Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Altius Minerals Q3 2022 Financial Results Conference Call. [Operator Instructions] This call is being recorded on November 10, 2022.

I would now like to turn the conference over to Ms. Flora Wood. Please go ahead.

[Flora Wood, executive]

Thank you, Sergio. Good morning, everyone, and welcome to our Q3 conference call and webcast. Our press release and quarterly filings were released yesterday after the close and are available on our website. This event is being webcast live, and you'll be able to access a replay of the call 2 hours after it finishes along with the presentation slides on the website at altiusminerals.com.

Brian Dalton, CEO; and Ben Lewis, CFO, are both speakers on the call, and then we'll open it up for questions. You'll see the forward-looking statement on Slide 2. That applies to everything we say, both in the formal remarks and during the Q&A.

And with that, I'll turn it over to Ben to take us through the numbers.

[Ben Lewis, executive]

Thank you, Flora. And good morning, everyone. Q3 attributable royalty revenue of $26.2 million, or $0.55 per share, was up 26% year-over-year, whereas year-to-date royalty revenue of $80.3 million, or $1.78 per share, is up 33% from the same period in 2021. With 9-month revenue currently at $80.3 million, we are well on track to exceed 2021's annual revenue of $83.9 million and setting a new record for the corporation.

Q3 adjusted EBITDA of $23.7 million, or $0.50 per share, was up 40% quarter-over-quarter. The Mineral Royalties EBITDA margin increased to 87% for the quarter as fixed costs remained relatively stable against the higher revenues. For the year-to-date period, adjusted EBITDA of $71.7 million is up 46% from its comparable period in 2021.

Q3 adjusted operating cash flow was $25.9 million, up 37% quarter-over-quarter. On a year-to-date basis, adjusted operating cash flow of $56.7 million, net of $7 million in cash taxes paid, is up 69%, again driven by higher revenue margin growth.

We continue to see accelerated revenue ramp-up at ARR through its 50% owned GBR joint venture. Notably, ARR achieved the milestone of first positive cash flow and operating profitability during the quarter. GBR also increased its 2022 annual revenue guidance from USD 6.5 -- sorry, to USD 6.5 million to USD 7 million from the previously indicated USD 4.5 million to USD 5.5 million.

Brian will speak more on the strong progress at ARR, and I'd further encourage you to review its recently published quarterly materials and the investor conference call remarks.

Now to the balance sheet and capital allocation. We successfully deployed $18.2 million during the quarter in new investments in cash flowing and advanced stage royalties as we took advantage of weaker market sentiment conditions. This consisted of $15.9 million to purchase an additional 550,000 shares in Labrador Iron Ore Royalty Corporation, which is a pass-through vehicle for royalties and equity dividends from the IOC iron ore mine.

We also funded $2.3 million in direct royalty acquisitions under our 10% co-participation rights with Lithium Royalty Corporation. ARR also participated for its 50% joint venture share of a new USD 40 million royalty investment in renewable energy developer, Hodson Energy.

The corporation also paid an $0.08 per share dividend during the quarter, which was a 14% increase from the prior quarterly rate. The Board of Directors also declared a Q4 dividend at $0.08 per share, which will be paid to shareholders of record on November 30 with a payment date of December 15.

We also purchased and canceled an additional 158,000 shares under our Normal Course Issuer Bid for a total cost of $2.7 million. We renewed the NCIB this past August, and that will run until August 21, 2023. During the quarter, we also made scheduled debt repayments of $2 million on our term debt.

I'll take a moment to provide a little more color on our current debt level as this is obviously becoming more topical amongst investors given the current interest rate environment. We carry term debt of $42 million and an interest rate on that debt is locked in at 4.3% until it matures in 2025. In addition, we had $82 million in revolving debt, which has a variable interest rate that is currently at approximately 6.3%.

While we don't consider our leverage level to be onerous relative to our total balance sheet, we are obviously monitoring rates closely and may consider shifting our capital allocation priorities towards debt reduction in upcoming periods. This would allow us to avoid higher interest costs and, quite frankly, we'd also avoid any unnecessary distractions relating to debt market volatility and possible increasing restrictiveness amongst lenders generally. This decision will, of course, be weighed on an ongoing basis within the context of managing our liquidity since we also have been finding a more attractive investment environment lately, as evidenced by the recent growth investments I already spoke about. Our current liquidity consists of $23 million in cash at the end of Q3, and we had $93 million in unused revolver. ARR at quarter end had cash liquidity of USD 55 million.

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 royalties continue to perform strongly within the current inflationary environment for sector capital and operating costs. These are pressuring operating level margins and increasing cost curve and incentive price requirements for most commodities.

