SRL

Business Context and Reporting Period

Company: Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag International Ltd.)
Filing Type: Form 20-F Annual Report
Period Ended: December 31, 2010
Accounting Standard: International Financial Reporting Standards (IFRS) (First-time adoption effective Jan 1, 2010)

2010 was a year of significant transition. The company completed the distribution of its former industrial engineering subsidiary, KHD Humboldt Wedag International AG ("KID"), to shareholders, classifying it as discontinued operations. Concurrently, the company acquired Mass Financial Corp. ("Mass") in November 2010, consolidating its results for less than 30 days. The company operates in three segments: Commodities and Resources, Merchant Banking, and Other (including medical supplies).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Surge: Revenues increased 481% to $85.4 million, driven primarily by the consolidation of Mass (Nov 2010) and increased royalty income from the Wabush iron ore mine (including a $11.2 million collection of prior-year underpayments).
• Discontinued Operations: The former industrial business (KID) was spun off. While 2009 included $53.0 million in income from discontinued operations, 2010 recorded a loss of $15.5 million from these operations due to tax impacts and distribution costs.
• Non-Recurring Gain: The company recognized $41.1 million in negative goodwill from the Mass acquisition, as the fair value of net assets acquired exceeded the consideration paid. This significantly boosted 2010 net income.
• Liquidity Improvement: Cash and cash equivalents surged from $38.0 million to $397.7 million, largely due to cash acquired in the Mass transaction and a rights offering that raised approximately $50 million.
• Debt: Long-term debt increased from zero to $48.6 million, primarily associated with the Mass acquisition.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Management projects 2011 revenues (including Mass) to be between $410 million and $425 million, assuming no new projects and consistent business results.
• The company established a new annual dividend policy: NYSE Composite Index yield for the preceding year plus 25 basis points. A 2011 dividend of $0.20 per share was declared.
• Strategy focuses on expanding commodities/resources and merchant banking through acquisitions and proprietary investing.

• Wabush Mine Dependency: Royalty income depends on a third-party operator (Cliffs Natural Resources). The company has no control over operations or access to reserve data. An arbitration regarding royalty rates is ongoing.
• Commodity Volatility: Earnings are sensitive to fluctuations in iron ore, metals, and plastics prices. The company does not engage in material hedging.
• Integration Risk: Realizing benefits from the Mass acquisition depends on successful integration; synergies are not guaranteed.
• Global Economic Conditions: A weak global economy could reduce transaction volumes and liquidity.

Investor Verification Checklist

• Mass Acquisition Integration: Verify the actual revenue contribution of Mass in 2011 against the $410-$425 million projection.
• Wabush Arbitration Outcome: Monitor the resolution of the royalty rate arbitration and any impact on future royalty income.
• Discontinued Operations Tax Impact: Confirm the final tax implications of the KID spin-off and ensure no lingering liabilities.
• IFRS Transition: Review Note 36 for reconciliations between Canadian GAAP and IFRS to understand the impact of the accounting change on asset valuations (specifically the Wabush royalty asset).
• Dividend Sustainability: Assess whether the new dividend policy is sustainable given the cyclical nature of commodity trading and merchant banking revenues.