Altius Minerals Corporation

Good morning, ladies and gentlemen, and welcome to the Altius Minerals Corp Q3 2023 Financial Results Conference Call. At this time, only internal lesson only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Thursday, November 9, 2023. And I would now like to turn the conference over to Ms. Flora Wood. Thank you. Please go ahead.

Good morning, everyone. Thank you, Ina. Welcome to our Q3 2023 conference call. Our press release and interim filings were released yesterday after the close and are available on our website. This event is being webcast live, and you'll be able to access a replay along with the presentation slides that are on our homepage and under the investor information section. Brian Dalton, CEO, and Ben Lewis, CFO, will speak on the call. The forward-looking statement on slide two applies to everything we say in our formal remarks and during the Q&A session. And with that, Ben is up first to take us through the numbers. Go ahead, Ben.

Thank you, Flora. Good morning, everyone. Thank you for joining. Royalty revenue for Q3 2023 was $17.8 million, or $0.38 per share, compared to $26.2 million, or $0.55 per share, in Q3 2022. Adjusted EBITDA followed the trend of revenue in the third quarter, with the overall EBITDA margin being 69% this year versus 84% in the third quarter of 2022. Again, following the lower revenue against relatively stable fixed costs. The minerals royalty segment had an EBITDA margin of 76% and 87% for the current and prior year respectively. Both revenue and adjusted EBITDA were impacted by lower commodity prices, primarily potash, and the scheduled closure of the 777 mine at the end of Q2 of last year. Q3 2023 adjusted operating cash flow of $11 million or 23 cents per share compares to 25.9 million or 54 cents per share in the same quarter last year. The decrease again follows the trend of lower revenue as well as slightly higher interest paid in current period. Net earnings of 3.5 million or 8 cents per share compares to net earnings of 11.5 million or 22 cents per share in Q3 2022. Net earnings for the current quarter reflects lower revenues as well as higher interest costs and marginally higher G&A expenses in the renewable royalty segment, which added a couple of people during last year. In addition, current quarter G&A includes $537,000 for the purchase of voluntary carbon credits related to the 2022 financed emissions, which is based on our calculated share of operating royalties emissions. Net earnings for the quarter was also affected by equity losses of approximately 2.9 million in GBR's investments in Blue Star and Nova. That's two development stage renewable energy businesses. Adjusted net earnings of 5 cents per share for the quarter decreased relative to 20 cents per share during Q3 2022. The main adjusting items are unrealized gains on derivatives related to the revaluation of share purchase warrants and junior mining equities, corn exchange losses, and gains on disposal of mineral properties. ARR reported its Q3 results earlier this week on Monday. Revenue from ARR continued to grow from the addition of several operating projects which were acquired in the second half of 2022. And another project is expected to reach commercial operations before year end. Electricity prices increased in the current quarter due to warm weather and increased power demand in certain markets in which GBR has operating royalty interests. On October 31, 2023, GBR announced that it entered into a $247 million project. Senior secured credit financing, which enables GBR to accelerate its growth trajectory in the renewable royalty sector while maintaining a competitive cost of capital. This agreement represents another strong endorsement of GBR's business model. Brian will speak more on the strong progress at ARR. And you can review the recently published quarterly followings and investor conference call remarks on ARR's website. Excuse me. I'll now turn to capital allocation and liquidity. We made our regular scheduled principal repayment of $2 million on our term debt during the quarter. We also paid cash dividends of $3.6 million, or $0.08 per share, to common shareholders and issued 10,860 common shares shares valued at $200,000 under the corporation's dividend reinvestment plan. The Board of Directors approved a regular $0.08 per share dividend that will be paid to shareholders of record on November 30, 2023, with a payment date of December 15, 2023. The corporation also repurchased and canceled 275,000 common shares under its normal course issuer bid for a total cost of $5.7 million during the quarter. In addition, ARR funded $4.7 million into GBR, representing its 50 percent portion of new and existing royalty investments. Our current liquidity consists of $16.2 million in cash at the end of Q3, and we have $93 million in unused revolver room on our credit facility. ARR had cash of approximately US $38 million at quarter end. With that, I'll turn it over to Brian.