Top line nature of our royalties as well as the diversity that has been built into our portfolio is serving the business well and our revenue is tracking around 1/3 higher than at this time last year. That said, there were a number of somewhat contrasting signals and developments from within the portfolio. Thankfully, most of these were balanced to the positive.

Starting with electrification-focused metals. 777 has recently wrapped up production, while a sizable new high-grade copper discovery is taking shape at Chapada. [ There our ] maiden resource is expected in Q1 2023 that Lundin Mining has indicated is now being considered within the context of its expansion plans for the operation.

Adventus continues to be on track with its plan to begin construction of Curipamba next year, and this morning announced that it had successfully negotiated an investment stability agreement with the government of Ecuador. Happy to take this opportunity to give our shout out to the whole Adventus team for the head-down progress it is making in chopping down hurdles and muting its naysayers.

LRC had several projects advancing the production as incentivization conditions remained very strong for lithium, representing a bit of a broader sector outlier or perhaps a harbinger, and we also understand that the company has been meeting with good interest levels as it considers its strategic alternatives.

Production is improving at IOC as some previously deferred and much needed sustaining and growth capital is once again being injected into the operation. Quality premiums remain strong, but benchmark iron ore prices have come off as China steel demand has slipped. Champion remains on track for releasing its DR pellet feed study results for Kami in half 1 2023.

Potash prices continue robust, particularly in Canadian dollar terms, although they have consolidated some of the initial steep run-up that came as a result of the Russian and Belarusian supply shock early in the year. That shock also seems to have caused buyers to overstock early, ahead of the [indiscernible] sanction constraints, and then in turn to buy less later in the year, which negatively impacted half 2 sales volumes by our operators. This has caused a bit of market consternation, but it feels a bit foolishly short-term focused to us, to be honest.

Our operators continue to note that the market remains structurally short its overall supply requirements, and they continue to invest in increasing capacity to whatever extent they can muster as the world faces legitimate famine threats now. They also note inventories of potash and many crops to be quite low in certain regions and soil nutrient levels relatively depleted, while strong crop prices continue to provide incentivization for farmers to plant more and try to increase yields going into next year. Medium and long term, we believe that Canadian-based potash production is poised for significant market share growth as geopolitical risk premiums in the major competing regions continue to increase and drive up Canadian-based relative incentivization conditions and advantages.

The end is now in sight for our coal royalties as Capital Power works to complete gas-based repowering at Genesee. We did, however, have a positive news in the form of a Supreme Court of Canada ruling that we believe considerably improves the strength of our de facto expropriation claim against the Alberta and Canadian governments.

Altius Renewable Royalties, through its 50% joint venture interest in GBR, continues to quickly grow in terms of investment deployment and adoption of its royalty financing structure for the renewable sector. It is also benefiting from increasing power prices that contributed to GBR recently increasing its full year revenue guidance and announcing achievement of the milestone of reaching positive cash flow.

Three additional royalty projects currently in construction and a big increase in the size of its development royalty portfolio, which came as a result of an acquisition by Enbridge, one of its investee companies, its embedded growth trajectory looks solid for the foreseeable future.

Importantly, we believe this growth trajectory will more than offset coal revenue declines in the near term. This was one of the key intended outcomes when we originated the business together with the GBR team. Back then, we called Project Lemonade, and it has played out well.

AngloGold's enthusiasm for the Silicon Project seems to be still building with recent public musings by the company suggesting that the potential resource size is continuing to meaningfully expand. It also acquired a large contiguous land package that is located along the southern boundary of the Silicon Project and likely host the extension of the Merlin deposit discovery for which a maiden resource announcement is expected early next year.

Turning now to update our bigger picture cyclical outlook. We've been asked by shareholders over the past few months if we think that the peak of the commodity cycle has now passed. This is a fair question. We mark the cyclical bottom as early 2016, and prices have been mostly higher for the 7 years since, especially if the period of deepest COVID fears can be disregarded.

Now, of course, there is concern around recession and what these might do to near-term supply-demand imbalances. It's a reasonable question indeed. Our argument against the cycle having peaked, however, is a fairly simple one. Our take of history says that a commodity cycle rolls over following a period of price incentivized supply growth. If we look at copper as a proxy, it is now more than 10 years and counting since the sector meaningfully invested in either replenishment or growth. We almost got there late last year in terms of incentivization conditions. But since then, a combination of lower prices and increasing CapEx and operating costs have actually pushed the bar higher. We think current short-term sentiment is deeply disconnected from fundamental long-term reality. This is making us feel even more generally bullish about our various forms of long-term positioning and optionality.

