Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Altius Minerals Corp. Q3 2019 Financial Results Call. [Operator Instructions] I would now like to hand your conference over to your speaker today, Flora Wood, Director of Investor Relations. Please go ahead, madam.

[Flora Wood, Director of Investor Relations]

Thank you, Marcella. Good morning, everyone, and welcome to our Q3 conference call. Our press release and quarterly filings were done yesterday after the close and are available on our website. You'll also see on the homepage a letter to shareholders. We're webcasting this event live, and you'll be able to access a replay of the call along with the presentation slides on the webcast and on our website at www.altiusminerals.com. In the room this morning, we've got Brian Dalton, CEO; and Ben Lewis, CFO, who will both be speakers on the call and active in the Q&A session following. Getting started, the forward-looking statement is on Slide 2. It applies to everything we say, both in our remarks and during the Q&A. And with that, I'll turn it over to Ben to take us through the numbers.

[Ben Lewis, Chief Financial Officer]

Thank you, Flora, and good morning, everyone. Our quarterly revenue of $19.2 million or $0.45 per share compares to $19.5 million or $0.46 per share in Q2. On a 9-month basis, revenue was up 23% from $49.4 million to $60.6 million or in per share numbers, $1.14 to $1.42 per share. This once again demonstrates the benefits of holding a diversified royalty portfolio. As for our base metals, prices are down on a year-to-date basis. This was offset by higher potash prices and volumes. Iron ore revenue was also up strongly as a result of higher iron ore prices and a larger share position in Labrador Iron Ore Royalty Corporation or LIORC, which has also resumed adherence to a more fulsome dividend payout policy. Adjusted EBITDA up $15.2 million or $0.36 per share compares to $16.3 million or $0.38 per share in Q2. EBITDA margins fluctuate with the relative weighting of Chapada sales, which comes with a 30% cost of sales to purchase copper under the streaming agreement with Lundin Mining. In the third quarter, Chapada's contribution was much larger than the previous quarter on the timing of some Q2 production settling in the third quarter. On a 9-month basis, the EBITDA margin is 81% compared to 80% last year. G&A for the current quarter of $2.2 million is up slightly from Q2 and the year-ago period, both of which were $1.9 million. This reflects the fact that we've added a renewable energy royalty team to the Altius Group, starting early in the current fiscal year. Altius Renewables D&A is around $400,000 per quarter, which means that excepting for this growth initiative, G&A costs across the rest of the traditional business have come down. As we will speak to later, we expect the Renewables business to become self-sustaining very soon as the business is growing faster than expected. We also make the point in our MD&A this quarter that our Project Generation or PG business represents about 1/3 of our G&A expenses. But to clearly evaluate the PG business, you have to factor in the cash proceeds from the sales of equities and their associated gains, which do not go through the income statement as revenue. These gains go through the statement of comprehensive income. So far this year, realized gains from the equity portfolio of the PG business stand at $10.8 million on net proceeds of $16.2 million. Net unadjusted earnings were $0.10 per share in the current quarter. This compares to adjusted earnings per share of $0.15 last quarter. Net earnings this quarter were impacted by higher coal depreciation charges and a higher tax expense in the -- than in the prior quarter, which reflected a tax recovery as a result of a change in rates in Alberta. We ended the quarter with $32 million in cash and cash equivalents, [ $145.5 billion ] in market value of mining and other investments comprised of the remaining junior equity portfolio holdings and the Labrador Iron Ore Royalty Corporation's shares. You can find our Project Generation portfolio listing on our website. Uses of cash in the quarter were primarily debt repayment, common share dividends and preferred security distributions of $2.1 million and $1.3 million, respectively. And $1.8 million invested under our normal course issuer bid to repurchase and cancel 154,200 shares. Since the quarter end, we've repurchased and canceled roughly another 100,000 shares. Total debt at quarter end was $115 million, which has come down steadily since the beginning of the year as we used $11 million in free cash flow to make a voluntary debt repayment in addition to our scheduled $20 million per year in term debt repayments. We've also invested free cash flow to initiate our renewable energy royalties business. As many of you know, in the first quarter this year, we acquired a private company that has become our 4-person Altius Renewables royalty team, and they are making great progress. Our first major renewable royalty has been created with more insight, and we continue to advance negotiations to partner with additional developers and operators. Our objective of replacing thermal coal revenues with renewable royalty revenues is well underway and in fact, now starting to look like a minimum realizable objective. Those are my opening comments and I'll be happy to take questions later. I'll now turn it over to Brian.