Thank you, Ben. Thank you, Flora. Some higher-level observations and commentary from me today, as per usual, before turning it over to questions. Apologies in advance to fellow shareholders for anything that sounds like a broken record, but as I've said many times, if our story is changing that quickly, something is wrong. Prices for most of our commodity exposures continue to hold at levels well below that required to incentivize new supply, as the markets continue to be gripped by near-term demand-side concerns. concerns that seem to be having trouble manifesting despite continuing to dominate sentiments. In the case of copper, the period of disincentivized growth capital investment has now crossed a full 10 years. Meanwhile, one of the most common features we have observed following this quarter's reporting by the major producers has been production guidance downgrades, not to mention heightened geopolitical risk and increasing threats to existing major operations, as well as several notable pipeline projects. It's all starting to lead us to wonder about whether the widely projected looming copper supply demand deficit missed the memo, that it wasn't supposed to show up until 2025 or 2026. Let's all stay tuned on that. We also note it would interest that one of the only big new projects to commission recently has updated its capital cost number once again. And the result is a capex intensity that is more than $13 a pound of new capacity. At our investor day in the spring, we revealed that our estimated incentive price for copper had just crossed over $5 a pound on our numbers. But note that this estimate was based upon a production growth capex intensity estimate that was far lower in the $8 a pound range. $13 is closer to today's reality. We are very low on our incentive price call. Potash market, the most fundamentally fundamental non-commodity market that arguably exists, has obviously been on a wild ride on a short-term basis, and this has played heavily into our recent revenue profile. I felt today it would be worthwhile to reset some context since this topic continues to be a hot one in our interactions with shareholders. Our potash royalties last year were well ahead of expectations because of the spike in pricing that occurred following the Ukraine war and the market's uncertainty around supply availability from the major Russian and Belarusian producers. The increased pricing drove global farmers to defer purchases and application to their soils. And as a result, less potash was put to ground than was extracted, or mined, if you will, through farming. In other words, soil potash levels have been depleted. It's all pretty simple math. There were two key short-term impacts from this dynamic. Firstly, lower purchasing caused prices to tumble back. And secondly, and more fundamentally, Agricultural yields have now decreased due to the nutrient-depleted soil. So it should not really be coming as a surprise to anyone, although it does seem to be the case. Both of our Canadian mine operators have forecasted a strong rebound in demand back to trendline in 2024. This is based upon their early customer interactions and sales inquiries. The world can't actually afford firm reductions while overall food demand continues to increase. Also, Farmers are recognizing that they are losing more revenue on yield reductions than they save by buying less potash. So sales are now in serious catch-up mode relative to fundamental demand, and prices have stabilized and even begun to turn up in certain markets. That's more than enough said on the recent or short-term part of the potash market, which, while volatile, obviously, has ultimately been working as it should. To touch on the positive, bigger-picture potash outlook we've been consistently espousing before we move on, nothing that has happened over the past two years has changed anything there, and in fact, the events have proven to be confirmatory. Around 2.7% more potash needs to be applied to global farms every year, on average, to keep pace with increasing food demand. That's a compounding 2.7%, by the way. So run that forward, and today's 70 million ton global requirement grows by 20 million tons to 90 million tons or so over the next decade, and by 50 million tons to 120 million tons total in 20 years, and so on. We laid all of this out in our Investor Day materials earlier this year, together with some scenario analysis around what that will mean for our underlying royalty volumes. We continue to fully stand by this work with nothing from recent events that would make us alter anything. As I said, the opposite is true. Hopefully, this also provides context for our shareholders on how wildly overblown the market's fixation on the impact of BHP's Janssen project is, which aspires to very gradually introduce 8 million tons of potash into the market over the next decade or longer. The real question not being asked is one of where the rest of the needed tons will come from to keep the world fed. We believe our minds are going to play a key role in that. Iron Ore saw another decent quarter in terms of pricing, and it also seems to have missed the memo that it is supposed to be trading far lower, as has been the case for most of the past seven years, by the way. Overall, our revenues came in pretty close to our internal expectations, despite another tough quarter in terms of production at IOC. These guys have been having a hard time catching any breaks, but I do think they are putting in the effort and the capital to get the ship righted. We also have continued to hear from Champion about continuing positive technical progress and demonstrating that CAMI can produce an ultra-pure and ultra-rare DR quality product as it nears completion of the project feasibility study. I highly encourage our shareholders to access Champion's latest quarterly newsletter that is available on its website to get a better handle on the macro-scale developments underway that are driving outsized demand for this type of material relative to more traditional types of iron ore. ARR made huge strides during the quarter in terms of advancing the pipeline of new royalty financing opportunities, and perhaps more importantly, in securing the liquidity required to execute upon these opportunities when it negotiated a new U.S. $247 million green credit facility. The equity and debt markets have really deteriorated for the renewable sector more broadly over the past couple of years, yet the need for capital and new production capacity has continued to increase. It's a perfect storm of opportunity as far as we can see, and there's very strong parallels with events and sentiment conditions that we and most of the other established mining royalty companies back upon so fondly when recollecting the 2015-2016 period. ARR royalties continue to ramp up nicely, and this is coinciding well with the end of coal royalties stemming from our portfolio, as we had hoped. The Genesee power plant is nearing completion of its conversion to gas in accordance with regulatory requirements. I should also point out that a hearing is scheduled in Alberta later today of our appeal of an earlier decision to dismiss our claim against the governments of Alberta and Canada relating to the de facto expropriation of our Genesee royalties. We will keep you posted on how this goes once the decision is released. Finally, on Silicon, there's not much new to report following the significant updates we provided last quarter. However, the operator has noted that it continues to expect to complete the resource declaration for the Merlin deposit and the concept study for the expanded Silicon project, which includes Silicon and Merlin deposits, in the current quarter. It reiterated that the study is, and I quote, evaluating opportunities to capture synergies from increased economy of scale and integrated infrastructure with potential for large-scale mining, end quote. We like the sound of that. So that's it for my prepared remarks. We'll now turn things over to questions. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please leave your handset before pressing any keys. One moment please for your first question. Your first question comes from the line of Adam Schwartz from Back Bear Value Partners. Please go ahead.

