Scully Royalty Ltd. current report, Q2 FY2012

Business Context and Reporting Period

Company: MFC Industrial Ltd. (NYSE: MIL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2012
Filing Date: May 15, 2012
Business Overview: MFC Industrial is a global commodity supply chain company engaged in sourcing, delivering, and financing commodities (minerals, metals, chemicals, plastics, wood). Operations are divided into three segments: Commodities and Resources, Merchant Banking, and Other (including medical supplies and corporate investments).

Key Financial Metrics

Metric (USD in thousands) Q1 2012 Q1 2011
Total Revenues $147,633 $133,837
Net Income (Attributable to Shareholders) $14,585 $2,920
Earnings Per Share (Diluted) $0.23 $0.05
Cash and Cash Equivalents $329,379 $396,753
Total Debt $22,507 $47,127
Net Debt (Net Cash Position) ($306,872) ($339,925)
Shareholders' Equity $558,003 $546,623
Current Ratio 2.90 N/A

Note: Q1 2011 results included a one-time expense of $0.14 per share ($7.2 million share-based compensation).

Material Changes vs. Prior Period

  • Revenue Growth: Total revenues increased 10.3% to $147.6 million, driven primarily by higher sales in the Commodities and Resources segment ($138.5 million vs. $118.7 million).
  • Profitability Surge: Net income increased significantly to $14.6 million from $2.9 million. This improvement was aided by the absence of the $7.2 million share-based compensation expense recorded in Q1 2011 and a reduction in Selling, General, and Administrative (SG&A) expenses to $9.4 million from $11.4 million.
  • Segment Performance:
    • Commodities & Resources: Income before tax rose to $10.6 million from $4.9 million. However, royalty revenue from the Wabush iron ore mine decreased to $4.4 million from $5.5 million due to lower pellet shipments (482k tons vs. 719k tons) caused by ice blockages in the St. Lawrence Seaway.
    • Merchant Banking: Revenues declined to $4.6 million from $11.4 million due to lower transaction activity.
    • Other: Revenues increased to $4.6 million from $3.7 million, driven by medical-related activities.
  • Balance Sheet: Total debt decreased by approximately $24.6 million due to debt repayments. Cash balances decreased by $57.7 million, primarily due to debt repayment and the acquisition of a subsidiary.

Guidance, Outlook, and Strategic Developments

  • Acquisitions:
    • Pea Ridge Mine (USA): MFC holds a 50% interest in this iron ore project. A technical report was filed in March 2012. Dewatering of the mine is scheduled to begin in Q4 2012. A NI 43-101 compliant feasibility study is pending.
    • Kasese Cobalt (Uganda): Acquired a 75% equity interest for $28 million in March 2012. The facility processes cobalt from tailings with an estimated 17-month supply remaining. The company plans to close the site and rationalize assets once tailings are depleted.
    • India Ferrous Metals: Entered an agreement for a new iron ore source in Goa, India, currently seeking operating permits.
  • Dividends: Declared a 2012 annual cash dividend of $0.22 per share (10% increase over 2011). Two quarterly payments of $0.05 per share were made in February and April 2012.
  • Share Repurchase: Commenced an odd-lot share repurchase program for shareholders owning 99 or fewer shares, running from April 9 to May 21, 2012.
  • Outlook: Management notes that credit markets appear to be normalizing, creating future opportunities. The company continues to seek captive commodity sources to improve margins.

Investor Verification Checklist

  • Royalty Revenue Volatility: Verify the impact of seasonal shipping disruptions (ice in St. Lawrence Seaway) on the Wabush mine royalty income and the status of the arbitration regarding royalty rate increases.
  • Pea Ridge Mine Viability: Confirm the timeline and cost estimates for the dewatering process and the upcoming NI 43-101 compliant feasibility study, as historical resource estimates are not yet verified as current reserves.
  • Kasese Cobalt Closure Plan: Review the environmental cleanup costs and asset rationalization strategy for the Uganda facility, given the finite 17-month tailings supply.
  • Merchant Banking Exposure: Assess the sustainability of the Merchant Banking segment given the significant revenue decline (60% drop) compared to the prior year.
  • Share-Based Compensation: Note that the Q1 2011 comparison is skewed by a $7.2 million non-cash expense; future quarters may have different compensation structures.