Altius Minerals Corp

TSX:ALS

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Altius Minerals Q4 2022 and Year-End 2022 Financial Results Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer [Operator Instructions] This call is being recorded on Wednesday, March 8, 2023.

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

[Flora Wood, VP, IR]

Thank you, Michelle. Good morning, everyone, and welcome to our Q4 call. Our press release and annual filings, including the AIF 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 along with the presentation slides on our website at altiusminerals.com.

Just a note on that because of the website issued today, normally, you see it in the view presentation button right beside the webcast registration. Today, you have to scroll down on that same page under webcast and presentations and you'll see right under Presentations Q4 and Financial Results Conference Call.

And Brian Dalton, CEO; and Ben Lewis, CFO are both our speakers on the call. There will be a Q&A afterwards. There's a forward-looking statement on Slide 2 that applies to everything we say both in our formal remarks and during the Q&A session.

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

[Ben Lewis, CFO]

Thank you, Flora, and good morning, everyone. Annual royalty revenue for 2022 was $103.5 million or $2.27 per share of 23% over last year. Q4 royalty revenue of $23.1 million or $0.49 per share compares to $23.5 million in the fourth quarter of last year. Attributable royalty revenue for 2022 represents an annual record for the corporation, mainly based upon higher realized commodity prices and the ramp up of renewable royalty revenue.

Our EBITDA margin of 82% is up from last year's 80% and the mineral royalties EBITDA margin was 87% for both years. Annual adjusted EBITDA of $89.7 million or $1.97 per share increased by 34$ in relation to 2021. While Q4's adjusted EBITDA of $18 million compares to $17.7 million last year.

Annual adjusted operating cash flow of $75.9 million or $1.65 per share increased 54% from 2021. And Q4 adjusted operating cash flow of $19.2 million is 21% higher than the $15.9 million generated in Q4 2021. These increases are largely reflective of the higher mineral royalties revenue.

Net earnings for the year of $39.5 million or $0.82 per share compares to net earnings of $38.3 million or $0.97 per share in 2021. Net earnings during the fourth quarter were $6.8 million or $0.14 per share. Results for both the year and quarter were positively impacted by strong royalty revenue, partially offset by foreign exchange and fair value adjustments on dividends -- sorry on derivatives.

Adjusted net earnings of $0.10 per share for the quarter and $0.74 per share for the full year followed the trend of revenue, partially offset by higher taxes. We continue to see revenue ramp up at ARR through its 50% owned GBR joint venture. ARR achieved milestone of first positive cash flow and operating profitability during the year.

GBR also added two new operating royalties late in 2022 and two more royalties from TGE and Apex investments hit commercial operations in late 2022 with another one expected in the coming months. As a result, TBR expects to realize annual royalty revenue in the range of $11.5 million to $13.5 million in 2023, based on the current royalty holdings. Brian will speak more on the strong progress ARR is making and I further encourage you to review its recently published annual filings and investor conference call remarks.

Now to the balance sheet and capital allocation. We successfully deployed $47.8 million during the year in new investments. This consisted of $25.9 million to purchase, an additional 866,000 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 $3.9 million into Lithium Royalty Corp., including our direct royalty acquisitions under our 10% co-participation rights. In February, LRC has filed a preliminary perspectives indicating its intent to IPO.

ARR funded its 50% into GBR of $43.9 million during the year, representing its portion of new renewable royalty investments. ARR also completed an equity offering of $38.4 million late in 2022 with Altius investing $20.7 million to maintain its pro rata ownership, which stood at 58% after the equity financing.

Board of Directors approved an $0.08 per share dividend that will be paid to shareholders of record on March 17, with a payment date of March 31. The corporation paid cash dividends of $13.1 million in 2020 to its common shareholders and issued 34,000 common shares under the corporation's dividend, reinvestment plan during 2022. We purchased and canceled an additional 268,000 shares at a cost of $4.8 million under our normal course issuer bid, which was renewed for another year on August 22 and will continue until August 21, 2023.

In addition, we repaid $8 million in scheduled principal repayments on our term debt. Earlier in 2022, we completed a drawdown on our revolver of $10 million to acquire investments. Our current liquidity consists of $15 million in cash as of the end of Q4 and we have $93 million in unused revolver. ARR at quarter end held cash of $50 million.

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

[Brian Dalton, CEO]

Thank you, Ben, and thank you everyone for joining. It's a pleasure as always. Today, we're putting a wrap on our 25th year of annual reporting as a public company with certainly [indiscernible] on multiple fronts, including achievement of the milestone of reaching $100 million in revenue. Royalties really do love inflation. That are more important in revenue milestone this past year, however, for the unusual a number of positive development signals that came in from across our diversified portfolio of long term assets. Many of these [indiscernible] confidence in the embedded growth that will serve to debate (ph) the next 25 years of Altius development.

For the considerable shifting of the same (ph), turning some of the major macro trends that our portfolio has been aligned with during the past year. A lot of this has to do with the accelerating deglobalization, that is in response to the war in Eastern Europe, which we are convinced will be particularly inflationary with respect to our broader industry. We are getting into this topic in more detail in our letter to shareholders that will be posted to our website later today.