That comment will no doubt invite the question of whether or not our investment appetite has shifted any, despite our belief that we remain in broader procyclical conditions. The answer is, yes, somewhat. While this is not a cyclical downturn characterized by looming oversupply pressures and distressed balance sheets, [indiscernible] during 2013-2016 period, operating margins have deteriorated quickly and competing sources of capital are acting gun shy.

We note that in past such intra-cyclical windows, examples being global financial crisis, trade wars, and the pandemic panic period, the market, in particular, offered up select opportunities to position in royalty-based equities at less than our view of the long-term value of the underlying royalties. So, yes, we are running sharp pencils again these days and making some investments. Thus far, we have added to our ownership in Labrador Iron Ore Royalty Corporation for direct -- indirect royalty exposure to the IOC mines and co-participated alongside LRC in direct royalty purchases. We are also looking at other select situations where we think the market is mispricing assets by dwelling on short-term noise and underweighting long-term fundamental values. Fingers crossed for things to stay gloomy for a while. By that, most of you know we mean more attractive. Either way it goes over the coming periods, we like our position.

And that concludes my remarks. Are there any questions? Thank you.

[Operator]

[Operator Instructions] First question comes from Craig Hutchison from TD Securities.

[Craig Hutchison, analyst]

Brian, you touched on your remarks, we've seen, obviously, a tremendous amount of inflationary pressure and that squeezed the margins of a number of producers. In some cases, balance sheets have actually deteriorated quite a bit, which creates an opportunity for you guys. Are you seeing larger opportunities right now? Or is it more smaller size in terms of new royalties? And I guess maybe how do you guys weigh those opportunities versus, like Ben's comments, that your shift to capital allocation is towards debt reduction over the near term?

[Brian Dalton, executive]

Yes, Craig, I'd say we've been dipping our toe certainly and what we've been finding so far is situations where public markets are knocking down prices relative to our views of valuations. It doesn't feel yet like it's gotten to, say, more private or direct negotiation type valuations and there's still, I think, underlying long-term views around asset values amongst those that hold and some -- here I'm talking about more direct royalty purchase opportunities.

That doesn't feel that distressed at this point. And again, the difference between here and, say, 2014 to 2016, yes, there's margin compression and balance sheet deterioration. But you got to remember back then there was balance sheet decimation underway. So, generally speaking, there's a better balance sheet out there. But maybe it gets deeper. I hope it does. But for now, we're just taking advantage of the more public markets-based dislocations that we're seeing, but we're ready for whatever.

[Craig Hutchison, analyst]

Okay, great. And just with respect to silicon, you guys had mentioned in the past the potential to -- potentially monetize that or do a swap for a base metal royalty. I know that they're coming up with prefeasibility study early next year. Any further thoughts on that? Is the timing more post the prefeasibility study, or could it be something we could see before that?

[Brian Dalton, executive]

There's certainly lots of interest in the silicon royalty. Obviously, world-class gold discovery, particularly in Nevada, that have royalties on them don't come along every day. But I think your comment is probably right. It feels like we're going to be looking at -- there's some big events early in the year. You've got the pre-fees on the silicon deposits. There may even be some resource uptake from there and maiden resources to come from Merlin. So we're pretty close now to some fairly big updates. So we'll see how that plays out and then [indiscernible].

[Operator]

Your next question comes from Brian MacArthur from Raymond James.

[Brian MacArthur, analyst]

My question relates to the potash business. Can you just remind us when you get paid on the royalty? Is it based on sales versus production, or is it when it's actually shipped? And the reason I go into this because obviously you mentioned pricing is rolling over a little bit but still strong, but volumes are being rebalanced as we defer stuff. So I'm just trying to get a feel for the volumes that are going to flow through your business over the next couple of quarters.

[Brian Dalton, executive]

The royalties are based on FOB Saskatchewan. Little more production, I'd say, than sales because you got that lag from obviously from Saskatchewan to wherever the product ends up. And that explains some of the pricing gaps we saw on the rising market. And we'll set it in both directions, obviously. But you got that typically just look at that one quarter gap if you're trying to figure out. Typically, this shifts around a little bit. That statement is probably most true when the bulk of sales are Midwest pricing basis. The more you get into sales into Asia or Brazil where you get into more contracted prices that can alter. But as a very, very rough rule of thumb, if you look at for average pricing for the quarter, previously, you'd have a pretty good clue as to what we're going to receive and report in the following quarter.

