Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by, and welcome to the Altius Minerals Q4 and Year-End 2020 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Thank you.It is now my pleasure to hand the conference over to Flora Wood, Director of Investor Relations. Ms. Wood, please go ahead.

[Flora Wood, Corporate Secretary]

Thank you, Jack. Good morning, everyone, and welcome to our Q4 and year-end conference call. Our press release and annual filings were released yesterday after the close, and are available on our website along with the presentation. This event is being webcast live, and you'll be able to access a replay of the call along with the presentation slides at www.altiusminerals.com.Brian Dalton, CEO; and Ben Lewis, CFO, are both speakers on the call, and then we'll open it up for questions. The forward-looking statement on Slide 2 applies to everything we say both in our formal remarks and during the Q&A session.And with that, I will turn over to Ben to take us through the numbers.

[Benjamin Gerard Lewis, Chief Financial Officer]

Thank you, Flora, and good morning, everyone. Thank you for joining us. Annual royalty revenue was $67.5 million or $1.62 per share as compared to $1.83 per share in 2019. This reflects lower prices for much of the year as well as certain volume curtailments related to COVID-19 precautionary measures as well as maintenance and equipment-related interruptions in the latter part of the year. Prices began a strong rebound towards the end of the year with several approaching multiyear highs. IOC paid a pent-up dividend amount, and we benefited from a full quarter of higher coal royalty ownership, which in combination, resulted in a new quarterly revenue record of $21.9 million or $0.53 per share in Q4. EBITDA margins of 78% for the year were lower than 80% recorded in 2019, in line with the lower annual revenue. Adjusted operating cash flow was $47.5 million or $1.14 per share for the year compared to $44 million or $1.03 per share in 2019. The annual cash flows -- the annual cash flow was higher despite the lower revenue on lower Chapada stream costs, lower G&A expenditures and the timing of tax installment payments in 2020. The adjusted operating cash flow amount does not include net investment proceeds of $6.7 million or $0.16 per share, stemming from our PG business, although the PG business positively contributes to cash flow, the gains on these investments are recognized under other comprehensive income in our financial statements.The main adjusting items in 2020 are the $1.11 per share impairments recorded earlier in the year, primarily on shorter expected thermal coal lives as conversions to gas-based generation continue to accelerate in Alberta. In addition, we recognized a small impairment as a result of the receivership by investee company, Alderon Iron Ore. Partially offsetting the impairments were foreign exchange gains and gains on fair market value of a derivative and adjustments relating to equity investments and joint ventures. Including the impacts of no longer accounting from Great Bay Renewables or GBR, as an underlying subsidiary following Altius Renewable Royalties or ARRs, joint venture transaction with Apollo that was announced in October. Capital allocation in 2020 focused heavily on the building of Altius Renewable Royalties, or ARR, as we invested $67.6 million in further royalty-based funding to Apex and TGE. Subsequent to year-end, ARR completed $100 million TSX IPO that is expected to result in less direct capital allocation emphasis at the Altius Minerals level going forward. This recently closed IPO, along with the Apollo partnership announced in mid-October, sets ARR up to participate in the tremendous growth in the renewable energy royalty sector that is underway globally. Brian will have more to say on this later.We also expended $9 million on a net basis to increase our ownership of existing thermal coal royalties to 97.3%. We paid $8.3 million in common share dividends in 2020, and repurchased 644,000 shares at a cost of $6.1 million. Subsequent to year-end, we repurchased another 400,000 shares under the normal course issuer bid. These shares resulted from the exercise of warrants issued as part of our Chapada stream acquisition in 2016.Repayments on our term debt totaled $20 million. We have $41 million available liquidity on our revolver. We ended the year with $21.8 million in cash and cash equivalents, unchanged from last year, and $146 million in the market value of mining and other investments, comprised of the remaining junior equity portfolio holdings and Labrador Iron Ore Royalty Corporation shares.Our net debt at year-end stood at $112 million on a cash basis and a negative $34 million on a cash and market investments basis. That leaves a lot of material for Brian to cover on the outlook and macro environment.And now I'll turn it over to Brian.

