Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Altius Minerals Corporation Second Quarter 2023 Financial Results Conference Call. [Operator Instructions]. This call is being recorded on Wednesday, August 9, 2023. I would now like to turn the conference over to Ms. Flora Wood, VP IR and Sustainability. Please go ahead.

[Flora Wood, VP, IR & Sustainability]

Thank you, Hilda. Good morning, everyone, and welcome to our Q2 conference call. Our press release and interim 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 the replay of the webcast, along with the presentation slides that are on our website and on the webcast site.

Brian Dalton, CEO, will speak on the call; and we have Stephanie Hussey, VP Finance speaking today as she's substituting for Ben Lewis, our CFO. We also have Lawrence Winter, VP Generative and Technical, who many of you know, he's here for questions you might have on Silicon or on Project Generation.

The forward-looking statement on Slide 2 applies to everything we say in our formal remarks and during the Q&A session. And with that, Stephanie is up first. Go ahead, Stephanie.

[Stephanie Hussey, VP, Finance]

Thank you, Flora, and good morning, everybody. Royalty revenue for Q2 2023 was $18.7 million or $0.39 per share compared to $28.6 million or $0.61 per share in Q2 2022. Adjusted EBITDA followed the trend of revenue in the second quarter. The Mineral Royalties segment had an EBITDA margin of 81%. Both revenue and adjusted EBITDA were impacted by lower commodity prices, primarily potash, and the scheduled closure of the 777 Mine at the end of Q2 last year. The prior year quarter also included a positive thermal coal adjustment of $1.6 million relating to 2021 sales.

Q2 2023 adjusted operating cash flow of $14.1 million or $0.30 per share compared to $16.6 million or $0.35 per share in the same quarter last year. The decrease follows the trend of lower revenue as well as higher interest paid and some working capital adjustments. Our balance sheet is strong, and we remain focused on our capital allocation strategies.

During the quarter, Altius received $8.9 million from Lithium Royalty Corp. as the return of capital distribution to the pre-IPO shareholders. We expect to receive a further combination of cash and shares over the next 24 months as described in LRC's prospectus. We made $2 million in scheduled principal repayments on our term debt during the quarter, paid cash dividends of $3.6 million or $0.08 per share to its common shareholders and issued approximately 9,800 common shares valued at $200,000 under the corporation's dividend reinvestment plan. The Board of Directors approved an $0.08 dividend that will be paid to shareholders of record on August 31 with a payment date of September 15. The corporation repurchased and canceled approximately 98,000 common shares under its normal course issuer bid for a total cost of $2.1 million during the quarter.

Our current liquidity consists of $25 million in cash at the end of Q2 and $94 million in unused revolver room on our credit facility. ARR held cash of USD 41 million at quarter end. The combined term and revolving credit balance was $116 million, while the market value of our holdings in LIORC, ARR, LRC, and the PG equities portfolio stood at a combined total of $387 million.

Subsequent to the quarter, Adventus announced a USD 9 million financing, of which USD 4 million was provided by Altius in the form of a convertible debenture. The debenture bears interest at 10% per annum and is set to mature by December 31 this year. Altius will have the right to convert the principal and the interest in the shares at any time. And if the loan is not repaid by maturity, Altius may convert the outstanding amount into a 0.63% NSR. We currently hold a 2% NSR on the Curipamba El Domo project, which is a high-grade copper gold project in late-stage permitting. In addition, ARR funded $9.9 million in the GBR, representing its 50% portion of new renewable royalty investment deployment.

And with that, I'll turn it over to Brian.

[Brian Dalton, Co-Founder, President, CEO & Director]

Thank you, Steph. The highlight for me this quarter relate mainly to several items of option value realization progress from preproduction stage assets. These include confirmation that the Silicon Project represents a new world-class gold district discovery, continued positive progress from the Saúva copper discovery within Chapada district and encouraging indications for metallurgical test work at Champion's Kami Iron Ore project. Each of these assets hold the potential to add significant long-term royalty revenue growth to our portfolio and this will come with no additional cost or equity dilution impacts to Altius' shareholders.

At Silicon in Nevada, an exploration target of 6.8 million ounces of gold was announced by AngloGold Ashanti for the Merlin deposit, while also noting that the deposit remains open in most directions for further expansion. This is in addition to the 3.4 million indicated 800,000 inferred gold ounces that were reported for the Silicon central deposit earlier this year.