[Brian MacArthur, analyst]

Okay. Great. And my second question has to do with the coal, and I'm not sure what you can say about it. What actually happens next? Are there any time data points on this as you -- I guess I'm not a lawyer, but reinstate your appeal or however I should word it?

[Brian Dalton, executive]

Yes. So we had the original negative ruling which dismissed our claim which we appealed, and the dismissal was upheld on repeal -- or up on appeal with specific reasoning being that under that court's interpretation of the law and the whole case law that we couldn't make the case that there'd been an actual taking. So the Supreme Court decision that came out recently clarified that point as to what constituted a taking and it's basically what it said is that, look, if government is gaining an advantage that's effectively -- that meets that part of the test as far as taking goes.

So, yes, we are -- we've appealed that latest dismissal. And obviously, with this new Supreme Court case law, we're feeling pretty optimistic that we'll have that turned over. I don't know, Flora, if you've got a better handle on timing for when that next appeal might get heard.

[Flora Wood, executive]

I don't yet, but I'll follow that up with our lawyers, and then I'll be able to answer that, Brian.

[Brian Dalton, executive]

Sounds good. Yes. No, I don't know specifically when that -- I don't think a date has been set, put it that way.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Flora Wood, executive]

Sergio, I just -- maybe give it one more minute because I know we're sandwiched in between other calls, and I know at least one party who's trying to get in. So if we just give it another 30 seconds or so.

[Operator]

Yes, sure. We have one another question from Orest Wowkodaw from Scotiabank.

[Orest Wowkodaw, analyst]

My question revolves more around strategy. We saw another M&A transaction this morning, this one on the royalty space, on the precious side. I'm just wondering where -- how you think about that philosophically and whether scaling up in this market makes strategic sense.

[Brian Dalton, executive]

We don't view scaling up for the sake of it to do much. Really, if you're talking -- we've done lots of M&A in our history. And obviously, we like it better in countercyclical-type conditions. Look, really what it boils down to is, does the M&A add value, and is it dilutive not just to short-term metrics, but more importantly, to quality. And for us, I think, increasingly, it's a hurdle around -- hurdles around just how much embedded optionality we feel we have right now.

When you do a transaction like that, yes, you're taking on assets, but you're also diluting your own. And yes, again, as a growth strategy, sure, there are situation we've used them in the past, and we wouldn't be shy about doing it again. But right now, I think we just like what's building organically within the company, and we also like these more smaller add-on opportunistic pieces. So we're not in that camp of, oh, we've got to scale up, we've got to scale up, we've got to scale up to be relevant at any cost. We're not going to dilute what's in this business now and what we think is going to emerge from it naturally for the sake of that. I think that's a fool's game.

[Orest Wowkodaw, analyst]

And maybe just as a follow-up. In the quarter, you further increased your ownership in [ LIORC ]. Should we think about -- I'm just trying to think about the comments earlier about potentially looking to delever the balance sheet just given the context of what's happening, with interest rates in the debt markets. Should we think about your stake in [ LIORC ] as basically a funding option to accelerate that kind of deleveraging?

[Brian Dalton, executive]

For that holding specifically, I would say no. We look at that incremental acquisition as being long term and not just -- it's not a trading position where we do -- look, if we really felt the need to do coming dramatic with our balance sheet, it's always available to us. We've always viewed that LIORC holding as being that. But intrinsically, it is a long-term holding position for us. You'll recall that back in 2020, when COVID fears were at their most and none of us really knew if any mine was going to be operating, and I think it came right on the heels of us having made pretty significant investment in ARR, so we were fairly constrained. We actually made the choice then to sell some Labrador and put more cash on our balance sheet. It wasn't a pleasant decision but in the interest of keeping our balance sheet fortress-like, if you will, we made that decision.

So the option is always there, but again, the new stock or the new shares we've added in Labrador are meant to be a long-term hold. The comment earlier about deleveraging of the balance sheet is we've -- it's just a noisier environment to be in debt right now and it's increasing investor questions. So, obviously, as we always continue to look at what our capital allocation priority should be, I would say that debt reduction going forward has moved up on the list just because it's noisy and distracting these days. But we're not in a situation where, say, 2020, where we've got to protect our assets here from debt on our balance sheet. It's nothing like that.

[Operator]

[Operator Instructions] Ms. Wood, there are no further questions at this time. You may proceed.

[Flora Wood, executive]

Thank you, Sergio, and thank you, everybody, for listening to the call. I know it's a busy morning today, and we'll look forward to speaking to you again at year-end.

[Brian Dalton, executive]

Thanks, everybody.

[Ben Lewis, executive]

Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.