[Brian Francis Dalton, Co]

Thank you, Ben, and thank you all for joining us this morning. As usual, I'm going to stay in the big picture today. There's lots of detail available in the formal disclosure materials that we published. Let me begin with some personal remarks today. I must commend Ben and his team for a top-notch year of financial management achievement in the face of great and unexpected uncertainty, also a tremendous business development support workload. Altius demonstrated solid financial resiliency through even the scariest part of 2020 and then went on to finish the year in stronger shape than ever. Thank you. I also want to recognize John, Flora and Mark, who worked like dogs this year and keeping all of our many initiatives moving smoothly forward. They often never knew from hour to hour in which direction they would get pulled next, but they were always exactly where it needed to be, getting it done with smiles on their faces. Chad and Lara and the whole PG team adapted remarkably quickly when COVID derailed many of their global plans, and pivoted our focus towards more home turf opportunities with tremendous resulting success. Last but not least, to every other obvious employee, my sincere thanks for all the hard work and smart thinking, keeping each other safe and for being a pleasure to be on the team with during this past remarkable year within this company that we carve out every stone up together. Thank you, everyone.2020 is not a year that any of us will likely forget anytime soon. Stress is an impact of the deadly pandemic that we have all faced will firmly etch the air in human societal history. It will likely also come to be known as a truly transformative year from a global industrial history perspective. The early lockdown gave many people an unexpected glimpse of cleaner skies and waterways than they've ever seen, and paved the way for governments to dedicate massive amounts of economic recovery stimulus spending towards a cleaner rebuild of our futures. More market-facing capital sources also came fully on board to cement this path forward.As a result, the sustainability-based macro trends we have been speaking about and aligning our business with for the past several years, all across critical tipping points in 2020. Altius now finds itself well positioned on all fronts through its creation of a renewable energy royalty business from the embers of coal power acquired power generation, through its focused exposure to the basin battery metals that are critical to the renewable energy and transportation, electrification transitions through iron ores that minimize pollution from steelmaking, and through its royalties on natural product fertilizers that allowed a feeding of our growing population while minimizing additional agricultural base deforestation.A great place to learn more about all of the ways at Altius is aligning its shareholders with these objectives is to our recently published inaugural sustainability report. Please seek it out on our website and reach out the floor with any helpful feedback or ideas you might have and how we can keep doing better.Before jumping into discuss various developments from each of these areas, I'll say a few words on our new approach to guidance. We will no longer be providing revenue-based guidance. Generally speaking, our revenue is a simple function of production volumes multiplied by prices. There are no shortage of ways for investors to find prices and price expectations on an ongoing basis to inform their own views on revenue over whatever time frames happen to matter today. Going forward, we will continue to provide summaries of our outlook for production levels across our assets, but we've come to a conclusion that guessing at volatile short-term realized prices versus holding to our broader cyclical views is quite a way to the time shareholders pay us for it.Moving on now to our business exposures. Starting with our own made-at-Altius version of the coal renewables transition, 2020 was a monumental year. Frank Getman and his Great Bay Renewables team in New Hampshire worked both cleverly and tirelessly in innovating and executing on the business model and have very much to be proud of.Upon the investment in Apex Clean Energy early in the year, we began to sense that adoption of the royalty model in the renewables sector was taking hold after several years of hard groundwork. With this realization, we set out to attract a strategic partner. A task not made easier during the pandemic, I can assure you. But that ultimately resulted in a joint venture with the infrastructure group, a major private equity firm Apollo in Q3. This was immediately followed by an additional investment in Tri-Global Energy, and a further enhanced sense of growing sector adoption and ultimately, the decision to take Altius Renewable Royalties Corp. public.This was completed just a couple of weeks ago. And so today, ARR is well-earned with its Apollo joint venture and the proceeds of a successful $100 million IPO to further GBR's efforts to deliver on its innovative strategy. Royalties on 4 U.S.