Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is James, and I will be your conference operator today.At this time, I'd like to welcome everyone to the Altius Q4 Year-End 2018 Financial Results Call. [Operator Instructions]I'd now like to turn the call over to the Director of IR, Flora Wood. Please go ahead

[Flora Wood, Director of Investor Relations]

Thank you, James. Good morning, everyone, and welcome to our Q4 conference call. A press release and annual filings were done 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 call along with the presentation slides on the webcast, which is on our website at www.altiusminerals.com.Brian Dalton, CEO; and Ben Lewis, CFO, will both be speaking on the call. And we'll then open it up for questions. We also have Lawrence Winter, VP Exploration, here for any questions you've got on PG. Getting started, the forward-looking statements is on Slide 2 and applies to everything we say, both in our formal remarks and during the Q&A. And with that, I'd like to turn over to Ben to take us through the numbers.

[Ben Lewis, Chief Financial Officer]

Thank you, Flora, and good morning, everyone. Altius generated $17.6 million in royalty revenue during the quarter compared to $17.1 million in Q3. Q4 was our strongest quarter this year for revenue and came close to the record quarter ended October 31, 2017, when royalty revenue was $17.9 million on higher Labrador Iron Ore Royalty Corp dividends or LIORC and higher Chapada revenue. EBITDA for the quarter came in at $13.4 million compared to Q3 at $13.9 million. The loss per share of $0.29 for the quarter, and earnings per share of $0.03 for the full year, include noncash impairment charges of $14.3 million, relating to the write-down of a nonproducing royalty and goodwill. This amount also includes our share of a write-down of $3.5 million relating to the Genesee Royalty Limited Partnership's amended royalty calculation.The fourth quarter earnings also included a $4.1 million unrealized loss on the fair value adjustment of derivatives. We have a slide in our presentation showing the waterfall for the full year reported earnings and the after-tax impact for noncash items on a per share basis.If we normalize for these items, our EPS for the year would've been $0.39 per share compared to $0.42 last year. Normalized EPS for the fourth quarter would've been $0.09.We ended the quarter with $28.4 million in cash and cash equivalents after spending $5 million to exercise the option to increase our Gunnison gross revenue royalty to 1.625%. Excelsior has commenced construction at the Institute copper leaching operation and expects production later in 2019.We also invested another $1.8 million in share repurchases in Q4 under our normal course issuer bid. Other uses of cash during the quarter included a scheduled $5 million payment on our term debt and $1.3 million preferred share distribution as well as a regular quarterly cash dividend of $0.04 per share.Total cash and market investments at the end of Q4 were approximately $153 million, with undrawn revolver capacity of $100 million, that's the quarter. Now I'll step back and talk about a few accomplishments during the year, which will deliver our long-term benefits.Earlier in the year, we increased our Potash Royalty exposure with the addition of additional partnership units from Liberty, which proved to be very well timed. At the same time, we also refinanced our debt at the end of the second quarter, which resulted in lower interest costs, better covenants and a new term out to June 2023. We entered into a swap to lock in the interest rate on $100 million of net debt on what was originally $125 million facility. The fixed interest rate is now approximately 5.45% and the interest rate on the balance is floating.Our position in LIORC grew from under 5% of their shares issued and outstanding at the beginning of 2018 to approximately 6.3% today. For all of 2018, distributions to us, which we treat as indirect iron ore royalty revenue, amounted to $5.9 million. The first quarter dividend, which the LIORC board declared March 7 of $1.5 per share will to give us approximately $4.2 million or close to 70% of last year's full year iron ore revenue.We increased our debt position by a net amount of $20 million since the year end. As noted previously, we continued to increase our LIORC position to 6.3% or a little over 4 million shares as of today. After year-end, we also acquired a 2% GSR on the Curipamba high grade copper-zinc deposit in Ecuador for USD 10 million, and we closed our first renewable energy royalty transaction and launched a renewable royalty business, which we are very excited about. All of these transactions are described in recent news releases, and Brian will speak more to them later.Our debt balance, as of today, stands at $135 million, with cash on hand of $22 million. Investment value is approximately $159 million. The board also declared the quarterly dividend of $0.04 per share payable at the end of March.We expect a strong year for royalty revenue with guidance of $67 million to $72 million. We're very comfortable with that based on commodity price movements since the beginning of the year, especially in Potash and copper. And with that, I'll turn it over to Brian.

