Scully Royalty Ltd. — FY2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023; filed April 29, 2024. This is an annual report, not a standalone fourth-quarter filing. Unless noted, amounts are Canadian dollars. Financial statements are prepared under IFRS.
Business context
Scully’s core asset is a net-revenue royalty on the Scully iron ore mine in Newfoundland and Labrador: 7.0% on ore shipped from the mine and 4.2% on ore from tailings and other disposed materials, with a $3.25 million annual minimum. The company also has Industrial and Merchant Banking segments, but management plans to rationalize these non-core businesses. The common shares trade on the NYSE as SRL; 14,822,251 shares were outstanding at year-end.
Financial results and liquidity
| Metric (C$ millions, except per-share data) | FY2023 | FY2022 |
|---|---|---|
| Revenue | 54.9 | 63.7 |
| Net income (loss) attributable to shareholders | 1.4 | (23.4) |
| Basic and diluted earnings (loss) per share | 0.09 | (1.58) |
| Operating cash flow | 26.2 | 30.6 |
| Cash at year-end | 78.3 | 63.7 |
| Short-term securities | 13.0 | 30.3 |
| Working capital | 144.0 | 136.6 |
- Revenue declined about 14%, primarily reflecting the March 2023 sale of hydrocarbon assets; increased royalty income partly offset the reduction.
- Royalty segment revenue rose to $35.3 million from $29.2 million, while Industrial revenue fell to $12.2 million from $28.5 million. Merchant Banking revenue increased to $7.4 million from $5.5 million.
- Costs of sales and services were $19.1 million (2022: $29.9 million); selling, general and administrative expenses were $24.2 million (2022: $28.5 million). The filing does not present a single consolidated operating-margin measure.
- EBITDA, a non-IFRS measure, was $19.9 million versus an $11.4 million loss. The 2022 loss included a $31.4 million non-cash impairment on hydrocarbon assets held for sale.
- Investing activities used $6.3 million and financing activities used $3.8 million in 2023. Cash increased by $14.5 million, including the effects of operating, investing and financing activity and a $1.5 million adverse exchange-rate effect.
- Current assets were $164.5 million and current liabilities $20.6 million. Other receivables rose to $67.8 million, including $20.6 million related to the iron ore royalty interest.
- Bonds payable were $36.1 million, due in August 2026, with a 4.00% nominal coupon and security over certain European properties. Cash exceeded this bond balance. A separate non-interest-bearing loan payable was carried at $7.6 million, has no fixed repayment date, and has a stated undiscounted contractual amount of $55.6 million payable from a subsidiary’s surplus cash.
- Overall income tax expense was $8.8 million, versus a $0.5 million recovery in 2022. Shareholders’ equity was $322.5 million (2022: $325.2 million); book value was $21.76 per share.
Material developments, outlook and risks
- Scully mine restructuring: The mine operator entered CCAA proceedings in October 2023. Its debtor-in-possession facility was initially US$75 million and increased to US$125 million in April 2024. A sales and solicitation process was underway; the company reported that the initial successful bidder consortium later declined to proceed. Scully says it is monitoring the process and may take an active role if no third-party solution is available.
- Royalty collection exposure: Royalty receivables were $20.6 million at year-end. Claims subject to the CCAA stay included $12.4 million of pre-filing amounts, including Q2–Q4 2023 royalties; the filing also describes disputed past underpayments. Scully reported receiving $8.2 million of post-filing royalties after year-end and the Q1 2024 net royalty payment in April 2024. Management recorded no expected credit-loss allowance after considering the available information.
- Mine operating context: Operator-reported shipments were 3.54 million tonnes in 2023, up from 3.10 million in 2022. Scully’s royalty revenue depends on production, iron ore prices and operator solvency; the company does not control the mine and has limited access to technical and reserve information.
- Asset rationalization: Scully sold its Alberta hydrocarbon interests in March 2023 for a $25.0 million base price, subject to adjustments. It received $18.2 million at closing, net of GST, and a further $1.8 million adjustment payment. It recorded a $1.2 million impairment reversal; the assets had incurred a substantial impairment in 2022.
- Dividends: The company paid a $0.23 per-share dividend in May 2023, but is taking a conservative approach amid the operator’s CCAA proceedings and potential capital needs. It intends to resume quarterly dividends after the operator’s financial condition is resolved; future payments are not assured.
- Legal contingency: Scully and subsidiaries are defending a claim alleging a guarantee of a former parent’s obligations. The asserted amount was approximately $118.1 million plus interest and costs at year-end. The company considers the claim without merit, intends to defend it, and recorded no provision; the outcome is uncertain.
- Other risks include iron ore and foreign-exchange volatility, counterparty and credit exposure, banking regulation, potential impairments, tax disputes, and restrictions on conversion or remittance of RMB. Management reported effective internal control over financial reporting as of December 31, 2023. The independent auditor issued an unqualified IFRS opinion and identified valuation of the mine and power plant and fair value of investment properties as critical audit matters.
Most important facts for investors to verify
- Current CCAA status, any completed sale or restructuring, mine operating continuity, and the operator’s ability to fund production.
- Collection and recoverability of the $20.6 million royalty-related receivable, treatment of stayed claims and disputed underpayments, and subsequent royalty receipts.
- Whether royalty income and mine shipments can be sustained, including exposure to iron ore prices and the company’s limited access to operator reserve and technical data.
- Cash available to the parent versus cash held in regulated or foreign subsidiaries, future capital needs, and the terms and funding source for the $7.6 million carrying-value loan payable.
- Resolution of the approximately $118.1 million guarantee litigation claim, tax matters, and key assumptions behind the mine and investment-property valuations.
- Whether and when dividends resume, and progress and realizable value from the planned rationalization of Industrial and Merchant Banking assets.