SRL

Business Context and Reporting Period

Company: Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag International Ltd.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2010
Date of Filing: May 17, 2010

The company completed a major restructuring ("Arrangement") on March 30, 2010, separating into two distinct entities: Terra Nova Royalty Corporation (mineral royalty focus) and KHD Humboldt Wedag International AG ("KID", industrial plant technology). As of March 31, 2010, Terra Nova ceased consolidating KID. The company now trades under the symbol "TTT" on the NYSE. The reported results for the quarter include the industrial business operations up to the deconsolidation date, but the balance sheet reflects only the royalty business and the retained investment in KID.

Key Financial Metrics

Note: The consolidated net loss of $18.5 million includes a non-cash income tax charge of $10.3 million related to the disposition of the 26% interest in KID. Excluding the industrial business, the royalty segment generated $3.8 million in income but reported a net loss of $0.3 million due to restructuring and administrative costs.

Material Changes vs. Prior Period

• Deconsolidation of Industrial Business: The most significant change is the removal of the industrial plant engineering business (KID) from the balance sheet as of March 31, 2010. Total assets decreased from $788.9 million (Dec 31, 2009) to $270.2 million (Mar 31, 2010). Total liabilities dropped from $463.7 million to $19.9 million.
• Revenue Composition: Consolidated revenues decreased 9.4% year-over-year to $101.6 million, driven by the divestiture of the coal and minerals customer group in late 2009 and the deconsolidation of KID. However, royalty income from the Wabush mine increased 79% to $3.8 million, driven by a 117% increase in pellet shipments (874,174 tons vs. 402,494 tons in Q1 2009).
• Profitability: The company swung from a net income of $1.2 million in Q1 2009 to a net loss of $18.5 million in Q1 2010. This is primarily due to the $10.3 million non-cash tax charge on the KID distribution and $6.2 million in foreign currency transaction losses related to the deconsolidation.
• Accounting Changes: The company changed the amortization method for its resource property interest from straight-line to unit-of-production effective January 1, 2010.

Guidance, Outlook, and Risks

Outlook and Strategy

• Future Distributions: Terra Nova plans to distribute remaining KID shares in two tranches: 23% in June 2010 and 29% in August 2010. Approximately 19% will be retained until bank guarantees expire.
• Rights Issue: The company intends to undertake a rights issue to raise capital for opportunistic acquisitions, offering approximately 7.25 million new shares (24% of outstanding) at a discount to market.
• IFRS Adoption: The company plans to transition from Canadian GAAP to International Financial Reporting Standards (IFRS) effective January 1, 2011. This may result in a significant revaluation of the royalty asset, potentially increasing its book value to $200 million.
• Dividend Policy: The Board intends to establish an annual dividend policy.

Risks and Contingencies

• Arbitration: An ongoing arbitration against Cliffs Natural Resources and others regarding underpaid royalties since 2005 is pending a ruling. The claim exceeds CAD $22 million.
• Commodity Prices: Revenue is heavily dependent on iron ore prices and production levels at the Wabush mine, which are controlled by the third-party operator (Cliffs).
• Concentration Risk: Post-restructuring, the company's valuation is heavily weighted on the single Wabush royalty interest.
• Guarantees: Terra Nova retains outstanding guarantees of $143.6 million issued on behalf of KID, though no claims have been made.

Investor Verification Checklist

• Arbitration Outcome: Verify the status and potential payout of the arbitration claim against Cliffs Natural Resources (exceeding CAD $22 million).
• IFRS Impact: Confirm the final valuation of the Wabush royalty asset upon the transition to IFRS in 2011, which could significantly alter book value.
• Rights Issue Terms: Monitor the final pricing and subscription rates for the upcoming rights issue intended to fund acquisitions.
• KID Share Distributions: Track the execution of the June and August 2010 distributions of KID shares and the associated tax implications for shareholders.
• Wabush Production: Verify if the Wabush mine maintains the increased production levels seen in Q1 2010 (874k tons) to support the projected royalty income scenarios.