-based renewable energy projects now totaling more than 1,100 megawatts have been created from investments to date and several more are in progress. Meanwhile, the coal royalties that we use to fund the building of ARR continue to fade out while still contributing. A few years ago, we decided to not divest our coal royalties and essentially pass the buck on the exposure while also crystallizing losses. We instead decided to use the remaining revenues to try to find a way to fight back the losses and to create something enduring as a replacement. The value of our interest in ARR, based upon the recent IPO valuation, now exceeds the write-down amounts we took when the accelerated regulatory phase out of coal was announced. For this, we owe great thanks to our shareholders for their trust and to our Board for their courage.Turning to base and battery metals. Perfect storm we have been talking about for a while, seems to have made landfall. It has now been more than a decade since any meaningful industry capital investment in mine supply replacement or growth has occurred, while existing mines have continued to deplete or move in to more challenging parts of ore bodies. On the demand side, most of the world has become acutely focused on directing large amounts of investment towards infrastructure that supports a more sustainable future. The build-out of renewable energy, including related grid and storage requirements and EVs and their supporting infrastructure needs, each fully depend on access to greater amounts of the metals we provide royalty exposure to. These include copper, iron ore, nickel, zinc, lithium and cobalt through our various operating and development stage assets.During 2020, our existing base metal mines all performed well in spite of the challenges of COVID. Other portfolio development highlights included the continued strong progress of Lithium Royalty Corporation, which we are a co-founding private shareholder, in acquiring new assets, and in attracting major private equity firm Riverstone Holdings as the large new investors.Sigma Lithium over whose key project LRC holds a royalty, attracted significant project financing during the year, and it seems well on its way to achieving producer status. Excelsior Mining, the Gunnison project, in which Altius holds a royalty, achieved first copper production late in the year. Adventus continued to advance its feasibility study for the high-grade polymetallic El Domo deposit, which is also subject to an Altius royalty, and continue to attract significant strategic and institutional capital.Vale continued to advance the construction of its new underground nickel, copper, cobalt mining operations at Voisey's Bay, and we look forward to hearing from Lundin regarding ongoing exploration results and expansion plans at the Chapada copper-gold mine.It was somewhat of a mixed year for our Saskatchewan Potash Royalty exposures. Prices spent the first half of the year near multiyear lows as previous excess inventories weighed heavily in several key markets, and demand during the early months of COVID look quite uncertain. By late summer, however, crop prices began to really turn upwards and potash demand and prices quickly followed suit. It turns out that we kept eating and growing the global population throughout the pandemic. It ended up being a record year of global demand for potash, with another record widely expected this year. And prices now approaching multiyear highs. The mines we hold royalties on are really well positioned to benefit in this environment, as they collectively host the bulk of the world's current spare production capacity. I continue to hold that this is the most globally essential mining district in the world.To put this optionality into a royalty holders perspective, production levels at these mines can continue to grow into increasing demand by more than 50% before existing current nameplate capacities are reached. And longer-term expansion possibilities beyond that are best and arguably the most competitive available in the world.Our iron ore exposure relates to the Labrador Trough mining district, which produces some of the highest grade and purity ore in the world. These forms of iron ore are becoming increasingly important as the next major front of attack on pollution and climate change begins to gain momentum. High purity forms of iron ore result in considerably less carbon-based and other forms of pollution during steelmaking compared to lower quality ores that are more typical.Prices for Labrador Trough iron ore products have now reached all-time highs accordingly. Our interest in the district include indirect royalty exposure to Rio Tinto's IOC mine through our shareholding in LIORC, and our direct royalty interest in the advanced stage Kami project, which Champion Iron Ore announced the acquisition during the year.IOC has announced increased growth-based capital spending for 2021, and Champion has begun rescoping the Kami project as part of its own ambitious growth targets.PG had a great year, both technically and in terms of commercialization, and demonstrated once again why I think it represents one of the world's leading exploration origination teams. A particular note were several quality projects that was able to assemble within the emerging Central Newfoundland gold camp, where, in fact, many of the early routes of Altius were set. And in turn, vendees onto several new strong partners. In total, the PG team has now successfully banded more than 60 projects over the past 5 years, which is likely unrivaled within its project generation peer group. The return of capital availability to the junior sector more broadly was also very positive for many of the junior companies we hold large stakes in. These collectively raised more than $150 million in financing during the year and have plans for around 178,000 meters of exploration and resource definition drilling in 2021.To put that in context, all of that core were laid out in a line, one would have to complete the equivalent of more than 4 marathons, just to view it all. This provides loads of essentially free option value bets to all to your shareholders.Happy now to take any questions that you might have. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Carey MacRury with Canaccord.