[Brian Francis Dalton, Co]

Thank you, Ben, and thank you all for joining us this morning. Today from my remarks, I'm going to take a different tact than usual by ignoring the minutiae of the quarter-over-quarter stocks in favor of discussing where I think we are in the bigger, longer-term picture. A little forest through the tree, to adopt the cliché. This is not to suggest there is anything in our quarter that I want to avoid. Quite the contrary, and as Ben described, it was an excellent one in which the diversity of our assets and commodity mix kept us on our steady course. It is instead to say that there's little we can do to manage quarterly royalty fluctuations, but everything to do in managing the business over longer time frames that capture full commodity cycles and even generations. To set this up properly, let's first look back. During the past mining upcycle from say, 2002 to 2011, Altius made a lot of money through its PG or exploration business. And it decided that it will use it to build a complementary, diversified mining royalty business. When commodity prices eventually collapsed through the mid-2010s, we put the money to work and bought 15 paying mine royalties. Our revenues have since grown by more than 20x from a few million to what should be well over $70 million this year. This was largely just a matter of letting the cycle work for us in terms of its irrationally discounting asset values for a window of time and of being long cash and liquidity when it happened, while all other competing capital sources evaporated. We believed and continue to believe that the mining sector, while often regarded as a zero-sum game, is actually ideal for contrarian cyclical investments. There was more to the strategy than just being countercyclical, however, and this is the part that goes to the long-term positioning that I want to focus us on today. When buying or creating royalties, there are 2 key criteria we look for. The first is an inordinately large underlying resource because there's probably no better predictor of a future brownfield capacity expansion or life extension at a mine than this factor. For a royalty holder with no share of capital investment, but full benefits accrual, this is about the best thing that can happen to you. This is what can make royalty investing a free growth, annuity-type proposition rather than just serving as a proxy for commodity price swings while continuously having to replace expiring assets. The second is strong implied margin curve positioning relative to sector competitors. The importance here is obvious when a gloomy commodity price environment exists because the worst thing that can happen to a royalty holder is that the underlying mine shuts down. As top line royalty holders, we can't lose money alongside an operator but we can go to 0. Strong relative margins mitigate this risk and also serve as the second best predictor of future brownfields investments at a mine, taking us back to that best thing that can happen to a royalty holder. Through the table in our letter to shareholders and our presentation today that shows how we are feeling the benefits of our strategy already. On average, our assets have an estimated combined revenue history and analyst consensus net present value that is almost 1.5x higher than the original purchase price, with most of these acquired within the past 5 years. This positive differential is even after factoring the still uncompensated government expropriation of the tail end of our coal royalty life at Genesee, related to which its lawsuit is underway. Excluding coal, the difference relative to purchase price is 1.9x. The most dramatic example of the long-term strategy working to plan is, not surprisingly, related to our potash royalties, which are the best assets in the portfolio in terms of the combination of remaining resource life and operating margin. On a typical quarterly call, I talk about the rainy North American spring and how it hurt planting and potash consumption and how agricultural inventories will need to be replenished next year and cause extra consumption. But this quarter, I simply want to point out that this is actually pretty irrelevant stuff. Potash consumption trends are going up in accordance with population growth and resulting requirements for increased farming intensity. Our operators in Saskatchewan are ramping up production volumes after pre-investing $9 billion in expansions from their ultra-long life, best-in-the-world mines. This is translating into higher royalties and value accretion for Altius shareholders for no incremental cost. The operators are also already looking out and talking about the next possible phase of growth investments. We therefore expect the long-term trend of these royalties steadily growing in value, irrespective of droughts, floods and countless other gyrations along the way, continuing for generations to come. It doesn't stop with potash either. Vale is currently spending $1.7 billion to build a new mine at Voisey's Bay and there will almost certainly be other mines built there in the future. Our royalty lands cover the entire district. Chapada total resources have grown steadily since we bought it in early 2016, and now Lundin Mining has entered with a clearly stated objective of future growth and expansion and the balance sheet with which to do it. We believe from the outset that Chapada represents an entire mining district rather than just a mine, and so we are looking forward with great anticipation to Lundin unlocking its full potential. Our stream agreement, once again, encompasses the entire district. Gunnison assumes that it will deliver first copper production and they ramp-up while 777 Mine's down. This one is particularly gratifying because it will mark the first paying royalty to come from our Project Generation business and will do so with an effective negative cost base after considering equity capital gains associated with the operator.I firmly believe that in 10 or 20 years when we look back on 2019, that it won't be heavy spring rains or Trump picking a preelection trade fight with China that we will recount this having mattered much, if at all. What we will remember is that it was the time when climate change concerns went mainstream and that the world decided to decarbonize ground transportation and power generation, all with firm capitalist rationale backing it. In hindsight, it will be seen as the dawn of the renewable energy generation and electrification era and will be cited at the point at which demand for all of the metals required for these prepared for takeoff. From an Altius perspective, the lookback will reflect on how many of its seedlings have taken root in alignment with these trends. I touched on thermal coal earlier and how it stands as the one acquisition category that has not appreciated for us. There is, of course, the possibility of the lawsuit making us hold, but there's also another far more proactive course being set to solve this challenge. Our initiative to reinvest the remainder of our phasing-out coal royalty revenues into the royalty financing and renewable energy projects is moving faster and with more apparent runway than expected. Our first large-scale renewable energy royalty was created a few weeks ago when the 360-megawatt Canyon Wind project was sold by our partner, Tri-Global Energy, onto a developer operator. We'll remember that 2019 milestone for sure. With several other agreements in various stages of negotiation, we are also beginning to consider whether the scale of the opportunity, combined with some other cost of capital arguments, make this business better suited to be spun out as the first utility-scale, pure-play renewable energy royalty company. More on this in future reports for sure and we welcome shareholder feedback in the meantime. Well, that's enough for me. Happy now to take questions regarding either the forest or the trees. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Craig Hutchison from TD Bank.