Hi, good morning. Thanks for taking my question. Could you comment a little bit about your thoughts on capital allocation and the potential for aggressive levels of buybacks and how you weigh that versus saving for the future, paying down debt, investing in new projects in the current climate, just given where the equity is trading. I'm just curious how you think through those decisions.

Yeah, so when we think about the buyback, first and foremost, we look at it not in the traditional bucket of capital returns. We kind of assess it more like we would third-party acquisitions. It almost falls more in an M&A type of bucket. So yeah, price is definitely a function of how motivated we might be on the buyback, obviously in accordance with liquidity and other factors. So yeah, it's just really we look at what we think the underlying value of the business is and how the market wants to price it on any given day, and that really drives our decision. We've been relatively aggressive throughout this year on the buyback, because again, we're pretty constructive on a lot of developments that are occurring within our business, but that has been weighed numerous times, I'd say, over the year in terms of what is happening with debt service costs and those kinds of things. But generally speaking, we continue to be not that concerned about our debt levels, but we watch things closely there as market conditions change. And so far, to date, the decision has been to allocate excess capital to the buyback to the full extent that we can and As of today, again, this is a dynamic market, but as of today, well, today I would feel even stronger about that than I would have a week ago. I hope that answers the question.

It does. Thank you.

Thank you. And your next question comes from the line of Craig Hutchinson from TD Securities. Please go ahead.

Hey, good morning, guys.

Hey, Craig.

How are you? Just a question on the potash volumes per se. Obviously, we're seeing growth from Mosaic and Nutrien. Do you have any sense, just based on the indications that they've made going into next year, what type of volumes you guys might see on your royalties in terms of maybe percentage growth year over year?