[Carey MacRury, Analyst of Metals and Mining]

Just given, obviously, a big change in the commodity price environment, where do you see the biggest upside to Altius in your portfolio over the next couple of years, assuming that metal prices stay at pretty good levels here?

[Brian Francis Dalton, Co]

Upside from these prices, I mean really, who knows what the price...

[Carey MacRury, Analyst of Metals and Mining]

I don't necessarily mean from prices, but like in terms of the underlying assets in terms of advancing or expanding -- yes, go ahead.

[Brian Francis Dalton, Co]

Yes. What I get excited about with these prices that many of them have now reached, what I'd call incentivization level. So you're getting to that point now where free cash flows from existing operations and just more market-type sources of capital are all available. So this is the environment where you'd expect to get the announcements from operators about capital investments and expansions. So obviously, Chapada and whatever Lundin decided to do there, conditions really couldn't be better. I don't know if they could have timed that acquisition. The work they've done to think about expanding any better. You can't ignore potash in this. I mean, it's already built. There's 50% growth from here, and you've got huge demand surge underway right now. So again, the price part is hard to call, Carey. I don't know where we're to right now. We're definitely in an upswing, whether it's got lots of legs left to it yet because the truth of it is, what's amazing is that it still hasn't resulted in anybody breaking from the whole super disciplined we're going to return capital to shareholders to starting to make any kind of capital investment announcements, and it really can't end until that happens. That has to happen. They have decided to spend the capital you have to put the capital to work, and then you have to start to have line of sight on the production growth. We haven't even kicked off with production announcement.So I'm pretty bullish on prices, but mainly, I would say, that's one lever that's natural and embedded. But the real exciting part longer term for us is that how many of our assets, either that are already built will get expanded or how many of the development stage or late-stage projects will get funded and built this cycle. That's the exciting part for us.

[Carey MacRury, Analyst of Metals and Mining]

And then maybe one other one. I know you guys like to invest countercyclically and again, given the commodity price environment. Does that mean we're unlikely going to see new investments over the next couple of years, and it's more moving the existing investments along? Are you seeing any opportunities for new investments?

[Brian Francis Dalton, Co]

Pretty limited. I see opportunities to invest in more earlier-stage situations where we have particular views on further resource growth maybe some last money in on project finance-type situations. But to be honest with you it is probably not going to be a lot of large-scale operators seeking royalty financing in this environment. They've got other forms of capital. So I've said it many times, we're not dollar cost averagers. We've made -- we laid in so many bets through the down cycle that we feel like we're moving to that point where the growth comes from the existing assets for a while right now.I mean we'll stay poised, there's always special situations and market anomalies and those sorts of things, but this isn't 2016. And you're kidding yourself if you think it is. And -- unless your dollar cost average or that basically means, the cycle is telling you that this is not the time, this is the time to grow from what you did in the downtimes.

[Operator]

Craig Hutchison with TD Bank.

[Craig Hutchison, Research Analyst]

Congratulations on the IPO of the renewables business. You guys announced last week, I guess, your first deal with Apex on the JayHawk wind project in Kansas. Do you guys expect similar deals this year? And how quickly kind of do you expect some announcements on that front?

[Brian Francis Dalton, Co]

Yes. With respect to Apex, in particular, I know people were wondering why when we announced the deal less whenever it was March, why no growth stem from that investment. And the reason for that is when we made the investment in Apex, they had several projects within their pipeline that we called excluded projects together. And these were essentially just projects that they had subject to prior sale, if you will. They had current negotiations underway, and it wouldn't have been fair or practical to try to have royalties inserted on them at that point. So what's key now is that, that backlog is clear. They had a really strong year. They sold a load of projects last year. It's just that, that was part of that backlog, which is now cleared. So JayHawk was the first one to come from the Apex investment. That was about 200 megawatts. Apex is targeting probably close to write some historical numbers, they'll probably do close to 2,000 megawatts this year. And most of those projects, if not all of them, are not excluded. In other words, they will be subject to royalty. So we do expect quite a bit the year in terms of projects being made subject to royalty from existing investments as well, of course, as opportunities for more deployment and to attach ourselves to more portfolios and even to more advanced stage projects.