Now to summarize some of those growth signals we are seeing across the portfolio. In our base and battery metals portfolio, we're seeing strong growth potential emerging in the form of expansion and new build actions and intentions. Chapada continues to be evaluated for expansion and is now being supported by the discovery of the Sauva deposit on the property. Significant maiden resource recently been declared there and the indicated grade is considerably higher than that currently being mined.

Providing clear positive implications for mine life extension and/or production rate growth. Lithium stands almost alone as a mine commodity that is experiencing incentivization (ph) conditions and this is working the purpose. Our direct and indirect exposure to lithium through our past investments in and alongside Lithium Royalty Corporation benefiting from the rapid construction advancements and increasing production level objective of several royalty portfolio projects. We expect to receive first ever lithium royalty revenue this year.

LRC is currently marketing an IPO and this has potential to [indiscernible] significant value for our equity level holdings. Adventus’ Curipamba project continued to knock down major hurdles during the past year. These included project finance arrangements, technical level environmental approval and a government investment protection agreement completed in advance of a potential construction decision later this year. We continue to be very bullish about the prospects for high purity components -- for the high purity component of the iron ore market, but the current lithium market perhaps acting as a bit of a harbinger for what we see ahead.

In lithium, the rating was put on the wall several years back, massive amounts of new investments in transition to EV-based manufacturing was collectively committed by global automakers. This was done in the absence of knowing where the necessary raw input materials would come from and the result has been strong incentivization pricing for lithium and more recently even direct level investments by automakers to secure various supplies. (ph)

Today, not tomorrow, large amounts of capital are being committed by global steelmakers The similarity transition their platforms to electric arc furnace based steelmaking at the logical future expense of blast furnace based production market share. EAF relies exclusively on scrap steel and very high purity iron ore inputs to produce cane or steel, meaning without associated coal inputs.

The vast majority of the world’s currently established iron ore supply and production base, which by the way is steadily deteriorating in average quality has no utility in EAF steelmaking. No one really knows how aluminum increase in high purity input demand will be matched, explaining why we invoke the lithium market parallel. We feel this represents a very underappreciated story, the one that we're very excited by.

One of the very few global iron ore district that can technically deliver increasing levels of this material and that has available infrastructure and that is not partied to the war in Eastern Europe. The Canada's Labrador Trough region. Here we hold royalty interest in several projects that include producing IOC mines, that are seeing resurgent reliability and growth based investments.

Champions Kami project with updated feasibility results for DR grade production, a DR grade production plan expected later this year as well as additional resource in earlier study stage projects. Our majority owned Altius Renewable Royalty business experienced a pivotal year in 2022 as it hit several key milestones along its sector level adoption and growth trajectories.

We made a number of new investments in operating projects as well as development project platforms while also seeing strong acceleration of its revenue profile and the achievement of first positive operating level cash flow. This growth is expected to continue to ramp up as a result of both maturing and progressing of the investments that has already made as well as the rapidly expanding pipeline of new investment opportunities that it is experiencing.

Both equity and debt capital became considerably more expensive for the renewable sector over the past year and this is prompting builders to projects to look for alternative sources of capital and ARR are certainly feeling the benefits of this. Also significant and gratifying relief to us, is the recognition that ARR's embedded revenue growth profile matching up nicely to not only replace, but to eclipse our quickly fading coal revenues.

It was anything but a boring year for boring old potash. 2022 was obviously a bigger than expected revenue year for us in this segment. On the strength of the price surge in the immediate aftermath of the Ukraine war and its resulting supply shock. Prices have since corrected to below pre-war levels. We think that they have likely overcorrected based on what amounts to an absurdly short term yet sentiment dominating demand destruction noise. There is an actual fact a serious structural supply deficit that has opened and current prices only incentivize a limited part of the immediate and longer term replacement and grow requirements.

Global food production yields are intrinsically linked to the replenishment of essential nutrients in proportion to agricultural depletion. This requirement was not met in 2022 and it seems like it won't be in 2023 either, while global food stocks have fallen to historic lows.

Fertilizer is not a discretionary investment over anything but very short timeframes. And in the past, periods of under application have been naturally met with succeeding periods of higher application. To put this in proper context, the alternative amounts to a food availability shortfall that will disproportionately impact the world's most vulnerable regions.

Our long term royalty mines are incredibly well positioned competitively to be the solution for the new supply that is required both today and for a great many tomorrows. Particular potential relevance in this regard is that until -- at least until recently, the majority of medium term new global supply requirements were expected to be met by Russia and Belarus and growth projects.

We'll keep our bets on Saskatchewan. Thank you. Our operators see the challenge to and are meeting it as an opportunity by investing to accelerate an alternative source of growth applied to the world from their best-in-class mines and resources. AngloGold Ashanti continues to advance exciting discoveries a silicon project in Nevada and recently provided increased and upgraded resource estimates for several deposits.

I also noted that it decided to buyback the concept study stage for the Merlin deposit and to instead integrate with its ongoing prefeasibility study for the adjacent silicon deposit. While maiden resource from Merlin is still anxiously awaited, AGA did refer to it as the gem in the crown of the district. We love the promise and suspension discovery.

