Altius Minerals Q4 2023 Earnings Call Transcript

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March 12, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Altius Minerals Corp. Q4 and Year End 2023 Financial Results. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Tuesday, March 12, 2024.

Operator

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

Speaker 1

Thank you, Joanna. Good morning, everyone, and welcome to our Q4 conference 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 web cast live and you'll be able to access a replay of the call along with the presentation slides that have been added to our website at alpheusminerals.com. The forward looking statement on Slide 2 applies to everything we say both in our formal remarks and during the Q and A session.

Speaker 1

Speaking of Q and A session, we also noticed just recently that there is a button on the webcast where you can send us questions in real time. So use that and we can test it out. And with that, Ben, you're up first to go through the numbers.

Speaker 2

Thank you, Flora. Good morning, everyone, and thank you for joining us. Royalty revenue for Q4 2023 was $16,000,000 compared to $23,100,000 in Q4 20 22. Full year attributable royalty revenue of $73,900,000 compares to $103,500,000 in 2022. Revenue and adjusted EBITDA for the year were impacted by lower commodity prices, lower revenue following Genesee's conversion to natural gas and the scheduled closure of the 777 minutee at the end of Q2 last year.

Speaker 2

The Mineral Royalties segment had an EBITDA margin of 81% 80 7% for the current and prior year respectively, reflecting these decreased revenues against relatively stable fixed costs. Q4 2023 adjusted operating cash flow of 7,700,000 dollars compares to $19,200,000 in Q4 last year. Full year 2023 adjusted operating cash flow of 37 point $3,000,000 compares to $75,900,000 into 2022. The decrease follows the trend of lower revenue, higher interest rates and the timing of income taxes paid. Net loss of $2,200,000 or $0.05 per share for the quarter compares to net earnings of $6,800,000 or $0.14 per share in Q4 2022.

Speaker 2

Net earnings for the year of $10,100,000 or $0.20 per share for 2023 compares to net earnings of $39,500,000 or $0.82 per share in 2022. Net earnings for both the quarter year reflect lower revenues as well as higher interest costs and marginally higher G and A expenses in the Renewable Royalties segment. The 4th quarter loss in 2023 included a non cash impairment charge on the Pickup Mountain royalty as well. Q4 2023 adjusted net earnings of $0.06 per share decreased relative to $0.10 per share during Q4 2022. While adjusted earnings of $0.24 for the year compares to adjusted net earnings of $0.74 per share in 2022.

Speaker 2

ARR reported its results on March 6. Renewable royalty revenue continued to grow, reflecting new operating and development stage royalties in the portfolio, which were added near the end of 2022. GVR also completed a new debt financing in the 4th quarter for US247 million dollars dollars with available liquidity of approximately US107 million dollars at the end of the year. On February 29, TDR entered into a new US30 $1,000,000 royalty investment agreement with Apex Clean Energy related to their 195 Megawatt Angela Solar project in Texas, which is anticipated to achieve commercial operations in May this year and is expected to begin generating revenue in Q4 of this year. I'll turn now to capital allocation and liquidity.

Speaker 2

During the year, we made scheduled debt repayments of 8,000,000 dollars and paid total cash dividends of $14,300,000 The corporation also repurchased and canceled 611,800 shares under its normal course issuer bid for a total cost of $12,500,000 during the year. Our cash balance at the end of 2023, excluding ARR cash, was $12,800,000 dollars and we have $94,000,000 in unused revolver room on our credit facility. ARR held cash of US88 point $7,000,000 at the end of the year. And with that, I'll turn it over to Brian.

Speaker 3

Thank you, Ben, and thanks everyone for being with us today and allowing us to update our views on the year that was and the one that is underway in Altius. I'll do this by segment as per usual. Starting today with base and battery metals, we'll hone in first on copper. There, capital and operating cost inflation continues at a high rate, while prices have been mainly stagnant. This of course means that operating margins have continued to compress and that the gap between actual prices and incentivization prices has further widened.

Speaker 3

That said, the price is not so bad that meaningful amounts of existing production are being forced from the market. Instead, it has been and technical issues that have caused 2024 supply forecast to fall relative to prior expectations. The result of this is that the widely forecast looming supply demand deficit in copper is no longer looming, it seems to have begun. Lithium is another matter. There, prices have clearly fallen into the cost curve as evidenced by several line closures and project stoppages.