I won't try to quantify that directly, but I'll point out a couple of items. There were some big turnarounds at the operations in the third quarter, particularly if you look at Mosaic. They, you know, in order to meet that extra demand that came at them in the most recent period here, they had to restart colon, say, and provided incremental tons there. But that was partly a function of a major turnaround that was underway at Esterhazy. And I think they've been pretty clear in their messaging that their preference is to maximize Esterhazy production when they can, but it's probably too difficult. They're basically completing the ramp-up of K3 and some de-bottlenecking work. I believe they're talking about mid-next year that that should be fully complete. So we'd expect more of their overall development production to come from ester hazy, where our royalty exposure is going forward. And similarly, you know, at nutrient core, he was on big turnarounds and whatnot this year. Short are all looking pretty hard at, uh, at just overall optimizing production going into next year. They see this big, uh, big demand surge. So again, some of the, some of the muted volume this year was less a function of overall market conditions and more just, you know, operational decisions and project-level turnaround-type work that occurred at the operations. So, you know, taking advantage of the low prices to do necessary work at the operations to tune them up for when markets are better. Pretty constructive on next year, though.

Okay. Let me just – sorry. Yeah, maybe just a follow-up question. Just for the garbage market conditions in general, I listened to the Altice Renewables call the other day. It sounds like there's obviously a flood of opportunities there, given some of the constraints for access to capital. And in your opening remarks, you kind of mentioned some cost of runs we're seeing on the base metal projects out there as well. Are you starting to see opportunities, more opportunities in terms of the base metal royalties, just given some of the capital overruns we're seeing and the cost of capital going up?

No, that's a mix. elements to that, because I think as everyone else looks at other people's projects and big cost blowouts, they start to get more suspect of their own projects. In many cases, anyone that has kind of stuck in the pipeline, their capital estimates probably are starting to feel very stale right now, and I would expect they're not excited about what new numbers might look like. So there's a real hesitancy out there There's no incentivization in terms of price. We're definitely below incentivization. I think the real question now is just how far below it we really are. Until operators can get more constructive on all forms of capital being available, there's not much new project finance work getting done that would give us opportunity to play. We're continuing to look pretty hard at you know, bigger picture, longer term development stage stories and trying to handicap just which projects in the world are going to be the ones that will fit into, you know, the deficit when it really starts to build up and when incentivization pricing does arrive with the shorty month. And that's getting harder, too, because that added layer of not just the technical elements now, like a political risk has never been higher. at handicapping exercises. I'm telling you, copper is scary from one perspective and tremendously exciting on the other.

Okay, great. Thanks, Brian. I appreciate the comments.

Thank you. And your next question comes from the line of Adrian Day from Adrian Day Asset Management. Please go ahead.

Yeah, excuse me. Good morning. Two quick questions. The shrinkage in margin, is that entirely due to the reduction in revenue? Or other factors? And then the second question, I may have missed it, and if I do, I apologize, on CEMI, when are you expecting the updated feasibility?

Yeah, thanks, Adrian. On the first one, on the margin, it is Pretty much that, because there's a fixed cost component to the business when you consider that we maintain the project generation business at stable levels. In fact, we often step things up when things are uglier. So the fixed cost relative to revenue, costs don't go up dramatically when revenues go up, and they stay the same when they go down. So that's your margin compression right there. We've got some flex in that, but we're not making big adjustments to the business just because sentiment is weak for a period. As far as Cami goes, it's not perfectly clear as to when that announcement is going to come. I think on the last call I heard from Champion, they talked about maybe before the end of the year, if not very early in the new year. So somewhere in that pretty soon in either way. Okay. Yeah, pretty soon. Thank you.

Thank you. Once again, that is star and one to ask a question. Ms. Wood, there are no further questions at this time. Please proceed.

Thank you, Ina. And I want to thank everybody for joining today and for the questions. And we'll look forward to speaking to you after Q4 results.

Thank you, ladies and gentlemen. Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may all disconnect.