Before closing allow us to dip our toes a bit into a debate that seems to be emerging in our industry. Some of you will be aware that NPV based models and mining have come under a fairly prominent attack lately for doing a poor job of approximating Tier 1 asset values. While we don't believe it's time to throw out the baby with the bathwater, we are in the camp that says some of the input conventions used in typical industry NPV models tend to overvalue marginal to average type projects, while significantly undervaluing those ever so rare, top tier, long like, multicycle mining assets.

We'll get into this in more detail in the letter to shareholders in case you want to explore the debate further. We certainly hope that additional logic being applied by capital market participants might help to break the logjam for growth funding. As a reality of significant looming supply deficits for many critical metals and minerals continues to be met with it, don't look up attitude. Otherwise, we expect that more of the world's attempts to replace them in gold mines will have to be funded and controlled, mainly at a desperation, but strategic interest such as carmakers, steelmakers and even governments.

If you think this sector suffers from inflationary inefficiencies today, I'm actually forward to that one. Either way, we continue to like our position. Thank you very much. Now we can open the questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Craig Hutchison from TD. Please go ahead.

[Craig Hutchison, TD Securities]

Hi. Good morning, guys.

[Brian Dalton, CEO]

Hi, Craig.

[Ben Lewis, CFO]

Good morning.

[Craig Hutchison, TD Securities]

A question on the lithium royalties. Obviously, Sigma is ramping up here the next quarter or so and you've got a couple more coming online next year. Can you just give us kind of a broad sense of range of potential revenues you expect from these three royalties that premier to production at current spot prices or some kind of long term prices, so we can get a sense of what these could mean to Altius with respect to your co-participation rates in the assets?

[Brian Dalton, CEO]

Well, there's actually a lot boiled into that question because ramp ups obviously are uncertain and timing can be whatever it is. But if I think forward to say a couple of years now when we think these things would be successfully ramped up, the next big uncertainty here is plugging your favorite lithium price over the next few years and long term. But generally speaking, these are pretty small royalty interest. They were co-participation in royalties.

But the thing about the mines is that they've become progressively bigger, each one of them has seen significant escalation planned production growth rates. So anyway, I guess, if I were to ballpark the next few years, if you were thinking about sort of current consensus long term pricing, these things could deliver an order of a few million dollars a year to us for sure.

[Craig Hutchison, TD Securities]

Okay. And then just switching gears to silicon. I know you guys -- there's some, I guess, debate over land issues and how the royalty extends until some of the adjacent lands. But does the Merlin deposit itself would that be fully covered by your royalty even if it sort of extends over to the adjacent lands?

[Brian Dalton, CEO]

We again, we don't have that detailed sort of resource estimate that would pinpoint it more precisely. But just looking at drilling patterns, we would think that the majority of the lands would be on the core part of the period of interest, but there's certainly some spillover onto land that Anglo recently acquired from Core Mining. They had a target that they referred to as Seahorse, which now appears is simply being extension of the Merlin land.

And I guess just to preempt any more questions on the difference of opinion that you referred to. So under our agreements, there's a base area of interest provision and then a paragraph behind that basically, at least in our reading, suggests that the royalty area of interest expands to the extent that contiguous lands emanate outwards from that AOI. So that has actually become a pretty substantial piece of geography right now.

We've submitted a schedule of those expansion AOI lands to AngloGold under the agreement, is there a requirement there for Anglo to support the registration of titles. This is interest in Land Royalty that we hold. And there is a difference of opinion as to how far that area of interest expansion provision goes. So we're working with them and trying to come to an amicable solution and it's a very, cordial discussion and relationship and we know we've got a long future together.

But in the event that we're not able to reach that amicable solution, our agreement provides a dispute resolution mechanism in the form of international arbitration based in British Columbia. So that remains an option and a fairly straightforward way to sort things out as well. So we're not going to pre judge outcomes here, but we are confident in our reading of the agreement. And believe that the royalty does capture the full extent of this very exciting and very significant new discovery in district.

[Craig Hutchison, TD Securities]

Perfect. And just one last question for me. With respect to liquidity, any plans to upsize the RCF? To say, in case there's some opportunities to present themselves as there?

[Brian Dalton, CEO]

That's probably a better question for Ben, but I don't think there's anything imminent along those lines and we have pretty good relationships with all of our lenders. And if something popped up quickly, I don't think would be a tremendous amount of problem with -- working with him and meeting whatever needs we might have. [Multiple Speakers]

[Ben Lewis, CFO]

I don't think there's no concerns there.

[Craig Hutchison, TD Securities]

Thanks guys.

[Brian Dalton, CEO]

Thank you.

[Operator]

Thank you. [Operator Instructions] There are no further questions at this time. I'll turn the conference back to Flora Wood for closing remarks.

[Flora Wood, VP, IR]

Thank you, Michelle, and thank you everybody for dialing in. Craig, thanks for the questions and we'll talk to you soon on the Q1 call.

[Brian Dalton, CEO]

Thanks everyone.

[Ben Lewis, CFO]

Thank you.

[Operator]

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.