[Craig Hutchison, Research Analyst]

You mentioned you -- obviously, you've got the sale of the Canyon Wind project this quarter. Can you just give us a sense of the timing when you guys received first kind of payment from that project and maybe just kind of like a kind of scale in terms of the revenue you're looking for that project? I assume it's somewhere in the range of about $1 million, but let's get some clarity on that.

[Brian Francis Dalton, Co]

I don't know if I have all those numbers right in front of me. But the stage that the project is at right now is that the new buyer is completing the project finance package for it. That should be done in the first quarter. And these typically then would have been somewhere between as little as 12, as much as 24-month construction time frame. So certainly within 2 years, the first of the revenues from that will come in. And then there's other projects that look like they're going to sell right behind it. So once it starts, this should be a steady flow. From that in particular, Ben, you've got to guess that what revenue for 360-megawatt generates?

[Ben Lewis, Chief Financial Officer]

My guess, and I can check it, is about USD 1 million per year.

[Craig Hutchison, Research Analyst]

Okay. And then just in terms of the spinout of the renewable business you guys mentioned earlier. Just curious to know what kind of scale you guys feel like you need to get to in terms of either revenue or kind of projects contracted to really start to think more seriously about that?

[Brian Francis Dalton, Co]

Yes. Again, when this objective began, the idea was to try to replace the coal royalty revenue, which was roughly, whatever, $12 million, $13 million a year. So in real rough numbers, at the kinds of returns we're looking at now, we felt that we would be over the fullness of time and trying to invest somewhere in the $100 million range to meet that objective. And as we've kind of alluded to, we think that, that number can be much larger but it's also the crossover number in my mind that, after which we hit that threshold, that this is probably better suited to be its own business. So think in terms of around $100 million invested. And it becomes too big, really, I think, to be just a portfolio component of all these.

[Craig Hutchison, Research Analyst]

Are you guys starting to see international opportunities outside the U.S. at this point in that business?