[Brian Francis Dalton, Co]

Thank you, Ben. Good morning, all. Thanks for joining. And to begin today, I want to provide a somewhat bigger picture overview, regarding the current nature of our royalty portfolio as it relates to important trends and to explain how this past year was a pivotal one for us, in terms of our long-term portfolio-management focus.Our portfolio has been designed to line up with major global shifts that are underway that we believe are long term and entirely structural in nature. These include electrification trends, particularly with respect to renewable generation and transportation, are a huge potential demand-side catalyst for the next global commodity bull cycle and beyond. Conversion of fossil fuel-based energy sources, to clean energy sources on emission-reduction imperatives is underway, lower pollution intensity from steelmaking requiring higher-quality, lower-impurity iron ore inputs is spreading to Asia, and continued focus on improving agricultural yields for growing population and shrinking arable land base, with each piece of available farmland now expected to yield 40% more food than during the 1960s.We provide copper, nickel, cobalt and lithium exposure to address electrification. Our thermal coal royalties are being transitioned into renewable energy royalties. Labrador-based iron ore products are the amongst cleanest available anywhere and Saskatchewan Potash mines might be the most important mining assets in the world, when one thinks of the impact they have on global food needs. These trends are all linked, obviously. With Altius's particular resource royalty portfolio emerging as a hub for the converging folks.The other core long-term focus that Altius has brought to its royalty portfolio creation and management, is the select underlying assets that have large existing resource basis and/or outsize exploration potential. That, at minimum, imply long-term operating lives at existing production rates. Big resources are also the best harbingers of future mine expansion. As royalty holders, with no cost share, but full benefits, there's not much better that can happen in terms of bolstering long-term returns and having an operator announce an expansion.It is worth noting as well that announcements of this type happen mainly during periods of cyclical resource company margin expansion, such as the one we're now seeing unfold.This also explains why, whenever we stood back and really looked critically at our otherwise very long life portfolio that the approaching ore exhaustion at 777 and the wind down of Alberta electrical coal over the next decade struck us as key challenges to overcome. We, therefore, made 2018 the year to just that. In the case of 777 and the potential problem of base net revenue declines over the next few years, we now believe that the solutions are fully in place. We've recently increased our royalty interest in the construction phase Gunnison copper mine. This will ramp up as 777 declines. We also purchased the royalty on Adventus' and Salazar's exciting high-grade Curipamba polymetallic project. We resolved our issues with the operator of Voisey’s Bay relating to royalty payment calculations. While a major capital investment was announced to build a new underground mine there. Expansion studies for Chapada on the strength of excellent exploration base resource growth are due later in the year. Problem solved. In fact, perhaps, even over solved.The Alberta electrical coal wind down presented a trickier problem for us. Simply finding other thermal exposures on long-life assets in other jurisdictions was a possibility, of course, but not very attractive given that it would only likely attract more of the types of issues we experienced in Alberta. We, therefore, decided to replace our electrical coal royalties with the very thing that are surely but steadily replacing coal-fired electricity globally, namely the remarkably rapid emergence of renewable sources as lower cost generation alternatives.Our first investment in this area is with an expert Texas-based wind developer, Tri-Global Energy, that should see us generate CAD 4 million to CAD 5 million per year in revenues as the projects build out over the next few years. This is a solid start to replacing the $12 million to $14 million, we currently receive from Alberta electrical coal and the potential opportunities that we are finding in these newly created resource royalty area is quite strong. With these developments, we can now classify all of our portfolio components as either long term or ultra-long term. This is incredible luxury for Altius shareholder that not only indicates an increase in expansion potential-driven option value, but also means that any organic or acquisition growth that occurs becomes purely accretive rather than replacement type in nature. To further confirm these points, I draw your attention to some of the other highlights from the year, beyond those described above.The potash markets continue to surprise sceptics by displaying continued strong global growth and subdued mining supply. This resulted in higher prices and strong growth in production from our potash mine royalty portfolio, which has significant remaining capacity available for further production growth as recent expansions continue to ramp up, particularly, now with regards to Esterhazy K3. IOC's new moss pit is in commissioning and is expected to improve production rates. Teck has signaled likely expansion at Cardinal River, with further details and announcements expected this year. Alderon and Allegiance provided positive economic study results for Kami and Telkwa and Adventus and Salazar are preparing an updated PEA for Curipamba that will incorporate high grade exploration drilling results received during 2018. Neo Lithium's 3Q project and Sigma Lithium's [indiscernible] also achieved important project milestones during that year. Within our earlier stage, PG royalty pipeline business, we estimate that a remarkable 140,000 meters of exploration drilling will occur on the projects we hold royalties over in 2019. Collectively, at all of the above noted projects, we can count many, many billions of dollars of recent, current and planned capital investments, for which we will fully benefit while never receiving a cash call.In terms of 2018 specific performance, our royalty revenue growth trend continued, and we achieved a midpoint guidance as lower base metal prices, a strike at IOC and withheld LIORC dividend were offset by potash and met coal price and volume growth and higher iron ore quality differentials.Our 2019 guidance shows a further growth expectation. Since we issued this guidance, LIORC has announced a large special dividend to distribute last year's withheld cash amount. The guidance investment was also created in January using then spot prices, which so far, this year have generally moved higher. But it is still too early to consider any adjustments given the great many short-term volatility factors currently at play.Please note that we also recently responded to an invitation to submit a presentation to the LIORC Board, outlining our thoughts on the potential benefits of segregating its royalty- and equity-related interest. We will post the presentation on our website for information purposes in the coming days.Finally, we remind you that we commenced $190 million litigation against the governments of Alberta in Canada during the year for actions that we feel were tantamount to expropriation of our Genesee electrical coal royalty entitlements past 2030. Full details of all public filings related to the action are being made available on our website under Investor Info. That concludes my remarks for today, and I'm happy to open up the lines for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from line of Brian MacArthur from Raymond James.