[Craig Hutchison, Research Analyst]

Okay, great. And just -- I know you guys aren't providing specific guidance now. But just in terms of the coal business, you still have a pretty good valuation here for Genesee. Are you expecting similar kind of volumes and prices for 2021 as we saw sort of in Q4 2020 for Genesee?

[Brian Francis Dalton, Co]

We're projecting, I believe, a bit of a lower volume coming out of Genesee. And some of it has to do with just work that's underway as part of the gas conversion, which we expect is going to impede production -- traditional production to some degree. And also just where the mining occurs relative to our royalty land. That said, I watch, take a quick look every morning at what the generation looks like in Alberta. There's a public site that shows it, and it's obviously been a cold couple of months. So Genesee has been pretty flat out for the couple of months here. So there's a lot of variables. But generally speaking, Craig, I think the way to look at good coal is pretty much everything bought Genesee is gone now. And Genesee is winding down. It's happening earlier than Capital Power probably even imagined 12 months ago. And I guess it's a function of -- I think they're feeling their own pressures from an ESG perspective. So whereas they might have been thinking about running out the coal for longer as long as regulations allowed, other pressures are building there more of a hurry. So the good reference point is the Investor Day materials that they provided. I think right 2023, 2024 is when they're targeting being fully gas. So -- the end is not. But that's fine. We got our work done. We got our work done, thankfully. I thought we had so much more time on that investments taking coal royalties and building out the renewables business. And it could have been quite a gradual thing. And in the end, we actually ran the renewables build up harder probably than we would have imagined. And boy, everything that we did. Everything happens faster these days than you imagined. I thought we had loads of time, and I think in the end, we've adjusted.

[Operator]

Brian MacArthur with Raymond James.

[Brian MacArthur, MD & Head of Mining Research]

I just wanted to follow-up on the countercyclical investing and Carey's question. But on the PG side of the business, which, again, as you said, maybe doesn't get as a lot of focus, how far are you through the vending process this cycle versus last cycle? Have we -- all that land you got when things were out of favor, is most of it into vehicles now? Or is there more to do on the PG vending business as we go forward?

[Brian Francis Dalton, Co]

Like in terms of the big bull what I'll call, the big inventory build up, say, in '20, really when the cycle turns out in 2013 or so '12, '13 for the juniors ran out of money, like we really loaded off on projects. And I wouldn't say we were indiscriminate but we were -- if there's a key belt with land coming open in it that just take your brain out and grab it. That sort of big inventory buildup is definitely cleared. There's been 60 projects, I believe, from that, that have been banded out. That doesn't mean we don't continue generating projects in the PG business. Really what it means at this part of the cycle when access to land just isn't the same. A lot of juniors and majors are funded and the amount of prospective mineral terrain that's available to acquire is dramatically reduced over a lot it would have been in that period. But there's always room for more innovative new ideas. So branching out into new trains, new ideas, just more of a deeper technical focus and things that come from that are always attractive. So that's -- I still see more projects getting generated and created, and I do see more project sales. But the big way -- we were very purposeful at the beginning around 2016, 2018 when the first signs of capital started to show up for the better of the juniors and even the other majors started to get their exploration budgets back. We're very purposeful about getting that -- those projects out into the hands of the groups that would ultimately explore them as early in the cycle as possible and exploration takes time. And that was a bit of a strategic change over how we would have ran the business model in the previous cycle.So I guess long answer to your question, but yes, the backlog of the big inventory amounts are already placed and the bets are in, if you will, but the team is busy generating projects. And actually, quite a good year this year in adding new projects as well as pending on projects that didn't exist at the beginning of last year.

[Brian MacArthur, MD & Head of Mining Research]

So just if I could ask a little bit more. When you say innovative, are you talking new commodities, I don't know, maybe manganese, which is in the whole EV chain? Are you talking innovative financing in the sense that you wouldn't just be doing royalties, you'd be doing other things as well and the royalty model would change?

[Brian Francis Dalton, Co]

It might be just new takes on existing belts or even trying to open up new belts. So more true generative work versus, say, 2015, you could walk into Chile, and here's the 2 biggest copper mines in the world. And look, there's a big chunk of ground open up. Well, just grabbed that. So that was there. You couldn't do that today, obviously. But thinking much more technically, much deeper, deeper levels of sort of more of a scientific approach to generating new concepts and new belts, that's more where I'm talking about, more hard-core science at this point. Less real estate work.