[Brian Francis Dalton, Co]

We're certainly looking at the rest of the world. But I mean, we're very focused on using the U.S. as the primary testing ground for creating renewable royalty. This is not an entity or a structure that existed 18 months ago in the world. So we're working with the operators, and we're really just trying to fine-tune, make sure this really works for us, for the counterparties. And also, we note that the U.S. market for renewables is probably the most sophisticated in the world, so we can make it work there. We believe we can then start to take it out to other places. I am taking -- going over, with some of the team. We're going to go on a Fairfax-sponsored trip to India early in the new year. And that is very specifically trying to understand the jurisdiction and also at least get a first look at what kinds of opportunities might exist there. So yes, broadly speaking, I think this is an international opportunity. Renewable energy is not a U.S. phenomenon. It's truly global. And so we're looking that far out, but we want to get it -- that the offering very right in the most sophisticated market that exists for the -- financing these things. We'll start there and then we'll worry about the next steps.

[Operator]

Your next question comes from the line of Jackson (sic) [ Jacques ] Wortman from Laurentian Bank.

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

Good quarter. Could you just speak to or guide towards what you think the thermal coal profile might look like over the next 10 years? I know that Cardinal River has got 1 more year, I guess, 2020. But what do the rest of the mines look like? Do they trend lower over time or should we expect them to kind of sustain the production levels we've seen in the past? I'm just trying to get a better sense of how this kind of tails out.

[Brian Francis Dalton, Co]

Yes, there are -- when we bought those originally, there was a schedule for their closure. It was a regulatory-based schedule that was really a look outwards from the original commissioning date. So with the exception of Genesee, all of the other coal royalties were scheduled to wind down through this decade. Do you have the numbers on the top of your head, Ben, on what -- which years the actual other non-Genesee royalties close at?

[Ben Lewis, Chief Financial Officer]

Yes. Well, Genesee, obviously, is to 2030 now. Sheerness, based on the current mine plan that we have, was 2025. And there was upside, but we were not making any assumptions on -- because one of the power plants could technically stay running until 2030. Paintearth tapers off as fairly small and Highvale is a very -- we're a very small piece of a very large operation, so it's difficult to tell on that one. But it's relatively small. So I don't know if that helps, Jacques.

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

It helps in terms of the time line. I just want to get a sense -- do you think those production levels, as they have been, will be sustainable to the end of the mine life or do they kind of taper down?

[Brian Francis Dalton, Co]

Well, that's a really hard one to call. I mean, notionally, the idea is there's really not much of a rampdown, it would be kind of an event. But some of these plants are also building in the optionality to burn gas instead of coal. So depending on when those investments are made and what the relative fuel cost looks like, we could start to see some pressure from competing gas being burnt rather than coal in some of these plants. The messaging we're getting out of the operators right now, it's hard to read through. The only thing that seems clear is that they're fairly adamant about maintaining the optionality to use whichever fuel type at the time, as long as they're allowed from a regulatory point of view. They just want to have that optionality. And I think it is telling though that even at current, very depressed coal -- gas prices, coal is still cheaper. Again, I can't tell you the answer. We don't have the schedule. I don't even think the operators know the answer to that. So we're going with the hard cut-offs. And we're not sitting on our hands with the renewal and renewables investments either. We're pre-investing there to be ready for that. We'd certainly expect to have that ramped up faster than any anticipated other rampdowns.

[Operator]

Your next question comes from the line of [ Zach Martin ] from Retail Investor.

[Unknown Analyst]

I just was wondering if you guys could add any color or talk about if there's any interest in any of the nickel exploration projects Altius currently has in their portfolio.

[Brian Francis Dalton, Co]

Yes, for sure. Great pickup, actually. So at the end of 2016 when the market bottom hit, we had -- we had built up a really big project inventory, and we had set an objective for ourselves to deal out that portfolio as early in the upcycle as we possibly could to give these stories as much gestation time, if you will, through the cycle that was ahead. The one exception that we took there was that we essentially held back on the portfolio of nickel projects and assets. That condition of waiting is over for us, so that's actually a really active file in the PG group now. There are several parallel lines of discussion underway about seeing that portfolio basically get converted out into equity and royalty. So I can't give you an exact time line but very active file, next big objective in PG, get the nickel portfolio [ marking ] for us.

[Operator]

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

[Carey MacRury, Analyst of Metals and Mining]

So a question on the renewables. You talked about, obviously, the opportunity could be bigger than you originally anticipated and you've got some discussions there. I'm just wondering, is that something you think you can add to this year or is that a little further out?