[Brian MacArthur, MD & Head of Mining Research]

Just the couple of questions. Just following up on the Genesee royalty that was restructured. You make a comment about you changed it but it's going to be more reliable going forward. Is there any way we can get any more detail to exactly, what's been done there?

[Ben Lewis, Chief Financial Officer]

Yes. Hi, Brian, this is Ben. Just in summary, there was a portion of the Genesee royalty that was based on a mine profits calculation. It was based on an old Alberta tax -- mining tax calculation extremely complicated, uncertain and it varied very much from year to year. So we negotiated with Capital Power. And basically, it's similar to the rest of the royalty now. It's an inflation indexed per ton royalty amount. What it triggered was that, because we did this renegotiation, we had to do deal with net present value and discount rates and work out the value of that. So there was a slight adjustment in the value of the royalty, once we updated it for all the new assumptions. And it was a very small adjustment as you know. So hopefully that gives you a little more color. But it'll give us more certainty going forward, we'll know exactly how much per ton we're going to be see after we adjust for inflation. So...

[Brian MacArthur, MD & Head of Mining Research]

And it's over the whole property?

[Ben Lewis, Chief Financial Officer]

Yes. That's correct, yes.

[Brian MacArthur, MD & Head of Mining Research]

Okay. That's very helpful. Just the second thing on coal. There was a statement that governments asked on the lawsuit for an extension to March 1 to file the documents or something. Is there any update? I mean, I know, you said you're going to put it over as things commit. Is there any update you can give us since the March 1 has passed right now where that stands?

[Brian Francis Dalton, Co]

Yes, there've been a few new filings. This is Brian here, sorry. So we were asked to provide additional particulars related to our claim, which we have. That's up on and available on the website. And statements of defense have been filed now by both Canada and Alberta. I'm really going to do my best to avoid interpreting much of that. I'm not a lawyer. So more or less, why we're choosing to provide pretty much everything that gets filed directly to shareholders. And if I were to take a chance at a very rough summary, I would say that it wasn't a very surprising defense. Basically, there was general denial of any requirement to provide compensation, which was not unexpected. And if I take a positive away from it, we can see absolutely no argument with any of the facts that we provided, going forward. But again, I'm in no position to really speculate on outcomes or progress, but everything that's -- that happens that's public, will be available to any shareholder to review of their own accord.

[Brian MacArthur, MD & Head of Mining Research]

So there's no real time line update or anything?

[Brian Francis Dalton, Co]

Not -- no, not particularly. It's a process we expected to be long. And we're prepared for that.

[Brian MacArthur, MD & Head of Mining Research]

Fair enough, sir. And just another question. Just quickly. I'm just curious, I mean, I think, you've remained pretty positive as you've talked about for the iron ore setup in Québec. I mean, obviously, you increased in lift but I also saw you sell down some of Champion. Is there any rationale for that? Or is that just plain portfolio management?

[Brian Francis Dalton, Co]

We invested, originally, in Champion in a convertible instrument that had 2 conversion features. One was to royalty. But there was a feature of that conversion option that disappeared in the event that project financing happened in short order, which it did. The second feature -- the conversion feature provided income as well once. That expired at the end of December. And we converted to pure equity. The rationale in terms of Altius as ultimately an asset level royalty buyer diminished. We're not trying to be equity portfolio managers. We, obviously, invest in equities where there is a strategic path to royalty. But -- so, yes, it was partly that. But it was also timed with the sale there, with partly timed with acquisition of the additional Labrador interest. So we basically took some profits on a pure -- well, to become a pure equity hold and increase royalty level holdings.