Speaker 3

We don't have a developed view yet on what the baseline incentivization price for lithium is, but we know that when everyone who spell lithium a couple of years ago could get funded that we were above it and that now we are well below it. It is still nascent sector and price discovery remains a volatile process. We are keeping tabs on things as it is in times like this, tied out moment, so to speak, that the longer term winners can be most easily identified. The key 2023 developments in the basin battery part of our portfolio included the announcement of a maiden resource at the new Saubo discovery within the Chapada district, which at minimum potentially add many years to the expected mine life or alternatively could result in expanded future production rates. Lundin is busy studying its expansion options at Trapada, while it continues to upgrade its Zuvo resource and test for its limits.

Speaker 3

With the introduction of the potential of SVA, there has been a delay in Lamine's previously announced expansion study result timelines, But this is for the very best reasons we could hope for. Vale continued development market at Voyagee Bay and announced recently that the building of its Eastern Deeps underground mine near completion and that first production is expected later this year. Sigma began production at the Grodo do Surlo lithium mine in Brazil, and as a result, we marked our first ever direct lithium based royalty revenue. Also, Lithium Royalty Corporation managed to execute a very successful IPO before that segment of the market closed up. Ernie and the team have since been busily deploying the proceeds toward new royalties, as conditions on the ground have become increasingly favorable for contrarian investment.

Speaker 3

That provides me with a nice segue into renewables. Frank and the team had a fantastic year. They executed a significant debt capital raise late in the year that leverages upon the prior business deployment of 100 percent equity based capital. The importance of gaining this liquidity at this time relates to the broader difficulties being faced by sector developers and operators in raising competing or traditional forms of capital such as equity and debt. Against that contrarian backdrop, the royalty financing that ARR or GVR has on offer has become more sought after into a wider range of potential counterparties.

Speaker 3

QBR recently announced $30,000,000 royalty investment into Apex's Angelo solar project that will become operational shortly and deliver revenue by late year. The steel pipeline continues to be very active with primary emphasis on additional late operating stage royalty investments. Revenue ramp up is also being supported by earlier developed stage portfolio investments that are continuing to steadily output new operating royalties. This revenue ramp up from our renewables portfolio was timely and coinciding nicely with the end of coal power generation based royalties. In iron ore, IOC had a few issues, including wildfires along its logistics network and some equipment breakdowns that impacted production levels.

Speaker 3

It continues to demonstrate strong commitment to investments in improving production reliability, however, and it is also looking towards structural shifts occurring in the iron ore market and evaluating opportunities to increase the percentage of its product output that could serve the growing electric arc furnace steelmaking segment. We've done a lot of work on this topic recently, and I'll direct those of you who are interested to our website, where you will find an overview of our conclusions. There should also be a link in our slide deck. I've commented several times in the past that the transition underway in steelmaking is a major undertold story. This is still true, but the undertold part is perhaps fading as the big iron ore producers now begin to shift their own narratives and investment patterns.

Speaker 3

This takes us to the project study that Champion published for the KAMI project. This above all demonstrated that KAMI awards are technically suitable for upgrading to purity levels sufficient for utilization in an electric arc furnace and to therefore enable greater expected scrap steel utilization rates in the broader industry. There are still several milestones ahead to be achieved before a project sanction decision can be made at CAMI, But we are certainly encouraged by the competitive capital costs and attractive operating costs indicated by the study as well as Champion's well earned reputation for conservative planning and excellence in execution. One particular milestone that we will be watching for relates to efforts that David and Michael and the team have underway to bring in a steelmaking end user as a project partner who could help support the initial capital investment requirements of the project. The other thing we'll be keeping a close eye on is the price discovery process for Doctor grade iron ore as its market share grows relative to blast furnace grades of iron ore and a structural bifurcation between these increasingly distinct markets continues to evolve.

Speaker 3

Potash returned to more of a state of normalcy in 2023. The price declines from prior supply shock based surge levels, while certainly reducing our royalty revenues year over year, have allowed the fertilizer buying strike by farmers to end. Both of our operators have noticed strong resumptions in global buying and soil application patterns back towards the amounts predicted by long term demand growth trends. Prices also appear to have stabilized at structurally higher levels than prior to the surge. This is likely a function of the more lasting impact of less globalized transportation and logistics frameworks.

Speaker 3

We also continue to believe that the fears of BHP's Janssen project wrecking the market are wildly overblown. The bigger question for us remains of where all the rest of the production that will be required by the time Janssen ramps up will come from. We are confident that the mines and operators we are associated with have strong competitive advantages that will allow them to continue to at least hold market share in the steadily compounding global potash market on a long term basis. We were certainly pleased in this regard by the announcement from Mosaic regarding its recent proving run at Esterhazy that is reportedly now made at the world's largest potash pond by capacity. Last but not least, silicon continues to grow in recognition as a world class gold discovery and in importance for our shareholders.