AGA also announced that it is now evaluating both deposits on an integrated production basis given their close proximity, referring to it as the expanded Silicon Project. Indeed, we speculate that with time, it may prove that Merlin and Silicon are connected. We understand that AGA is targeting completion of a formal resource estimate for Merlin and a concept study for the integrated project by year-end. We will be particularly keen to learn what optimized production level range will be determined from that work as this factor now represents one of the largest remaining sensitivities in estimating the value of the royalty. The 1.5% MSR we hold was originally generated through an early stage exploration funding agreement completed by predecessor company Callinan Royalties, and that costs around $250,000.

We also note the dates have now been set in early April of next year for a BC-based arbitration hearing to determine the extent of the lands that our royalty applies to. It's our contention that it extends to include AGA's full consolidated land package rather than just the land hosting most of the Silicon and Merlin deposits, holds up in several additional known deposits with a current combined endowment of more than 4 million historical ounces in various categories, plus considerable further exploration potential will be added to our royalty inventory.

At Kami, we understand that Champion remains on track for completion of a feasibility study at around year-end. The [indiscernible] study is targeting the production of high purity DR pellet feed material, which is both relatively rare and projected to be in significant deficit in coming years. This is owing to the ongoing transition of the global steelmaking fleet to electric arc furnaces from traditional coal-fired blast furnaces. EA furnaces can only input DR-grade iron ore and scrap steel.

During an investor presentation that Champion recently delivered, it commented that its preliminary metallurgical finding suggests that Kami ores are amenable to DR-grade concentration. Our cost to originate the Kami project royalty net of recoveries to date is actually negative. While no new drilling results from the high-grade Saúva copper discovery at Chapada were reported this quarter, Lundin did note in its investor conference call that, "in February, we announced the maiden indicated resource estimates for the Saúva discovery and view it as the first of many iterations of increasing mineral estimates to come. We are very excited about this discovery, and we'll continue to evaluate potential expansion opportunities to best exploit the significant mineral resource base and the growing Saúva deposit." We recall specifically viewing the Saúva-Formiga area is an exciting target for future exploration and option value realization potential at the time of our due diligence and acquisition of the Chapada copper stream back in early 2016. And so, it has been neat to see it play out.

In addition to its LRC equity position, Altius also holds minority partnership interest in 3 LRD royalties, 1 of which commenced production during the quarter, and 2 others are expected to begin operations later this year or early next year. This should introduce the first-ever royalty revenue related to lithium production to our portfolio.

At our Investor Day earlier this year, we went to considerable length to explain the potential option value of these developments, among several others in our existing portfolio and reiterated how maintaining discipline around external growth opportunities was particularly critical for us at this time as a result and particularly so for any situation that might involve corporate level equity dilution. Our conviction has only strengthened in this regard to sustainment.

Quickly now on the operating stage portfolio. The main factor impacting revenues this past quarter, at least relative to the year ago quarter was generally lower commodity prices. Production volumes were also challenged by the impact of plant maintenance issues at Voisey's Bay in Chapada, forest fires in Labrador and Quebec to limited IOC production and sales and from constrained potash logistics. These volume issues have now been mainly resolved with better second half signaled at most operations.

On prices, we do note some stabilization and modest improvements recently for some, although commodity markets are still acting very choppy, and most prices remain well below our estimates of mid-cycle incentivization levels.

ARR continues to ramp up its number of producing stage assets and also added another large developer platform to its portfolio this quarter. U.S. merchant electricity prices, which were quite weak in the first half as gas prices fell are more recently being positively impacted by extreme heat conditions and a surge in power demand. Longer-term PPA or contracted prices continue to move up nicely in response to industry cost pressures. Renewables team at GBR, ARR are seeing strong royalty financing deal origination activity as competing forms of capital such as equity and debt remain challenged.

At Genesee, Capital Power has announced delays with natural gas-based repowering plans and that is now expected to eliminate coal burning in 2024 as opposed to towards the end of this year that was expected earlier.

On potash, Nutrien has announced that it is pausing investment around its expansion program, setting current market conditions and capital allocation prioritization decisions. We continue to believe that this expansion will be required in the markets as global demand growth trends reassert themselves following the recent period of unusual volatility and market supply uncertainty.

Mosaic on the other hand, announced the completion of a meaningful expansion of Esterhazy's nameplate capacity. Lastly, the PG business is also quite busy on the deal making front with several project deals recently completed and in the works that are resulting in new early-stage royalties and junior equity positions being added to the portfolio.

