it's convertible, there's a clause where we can convert to shares upon an IPO. And so the estimate right now is that, that would occur within a year. But obviously, there's lots of factors that could affect that. So that's why it was great current.

[Operator]

Carey MacRury with Canaccord Genuity.

[Carey MacRury, analyst]

Maybe just back on the potash side. Just you had a record first half, record Q2. Prices up come up a little bit, but looking at the volume guidance from Nutrien and Mosaic. It looks like you really could again have maybe a similar second half or even stronger. Is there anything I'm missing on that? Or is that in line with what you're expecting?

[Brian Dalton, executive]

Yes, all the usual caveats, I guess. I mean Midwest U.S. prices have really not modeling that much at all to the extent that products loaded there do better to the extent that in Brazil, things have moderated more. So it really comes down to where product gets placed. But generally speaking, particularly in Canadian dollar terms, prices are down a little bit, but not that lot quarter-over-quarter. As for volume, you always hard recalls, we know from the operators that sales were a little below expectations despite the fact that you've got a market that's actually constrained by supply, but it had more to do with a planting season in the U.S. and the operators are commenting that they expect that gets caught up in the back half of the year. So it does seem like from a volume perspective, it's probably going to be a back-end heavy production here. Again, a lot of caveats here, but then you've got to factor in the 1 quarter lag roughly as well, but potash still looking pretty good.

[Carey MacRury, analyst]

And then on 777, obviously, come to an end, but just given the timing between you get paid and when the mine produced should we be expecting something in Q3 like a residual payment? Or is it pretty much done from your perspective at this point?

[Brian Dalton, executive]

I think if I recall correctly, there are still residual payments that would result to just product leading in product late and those kinds of things. What we know is that mining and new extraction ended, but I still think there's material that needs to be process sold and royalties calculated on. But I don't think it's -- you don't expect a normal or pretty level of revenue in the next couple of quarters, but you'll see something.

[Carey MacRury, analyst]

And then maybe one last one for me. Obviously, a big pullback in the mining space, particularly in juniors. Do you think these conditions open up new opportunities for you? I know you guys like to invest countercyclically. Under what your thoughts are on the market that we're in right now?

[Brian Dalton, executive]

On the junior, the market response is so immediate that there are things we're certainly looking at and maybe involves adding to existing positions that are pulled back on stories that we really like. Bigger picture, royalty -- at the royalty level. Yes. There's other sources of capital are certainly retreated, and I think that creates some opportunity. Now whether that's met by a similar retreat from operators and developers and even trying to access markets remains to be seen.

But we're certainly seeing some opportunity there. And the other thing, again, we bought some Labrador shares during the quarter Labrador Iron Ore Royalty Corporation because there was a case where there's a difference between somebody selling an asset directly or an interest in an asset directly, and their price moving with the market versus, say, Labrador where the market every day decides on a new price and we can just compare it in center, our long-term view of the value and make decisions like that. So there's -- again, there's a little difference there between how long it takes for owners of assets or those who might write royalties to adjust their sense value or decide they've got to go irrespective of where markets are versus that wonderful machine [indiscernible] the market making big mistakes All good.

[Operator]

Orest Wowkodaw with Scotiabank.

[Orest Wowkodaw, analyst]

A lot of my questions have been answered, but I was wondering about Kami specifically in the sense that Champion is obviously ramping up their Phase 2 at Bloom Lake and starting to look at, I guess, new growth opportunities. And from my perspective, they're trying to kind of weigh the pluses and minuses of potentially developing Kami versus potentially doing a Phase 3 expansion at Bloom Lake. Given your 3% gross revenue royalty on Kami, I mean, from my perspective, that seems like a fairly -- well, obviously, a very valuable royalty for you, but a fairly punitive royalty for them in terms of on the asset from a burden perspective. I'm wondering if there's any room for negotiation to perhaps lower the 3% in order to help move that project forward?

[Brian Dalton, executive]

There haven't been any discussions around adjusting royalty rates, and not something we're very open to. There's just so many other factors at just the side of the border relative all kinds of things that are I expect -- or expected of how [indiscernible]. I mean if you look [indiscernible] view of the demand that is coming in the market for [indiscernible]. But I think you would argue that it's an all of the above. Now direct all these are big -- but to your direct question [indiscernible] royalty rate.

[Operator]

[Operator Instructions]

[Brian Dalton, executive]

Thank you, everyone. We will see you next quarter. Flora, did you have any closing remarks?

[Flora Wood, executive]

No, Brian. That sounds good to me.

[Brian Dalton, executive]

Thanks, everyone. Back to work.

[Operator]

This concludes the Altius Minerals Corp. Q2 2022 Financial Results Call. We thank you for your participation. You may now disconnect.