Speaker 3

With its year end reporting, AngloGold Ashanti published an initial resource for the Merlin Gold discovery that considerably exceeded the top end of its prior indications and guidance. And perhaps more importantly, with respect to our sense of the royalty valuation, noted that it now believes annual production rate potential to be in excess of 500,000 ounces per year, up from previous indications towards greater to 300,000 ounces per year. Our upcoming arbitration process to determine the potential district scale applicability of our royalty beyond the immediate silicon and early deposit areas remains on schedule for hearing early next month. Meanwhile, we are continuing to explore strategic alternatives and are weighing and testing a number of combinations that range from selling and our swapping for non precious metals royalties to maintaining silicon as a part of our long term portfolio. That decision is one we expect to be in a position to make sometime this year.

Speaker 3

I said that was last, but there are some shout outs that I feel like I should make before closing or that I really want to make before closing. Vocami and Silicon are royalty holdings that stem from our project generation business. We have long held that our royalties are the eggs, while PG is the golden goose. And while hatching times are by no means rapid, the results serve to help us meet our core objective, that is to deliver outsized total portfolio returns over time to our shareholders. I therefore take this opportunity to let the whole of the PGT know that their efforts, innovations and ultimately their patient long term execution strategies do not go unrecognized.

Speaker 3

I also take pride here in commending the broader team and the tremendous work that they do to keep our finances and governance in order in evaluating countless opportunities find those rare jewels and keeping you, our owners, well informed. It is a daily treat to work with each of you within this team. Thank you sincerely. And with that, we can turn it over to any questions.

Operator

Thank you. First question comes from Carey MacRury at Canaccord Genuity. Please go ahead.

Speaker 2

Hey, good morning, Brian. In terms of ARR, obviously looking at it's got a great, obviously, revenue potential as you said the future, which would be obviously a big material component of Altius Minerals. How do you think about like does that worry you in terms of being too big? I mean, obviously, it's a good problem to have, but how do you think about ARR within ALS in the longer term?

Speaker 3

When I take a longer term view at our total portfolio, there's 5 key kind of components, maybe 5 or maybe there's 4, but maybe there's 5 now, depending on how we go with silicon. I actually think there's pretty good looking growth across potential across all the elements. So I don't think that there's I don't have a sense that something is getting terribly out of balance, to be honest with you. So yes, ARR, I mean, we just look at it as a long term part of our portfolio. It's doing all the right things.

Speaker 3

Revenue is really starting to ramp up now. We're kind of past that initial phase when all of our early investments were into developers and obviously that takes time for maturing and that's really started to happen now. There's projects that are beginning to pay. There's lots of construction announcements from within that portfolio. And yes, it's good.

Speaker 3

No radical thinking going on at all. Just keep growing the business and let it drive benefits back to shareholders here.

Speaker 2

All right. That's good. And then maybe, obviously, a lot of companies are somewhat capital starved. So are you seeing more opportunities to deploy capital into new royalties or streams or anything?

Speaker 3

Certainly on the renewable side, I mean this in renewables, I I said it on the renewables conference call that it feels an awful lot like the mining world did back in that 2015, 2016 period when balance sheet repair was kind of the big driver. So those kinds of conditions certainly are present today in renewables and pounding the table with the team that don't spread out the liquidity you've got right now, get it deployed, So that kind of messaging. On the mining side, I got to be honest, not much has changed there. I still feel like we are in that in betwixt period where just the incentivization just isn't there. The equity valuations, I don't think are supportive of big capital investment.

Speaker 3

There hasn't been that kind of shift really away from focus on excess cash flows towards shareholder returns versus growth. And really until all of the parts are somewhat clear, I don't expect a lot of projects to come to market for the full financing package that might include royalty financing. There are some things that are in the market. We've been making a lot of passes lately. Some of that, I'll be honest, is a function of just what we're seeing in our own portfolio, any kind of big external acquisitions right now, particularly if they would involve equity dilution are just not attractive to us because again we just see too much internal embedded growth.

Speaker 3

But mostly I would say it's just not seeing

Speaker 4

those

Speaker 3

opportunities that we really, really like and that we get around. We're ready for them and we my God, we look at so many projects these days. It's crazy. But no sweet spot pitches that we've seen in a while. And that's fine because this is our own portfolio is bringing the growth.

Speaker 2

Okay. Maybe one last one, if I can just speak it in. I know obviously the coal business is done, but should we be expecting any residual revenue into 2024?