Despite soft exploration market conditions, we expect option value exposure to reach almost 300 kilometers of drilling this year in our PG business, and this is being entirely funded by our partners.

And with that, I will open the floor to questions. Thank you.

[Operator]

[Operator Instructions]. And we have a question from Carey MacRury from Canaccord Genuity.

[Carey MacRury, Canaccord Genuity]

Maybe just a question on the balance sheet, just given where interest rates are, can you remind us what you're paying on the revolver? And is there any desire to pay down any debt quickly? I know the debt was not that big in the grand scheme of things, but just your thoughts on the balance sheet.

[Brian Dalton, Co-Founder, President, CEO & Director]

Steph, do you have that?

[Stephanie Hussey, VP, Finance]

Yes. Yes. We're paying about 7.5% carry on the revolver.

[Carey MacRury, Canaccord Genuity]

And what would the term amount be locked in there?

[Stephanie Hussey, VP, Finance]

The effective interest rate on the term is like 5.5%, I think, right, with all the costs baked in, yes, in the swap.

[Brian Dalton, Co-Founder, President, CEO & Director]

Yes. So Carey, I guess, as far as how aggressive we might want to be with that, it doesn't cost us. I mean, we're obviously watching what's going on with interest rates right now. But like for example, would we raise equity to pay down debt or no -- I'd actually probably -- just in terms of prioritization, I think there's a better argument right now to be made on the buyback than there would be for discretionary debt repayment. But again, we'll just have to keep an eye on where rates go and how we see the ongoing pricing of the company in the market relative to the value. So it's for something we watch almost daily.

[Carey MacRury, Canaccord Genuity]

And then maybe just switching to potash. I mean I think potash is a lot weaker than probably everybody expected. Just wondering what your thoughts are on what's going on in the potash market and how that's going to look maybe later this year or into next year?

[Brian Dalton, Co-Founder, President, CEO & Director]

Well, it's a good one. Good question. I think part of it is that it certainly seems now that more production is getting out of Eastern Europe than probably was originally expected would. I mean, the channel that's getting out at are uncertain that there's obviously product finding way to markets. That said, that the price volatility has probably been the biggest factor that's impacting demand lately. It's kind of like catch the falling knife a little bit and people being fairly hesitant. But that said, does think that inventories are getting pretty precarious at this point in time, hard to make the call, but it does look like there may be some bottoming action in the prices right now. But long term, I don't think everything is completely intact. There's -- we're still eating the same amount and the same amount as required and deferral ultimately had to be met with over applications. So big picture here, there's really no shift. There's just so much volatility that I think it's making it difficult for everyone, and particularly farmers to make a call on -- I'm going to really act, but again, main point is that nothing has changed in the big picture. There are -- there is demand growth and there is not enough supply currently being incentivized to meet that demand and story is intact.

[Operator]

Our next question comes from Craig Hutchison from TD Securities.

[Craig Hutchison, TD Securities]

Just on the -- you mentioned that there'll be a couple more payments post the Lithium Royalty Corp. IPO, next you got $9 million in the quarter, and there's a couple more in the next couple of years. Can you just give us a sense of how much cash and kind of shares you're expecting to receive in the next 2 years? And maybe the timing on that, if you have it?

[Brian Dalton, Co-Founder, President, CEO & Director]

I don't have that on the top of my head, to be honest with you. But where you can source that is it's laid out in a schedule in the recent IPO documents that LRC published that sort of released schedule for the share tranches as well as potential additional cash payments is all -- all found -- all to be found right there. Sorry, go ahead.

[Craig Hutchison, TD Securities]

And just on the Silicon Gold Royalty, obviously, great to see the expansion potential there. What's your best sense in terms of potential start-up of production? I know obviously, the pre-feasibility studies come at year-end, but -- and maybe just a sense of where do you think the production starts in terms of those targets based on what AngloGold set in the past?