[Brian Francis Dalton, Co]

This year.

[Carey MacRury, Analyst of Metals and Mining]

Okay, that's great. And then maybe on the potash business. Nutrien is idling a few -- 3 plants. I don't believe that affects Rocanville. So I'm just wondering, do you have any visibility on -- or sort of what are your expectations on potash as it relates to LTFs.

[Brian Francis Dalton, Co]

I think in -- take a decade or a little longer horizon, the value of those royalties will be worth more than the market cap of the company. The short term, really what happened this year is that there was a poor planning season. Potash couldn't get deployed, couldn't get put on the ground, inventories built up and accordingly, the operators are idling production a little bit in the fourth quarter just to get things -- get their inventory levels back in balance. But the offset to that is that the poor planning season has caused prices for most of the crops to shoot up and inventories for food have come down. So if you look at the commentary from the operators, they anticipate a really, really strong planting season next year, because we all need to eat. And so what's lost this year, I think comes back to us next year with an abnormally high production year. But again, on the longer-term outlook here, this is just -- that business is basically -- or that industry is basically just chugging along at its, whatever, 3%, 4% compound growth. And the operations that we have royalties on are so well-positioned, they've already put down the capital to grow out capacities. They have excellent margin positions. So nobody is in a better position to grow into that demand increase and possibly even to take market share. Again, it's one of those short-term versus long-term things. Maybe next year, there's a drought, and there will be -- we'll be talking about all this again. But at the end of the day, we're going to eat and that potash is going to get put on the ground somewhere.

[Carey MacRury, Analyst of Metals and Mining]

I guess, what I was referring to is that the plants that are going down, you don't have royalties or those are relatively small royalties for you. So I'm assuming you have [ additional ] volume. Rocanville is probably still flying ahead at full speed. Just wondering if you're seeing any evidence of that.

[Brian Francis Dalton, Co]

Yes, for sure. When you look at Nutrien, Nutrien has come out and said that the bulk of their curtailment that they'll do will be landing in Vanscoy and...

[Flora Wood, Director of Investor Relations]

Allan.

[Brian Francis Dalton, Co]

Allan. And if you look at our royalty revenue by mine, you see that those are actually pretty small ones in our structure. So we're in the really fortunate position that the higher royalty exposures are related to the lower-cost mines. And so whenever there's curtailment, obviously, the higher levels of -- or the higher-cost operations go down disproportionately. So our expected potash production exposure is not going to go down in direct line with the amount that Nutrien reduces production. That's the bottom line. Or there's just going to be a much more muted effect at the royalty level. And in fact, if price becomes part of the driver, what you see is that volumes don't just come off of the higher cost operations, but they actually go up at the lower cost operations. So we even get a benefit sometimes because prices go down. We're really, really nicely positioned there, but you're right. That's a key point here is that the royalties or the mines that we have low royalty exposure to are the ones that are being mainly impacted.

[Carey MacRury, Analyst of Metals and Mining]

Right, and then the -- on Iron Ore -- sorry, go ahead.

[Ben Lewis, Chief Financial Officer]

Yes, I can -- this is Ben, Carey. I can add a little bit to it. We haven't seen any change yet. And if we -- if they do everything they say they're going to do without any of the positive impacts Brian talked about, it's a couple of hundred thousand. It's pretty muted on our revenue line.

[Carey MacRury, Analyst of Metals and Mining]

Right. Then maybe on iron ore. Iron ore has come off pretty hard in the last while. I'm just wondering, A, what your thoughts are on iron ore right now? And is that an area you think you could add to, just given the downturn?