Speaker 3

I don't believe so. If it is, it's not material. Maybe Ben might have more insight into that analysis. Yes, it won't be meaningful.

Speaker 2

Okay. That's it for me. Thanks guys. Thanks, Gary.

Operator

Thank you. Next question comes from Craig Hutchison at TD Securities. Please go ahead.

Speaker 5

Just a question on the Silicon Gold royalty and the arbitration. I there's a hearing early next month. Are there certain milestones set for getting some kind of decision on that? How quickly, I guess, can we get some kind of decision after the hearing?

Speaker 3

No, there's no set timeline for the decision. The hearing is expected to take a few days, and that's what's kind of scheduled and on the books. And then there'll be an opportunity for final submissions a little bit after the hearing date. So I really can't point to a day. I will just say that this is not like a court docket where there's hundreds of competing files to be dealt with.

Speaker 3

This is a dedicated group of selected arbitrators that I expect anyway will probably want to clear this file in a reasonably expeditious manner. But honestly, no, I don't have I can't say on this day, look out here as soon as the results come.

Speaker 5

Okay. And maybe just a question on return of capital. You guys have bought back stock last year. Any more thoughts on that? Is that your priority, potential increase in dividend this year?

Speaker 5

Maybe just thoughts in terms of what you guys want to do with your excess free cash flow?

Speaker 3

Yes. First off, we don't look at the buyback as in terms of returns of capital. I mean, I know it has that function, but we look at it much more like we would a competing M and A type transaction, quite frankly. We look at it as an opportunity to buy greater interests in on a per share basis and all the assets that we hold. So it's very much an opportunistic decision when we make it.

Speaker 3

And certainly for the last year or so. As far as capital allocation prioritization goes, nothing has outranked. And essentially, if you look at our free cash flow generation for the year, that obviously dividends maintained as a priority, but everything discretionary, if you will, went into that internal denominator focused M and A initiative that is the buyback. We feel like we've been being handed the gift and we're taking it. Okay.

Speaker 3

Understood. Thanks, guys. Thank you.

Operator

Thank you. Next question comes from Brian MacArthur from Raymond James. Please go ahead. Brian, your line is open. Please proceed with your question.

Speaker 6

Sorry, good morning. Can you hear me now?

Speaker 3

Yes.

Speaker 6

I'm just following up on Craig's question. You made a statement that you think you'll be able to decide on the strategy later this year. Does that imply though that you think you will have a decision on the court case by then or would you actually make a decision on what to do on silicon without having clarity on the court case?

Speaker 3

No, the court case is important. I mean, whether we're a buyer or seller, what that arbitration really is going to determine is it's an element of the overall optionality and how that might impact the value of the royalty either as a holder or to external buyers. No, but we do anticipate that during the year, we will have the results of the arbitration, hopefully, relatively soon after we complete the hearing. The other thing that we were kind of hung up on a little bit that we'd identified as important before we felt we were at a potential decision point was for a while now we felt that Anglo's guidance towards more than 300,000 ounces per year really, really suboptimal against the kinds of resource growth we've seen there. I think across the district now, Anglo is reporting more than 17,000,000 ounces with upside indications all over the place.

Speaker 3

So that as long as that number was out there, that 300,000 ounces a year was out there, we felt like there was again, it looks suboptimal and to the extent that, that impacted potential valuations, we just weren't going to do anything. But now they've come off that and come out with stronger guidance towards greater than 500,000 ounces a year. So that and the arbitration would have been the 2 things we were really watching for before we even considered really getting serious about making a decision. And yes, so we're halfway there, more less than a month out from getting to our hearing, so getting close. That's why I think that this year is the year that we have to make a decision when we're ready on this.

Speaker 6

Great. Thanks. That's very helpful. Maybe moving just on to another topic. I noticed you managed to buy a little more the potash royalties in December.

Speaker 6

Are there still more opportunities? I realize you only own 91.7 percent, but are there other opportunities out there or maybe a bit of color on how that became available?

Speaker 3

Yes. So that was from the product royalties were held or built or originally bought in a limited partnership. And so there was an individual family trust that was part of that and Liberty Mutual, the insurance company, was part of that alongside of Altius. So that goes back to the original acquisition. A couple of years ago or a few years ago now, I guess, we were able to reapply our Liberty's interest in that limited partnership.

Speaker 3

And this year, there were some of the members of the family group were doing things that needed to raise some capital. So we were very happy to get an opportunity to buy some more units there. Great. Thanks. We've also always been kind of there are individual owners of some of the unit areas, the potash mines in Saskatchewan, they tend to be pretty modest land holdings right now that are part of the greater unitized area.