[Brian Dalton, Co-Founder, President, CEO & Director]

I think the challenging part of that is still trying to get their arms around this animal. It's hard to make a definitive call and say, this is it, we're going to engineering right now and the resource continues to grow at this kind of a pace. And I note that because they've integrated Merlin and Silicon now, they're not talking PFS. They're back to sort of concept study PEA, and I think that's a function of just the fact that Merlin is not at a proper resource category. So there's a limit to how far you can go with studies there. I think the end of '25 is when they're talking about for start-up at the North Bullfrog selling off to the Northeast, but yes, I don't know. I think we'll have to wait until towards the end of the year to get a better handle on wind or actually going to get to the point with delineation drilling and resource modeling to start to ballpark wind when construction and production could start. I mean, having that date push back because the resource continues to grow and the scale of -- the ultimate scale of the operation likely continues to expand is a great reason for delay. It's about the only good reason I can think of for delay in a mining project. It's too early to call. This thing is growing really quickly. It's a monster.

[Craig Hutchison, TD Securities]

Great. One last question maybe for me. Just you mentioned there's the challenge in the market for the exploration development front, which I agree. Are you seeing opportunities for additional royalties there? You mentioned you've got an active portfolio in the Project Generation side. But outside of that, are you seeing opportunities for creating new royalties here in this market environment?

[Brian Dalton, Co-Founder, President, CEO & Director]

Do you mean at the exploration stage or the...

[Craig Hutchison, TD Securities]

Yes, exploration stage -- and further out, if you can collaborate on that.

[Brian Dalton, Co-Founder, President, CEO & Director]

Yes. Look, as far as the exploration stage opportunities go, I mean, we're just basically monitoring everything that's going on out there in exploration land. And anything really catches our eye, we do get in touch and make proposals, usually combined sort of equity early stage royalty type investments there. But I can't really say that there's lots that's on our plate right now. There's a few things that we're watching pretty closely in a few discussions underway, but it's -- maybe as we get into the fall and a lot more exploration results flow starts to happen. And obviously, the longer it goes here with equity markets for juniors sort of being closed, the more opportunity that we're going to see just because one of the few conducts to exploration funding that exists when equity markets close, so we're poised.

[Operator]

Your next question comes from Brian MacArthur from Raymond James.

[Brian MacArthur, Raymond James]

My question has to do with Silicon as well. In the MD&A, you talked about looking at value creation alternatives for that royalty, including a whole partial sale or swap transaction for non-precious metal royalty. I got 3 questions related to that. How do you think about the timing of that given, a, as you mentioned, it's hard to know exactly how big this is; and b, you probably won't get clarity now to mid-2024 in the lawsuit? Second part then is, when you say non-precious metals, would you -- would that include renewables or lithium? Or are those sort of states and then the -- you can't do it, they all have to go through ARR on the renewable side or Lithium Royalty Corp. on the lithium side. And I guess then the final point is, I mean, if this gets as big as you may be saying is or even large enough base metal royalty opportunities out there to effectively redeploy the capital.

[Brian Dalton, Co-Founder, President, CEO & Director]

Yes. I guess the way I'll answer that is just in terms of timing for that kind of a decision. I think [indiscernible] in 2 key factors. The arbitration is obviously very meaningful. There's pretty big delta and total contained ounces, depending on how that goes. And I guess the other big factor that could really impact on valuation, and this is both from our sense of what it's worth and what potential buyers might think it's worth is just what is the ultimate production rate that, to be quite honest, has been probably more impact going forward on value right now than just adding more ounces. It's already huge and going to go for decades, but what production rate will it run at, that will be a real driver.

There are base metal royalties out there that I think can match Silicon in terms of scale and sort of continuing optionality whether anyone is willing to part with those in trade. It's kind of an open question, but we'd certainly be open to that kind of a transaction. I mean, I won't close the door either. I mean, as this thing grows in scale here to just being a holder that's always a possibility.

But from a timing perspective, we're going to want to see the study later this year or maybe it's published in early next year, and then we've got that hearing coming up, the arbitration hearing coming up being in early April. So those are two big factors that are pretty much sort of required prerequisites to us really getting our on what we're going to do with this royalty.

[Operator]

[Operator Instructions]. At this moment, we show no further questions. I would like to hand the call back to our presenters for any final remarks.

[Flora Wood, VP, IR & Sustainability]

Thank you, Hilda, and thank you, everybody, for dialing in and for the questions. And we'll look forward to speaking with you again in Q3.

[Brian Dalton, Co-Founder, President, CEO & Director]

Thank you, everyone. Enjoy your summer.

[Stephanie Hussey, VP, Finance]

Thank you, everybody. Thank you.

[Lawrence Winter, VP, Generative and Technical]

Thank you, everybody.

[Operator]

Ladies and gentlemen, this concludes your conference. Please disconnect your lines.