[Brian Francis Dalton, Co]

I had a chat the other day, just a friendly chat with Michael O'Keeffe over at Champion, and we both noted that if you told us 18 months ago that we'd be looking at $90-plus, 65-plus iron ore that we'd have been dancing in the streets. That's exactly what we're at. So yes, it has come down, but from exceptional short-term highs. There's a few pretty neat things, I guess, that happened during the quarter with regards to IOC and iron ore that we're watching. One is that they've decided to not be sellers of the asset. And I think that's important for us because it removes a big uncertainty around what a new owner might have done with regards to capital investment, those sorts of things and what that could have done for the dividend. But maybe more importantly is the fact that Rio Australia operations are having to sell a portion of their production these days at below -- there's a portion of our production that's below-average spec and they're getting a heavy discount for it. And so they've now started to openly talk about using IOC, and it's super high-grade and high-quality production at the blend stock to improve the quality of the sales price for some of that off-spec stuff in Australia. So I think that's really -- I think that's a really big thing. I think that is a true proving of a thesis for us, that high-quality assets are becoming more important as the overall increment of global production quality deteriorates. So there's trends within trends. I think that one for us is far more important than what the benchmark price is doing in the short term. I think it's place in the world is only becoming more enshrined and yes, we're pretty bullish on it. Is it a buying opportunity? Let me put it this way. On an annualized basis, right now, we're running at -- I think our cost base is somewhere around $18. So we're running an after-tax yield on that investment right now well north of 20%. So if you think $90, 62% or 65% iron ore is a reasonable price or anything even close to it, it looks like a pretty attractive buy. But for us, we are well-exposed. We do have a nice-sized position. And just in terms of -- we can't do everything, so our investment focus today is on growing up the renewables business as fast as we can and doing things like buying back shares. So if we were flush with excess cash all over the place, I wouldn't hesitate to add more to our holdings. But we're well-positioned. We bought at a really good time, and it's working out really nicely for us. So that might have been a bit of an opaque answer, Carey, I'm sorry. I would buy it if we had loads of cash to throw around right now.

[Operator]

[Operator Instructions] Your next question comes from the line of John Tumazos from John Tumazos.

[John Charles Tumazos, President and Chief Executive Officer]

This is John Tumazos. Thank you for your Project Generation update released last month. Are any of those projects looking like they might produce and have revenue in the next 5 years? And could you just review the market value of your ownership in each of those stocks and royalty participations?

[Brian Francis Dalton, Co]

I might need a little bit of help on that from the team here. So I'll talk randomly for a second while somebody puts the right numbers in front of me. I think there are several mines within that portfolio, to be honest with you. And that's obviously a very forward-looking, speculative statement. But we -- what I like about what's going on in that portfolio is that there is a crazy amount of money being spent in drilling occurring, all at no cost to us. There is a flood of big strategic mining companies that are coming in and investing in the companies behind us. So those are both really bullish indicators. I mean, if I had the handicap which of the projects would become mines, I mean, I guess, the easy way is to just look at the ones that have had recent..

[John Charles Tumazos, President and Chief Executive Officer]

Excelsior is almost built.

[Brian Francis Dalton, Co]

Excelsior is built, so that's the first one out the door. I mean, Adventus on Curipamba had an excellent PFS result earlier this year and loads of upside sitting there in terms of explorations. Sigma's project, the lithium project in Argentina, that's really coming along. PEA numbers quite good and great partners coming in -- strategic partners coming on and to fund things there. Allegiance in British Columbia brought on another big strategic partner. Again, it's really -- you know yourself, it's hard to pick these things, but it's nice to see these very sophisticated investors coming in and backing these stories and endorsing what -- the work that these juniors are doing and then just lending strength and credibility to the efforts going forward. There's another one as well that we're -- it's hard to get any information on. But if the rumors are true, it's a real winner. And that's the Silicon Project of Renaissance in Nevada, the Anglo American or Anglo Gold has joint ventured. Again, hard to get accurate information, it's not flowing openly out of Anglo -- as much as we would like at this point. But again, on the ground, there does seem to be some really good signs there. So -- and you know what, it will probably be one I haven't thought about here. That'll be the next one, right? Nature of the beast. On our ownership levels. I pointed to the website, I guess, because we do actually publish a table quarterly that reflects any adjustments that we made to various holdings and tells you if we own meaningful positions.

[Operator]

There are no further questions at this time. I turn the call back over to the presenters.

[Flora Wood, Director of Investor Relations]

Thank you, Marcella, and I'd like to thank everybody for dialing in and for the great questions, and we look forward to speaking to you when we have our year-end results.

[Brian Francis Dalton, Co]

Thanks, everyone.

[Operator]

This concludes today's conference call. You may now disconnect.