Speaker 3

So we're always kind of on the bid there, if you will, for more increments of that, but it tends to be very incremental.

Speaker 6

Great. Thanks. And my next question just relates to the coal as well. You mentioned you won't get anything this year, but where does the court case stand right now?

Speaker 3

It was heard late last year and quite frankly, I don't know when that decision is likely to come. That stands in contrast a little bit with the arbitration process in that. It's obviously a very active court calendar that basically is competing here in terms of attention from the court. So it's really out of our hands, but it's been a while now for sure. I would again, I don't want to speculate on wind, but it's concluded and we're just all waiting for the court's decision.

Speaker 6

Great. Thanks. And sorry, my last question, you mentioned on with related to Kami and one of the things you were sort of waiting for was price discovery for what premium DRI might trade for in the market. Do you have any preliminary thoughts about what that might be, that premium going forward from your perspective?

Speaker 3

Oh, I have a lot of talking about that, quite frankly. I don't know if you got a chance to see it, but we talked about it in the prepared remarks linked to a presentation that we attempt just that. We go through a whole bunch of different scenarios. What I feel very strongly about is that the current linkage between glass furnace grades of iron ore just up the sort of a sliding number up the iron content scale makes no sense whatsoever. Glass furnace grades of iron ore quite frankly serve an entirely different industrial process and why they input would link to that makes very little sense.

Speaker 3

Doctor grades of iron ore in contrast, what they really I won't say compete with what they complement are scrap usage in an electric arc furnace. So it's logical to me that somebody is running an electric arc furnace and trying to decide on the input blend on any given day or month that they're going to weigh the relative price of scrap steel at various quality levels to the amount of Doctor grade iron ore that you need to put in alongside of that. So you've got flexibility if you're running an electric arc furnace, you might have you might run it at 100 percent Doctor grade iron ore, you might run it at 30%. It's kind of a bit of a literally alchemy, But it still makes true the fact that the price that's important as a benchmark for that decision is the scrap steel price, not the blast furnace grade iron ore that can't even possibly go into an electric arc furnace. It's just too absurd for words.

Speaker 3

So that will obviously shift. It's just that Doctor grade iron ore represents such a tiny market right now that it hasn't had that significant price discovery moment. But you only have to look at how many electric arc furnaces are being sanctioned right now and built to know that all that's not going to change in the future. It's already in the process of changing. So it will be fun.

Speaker 3

But it won't be based on blast furnace grades of iron ore, which are in structural decline.

Operator

Thank you. Next question comes from Adrian Day at Adrian Day Asset Management. Please go ahead.

Speaker 4

Hi, good morning, Brian and team. A couple of thoughts on silicon. When you said you have an excellent decision whether to swap it for other royalties or keep it. You didn't mention just selling the royalty. That was the first part.

Speaker 4

And secondly, you've obviously looked at the potential of spinning it off. And I wonder if you have any thoughts on that?

Speaker 3

Yes. When I say swapping, I think realistically what we're talking about is some combination of either a straight up sale or a sale that involves royalties coming our way as part of the consideration. And I think generally speaking, we prefer that over a straight up cash sale. If we're parting with a significant royalty asset. We want to see something come back in and hopefully something that offers similar levels of long term option value as we see in silicon.

Speaker 3

So it's definitely a tall order. But I don't think it's impossible. But again, I've said this before, like if you think about what silicon represents and what we have so commonly stated is our objective in acquiring royalties, it hits an awful lot of the hallmarks. So it won't be an easy decision and maybe as much as anything, it will be a test of how much others might consider it to be worth in their structures versus what we consider to be worth in ours, and that's going to take a little bit of effort to explore. I wouldn't say a spin out is off the table, but it's not feeling like a priority right now just because do we want to be a shareholder of a gold royalty company, say, in the way that we are we own our royalty in IOCs through an equity holding and renewables.

Speaker 3

But the difference there is that we control those businesses. And I guess the easier way to answer it is that our structure probably looks cumbersome enough. I think it's either a direct hold or we do something more strategic with us. And I honestly don't know which way that's going to go right now. That's truly a very live internal debate and there's still some data points to be gathered around the arbitration and really just about a better sense of what others see as the potential value here.

Speaker 6

Okay.

Speaker 3

Thank you. I wish I could say more now, but that's kind of where I'm to.

Speaker 4

Okay, great.

Speaker 3

Thank you.

Operator

Thank you. We appear to have no further questions. You may proceed.

Speaker 1

Thank you, Joanna, and thank you to everybody who joined today, especially in the Q and A period. We look forward to speaking again in our Q1 results.

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