[Operator]

[Operator Instructions] [ James Bullen ] with Aldebaran Asset Management.

[Unknown Analyst]

Altius has acquired lots of shares in Orogen Royalties over the last month. What in particular makes the purchase of Orogen Royalties shares extremely attractive at the present time?

[Brian Francis Dalton, Co]

We have been invested in the predecessor companies Orogen, merger of Evrim and Renaissance, both quite strong project generation teams in their own right. It has the royalty on The Ermitaño Project, which is moving along nicely, and it also has a royalty on a, I guess, a rumored discovery in Nevada that if the discovery is anything close to the rumors is pretty, pretty exciting. But our view there is a bit longer term. We just like the business and how it's being run. We like it as a project generator. We like Paddy and the team, and we felt that the share price was -- is attractive and decided to add to our position. We've been making a lot of cash in the PG business over the past several months. So just selectively redeploying here and there.

[Operator]

Adrian Day with Adrian Day Asset Management.

[Adrian Vincent Day, Chairman, President & Treasurer]

Brian, when I visit to one of your meetings, I don't know if it was 10 years, 15 years or what it was, time flies. But you mentioned that you're sort of, I'll call it, a broad goal or broad aim was to be exposed to commodities more or less in proportion to their market size. And I'm wondering if there are -- based on that, if there are any particular areas that you feel you're missing or you're significantly underweight, but you'd like to boost?

[Brian Francis Dalton, Co]

One that's always stood out for us, but there aren't many ways in is aluminum or alumina. We've thought about it, but it's more of a industrial, less of a sort of a mining geology-driven type business. That's one that if something strange could be worked on, we'd certainly take a good hard look at it. And to be honest with you, you're exactly right. I mean, you tried to stay away from relatively smallish market-type commodities and that volatility in favor of more bread and butter and sizing our portfolio around just general size of the traded markets. So on that basis, why are we investing in lithium today, and we are -- we have got a big focus there or have been for the last several years because on total traded volume wouldn't seem to fit to build. But there, it's just a case of we expected to, and we're getting out ahead of it. But broadly speaking, I do feel like the portfolio is pretty balanced. Another way to describe what you're describing what I would have said probably at the same time is that the objective here might be to try to create an alternative to investing at the operator level into diversified mining. So ultimately, to represent the alternative that Franco does to Barrick or Newmont, or how do we do that relative to a Rio or a BHP. And I think we're in pretty good shape in that regard now. Zinc is one that's probably kind of come out with 777 in a couple of years. And then you've got Curipamba coming on behind that with loads of zinc in it. So -- no big pressure. Again, long answer, but no, I don't feel any big pressure anywhere within the portfolio right now that something is really way overweight or way underweight against the exposures we want to have.

[Adrian Vincent Day, Chairman, President & Treasurer]

Okay. Super. Second quick question. Any update on the lawsuit in Alberta?

[Brian Francis Dalton, Co]

Yes, there was a -- I think we announced on this, but there was a -- call it a hearing, it's not before a judge, it's more sort of a mediator-type person, I think it's called a master, it's sort of a sublayer to the courts that heard things out in late fall and that didn't go our way, but it really has no teeth, and it's not binding. So basically, the real first leg there is a hearing that we're -- we'd expect probably in the first quarter assuming they can get through their first quarter and second quarter, assuming they can get through their COVID backlogs in the courts. So we'll have more on that as the year proceeds, but we should get our day in court in any way.

[Operator]

There are no further questions at this time. It is now my pleasure to turn the call back over to Flora Wood for concluding remarks.

[Flora Wood, Corporate Secretary]

Thank you, Jack, and thank you, everybody, for tuning in. Those were great questions, and we'll look forward to speaking to you all after the Q1 results. Bye-bye.

[Brian Francis Dalton, Co]

Thanks, everybody.

[Operator]

This concludes the Altius Minerals Q4 and Year-end 2020 Financial Results Conference Call. We thank you for your participation. You may now disconnect.