[Operator]

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

[Craig Hutchison, Research Analyst]

The question with Lithium Royalty Corp. Can you give pricing context in terms of the original investment, I think it was $6.5 million. How much of that amount has been actually deployed into royalties? And in terms of -- I think you purchased a royalty in February, redeveloped by Sigma Lithium resources. Can you give us some context on when you expect to certainly getting paid royalties from the lithium portfolio?

[Brian Francis Dalton, Co]

I'll, probably, going to have to get back to you on some of that. But we just have just over $9 million in total invested in Lithium Royalty Corporation and which includes in the equity in the business, but also [coal] anticipation on some of the royalties that they've acquired. I don't have an exact up-to-date amount in terms of how much of the total capital that LRC has raised already has been deployed. The substantial amount of the initial raise certainly has been put to work already. More broadly speaking there, lithium prices and lithium company valuations certainly took a hard turn downwards last year, which is exactly the doctor ordered in terms of our plans there. I wouldn't look to put too much in the near term into the model. This is bit of a -- more of a long-term listening-post type investment for us as we expect in the fullness of time that lithium becomes a much bigger sector globally, and we want to be prepared for that. So this is very much an early-stage, development-stage type, listening-post investment as I said. But I can -- later I can follow up with any additional details that I can get from the company directly.

[Craig Hutchison, Research Analyst]

Okay. Are there any restrictions in terms of in moving past the lithium space maybe into other battery metals? Whether it be cobalt or nickel?

[Brian Francis Dalton, Co]

No, certainly not. We're obviously going to be showing more impacts from nickel and cobalt as the Voisey’s Bay ramps up. So we think we have royalty exposures to both of those commodities, probably from one if the, if not the best, asset out there. So that's going to happen naturally, without us having to do much more. We probably wouldn't be looking to specifically increase cobalt other than as part of nickel- and cobalt-type investments overall. But right now I think we're fine, and natural growth that will come from the ramp-up in the underground development of Voisey’s Bay combined with the fact that we got the royalty agreement, sort of, out with the operator this year puts us in fine shape in those commodities.

[Operator]

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

[Carey MacRury, Analyst of Metals and Mining]

Just had a question on the 2019 guidance for coal and potash. I'm just wondering in terms of the change from 2018 in terms of volume versus price. Like with the potash, are you assuming, sort of, similar levels or a spot price at the end of the year for your 2019 guidances? And similarly, for coal? Or should we expect volumes to be higher or lower year-over-year?

[Brian Francis Dalton, Co]

Our assumption in terms when we made the guidance was for flat pricing over last year's level. One thing you do want to be careful of though is, there is a lag affect from some of the operations and sales to when our royalties were received. So we didn't get the full impact last year at the big price increases, some that will start to flow into this year. And our guidance also assumed the best knowledge we had at the time from the operators, which was for -- at that point, they weren't prepared to talk about plans for 2019. So we assumed flat volumes year-over-year, reading between the lines that some of the guidance we're sensing from the operators suggest that there is room for continued volume ramp ups there, as other producers globally seem to be running into more and more troubles, getting their volumes [ fall ] down and demand growth continues. So we're optimistic there. But our guidance to answer your question was based on flat numbers.

[Carey MacRury, Analyst of Metals and Mining]

And on the coal side?

[Brian Francis Dalton, Co]

Thermal coal?

[Carey MacRury, Analyst of Metals and Mining]

Yes.

[Brian Francis Dalton, Co]

Well, again, there is obviously no price exposure.

[Ben Lewis, Chief Financial Officer]

Slightly lower.

[Brian Francis Dalton, Co]

Yes.

[Ben Lewis, Chief Financial Officer]

But not significantly lower.

[Brian Francis Dalton, Co]

Right. So our product -- guidance from producers. And a lot of this just had to do with the way the mine plan runs in and out of the higher royalty plans. So overall, we're anticipating that the utilities will run at similar levels, and that our relative royalty component to that will mean slightly lower volumes. And, of course, no price components.

[Operator]

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

[Flora Wood, Director of Investor Relations]

Okay. So if there is no further calls, I'd like to thank everybody. And Q1 is coming up soon. So we'll be talking to you again in just about 6 weeks, I guess.

[Brian Francis Dalton, Co]

Thanks, everyone.

[Ben Lewis, Chief Financial Officer]

Thank you.

[Operator]

This concludes today's conference call, you may now disconnect.