Scully Royalty Ltd. — FY2019 Form 20-F
Reporting period: Year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide separate Q4 results. Financial statements are prepared under IFRS in Canadian dollars unless otherwise stated. Amounts below are C$ millions except per-share data and ratios.
Business context
Scully is an international merchant bank and investor with activities in iron ore royalties, industrial and resource assets, and regulated specialty trade finance and merchant banking through Merkanti Holding. In 2019, it reorganized reporting into Iron Ore Royalty, Industrial Equity, Merkanti Holding and All Other segments. The Scully iron ore mine restarted under a new operator, with its first seaborne shipment announced in August 2019. The royalty provides minimum payments of $3.25 million annually, creditable against royalties generally equal to 7% of net revenue.
Financial results and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $113.3 | $139.8 |
| Costs of sales and services | $96.6 | $95.2 |
| Selling, general and administrative expenses | $22.6 | $26.4 |
| Credit losses | $13.4 | $35.0 |
| Income (loss) before tax | $(16.8) | $167.8 |
| Net income (loss) attributable to parent shareholders | $(18.6) | $112.3 |
| Basic and diluted earnings (loss) per share | $(1.48) | $8.96 |
| Cash used in operating activities | $(9.8) | $(7.2) |
| Cash used in investing activities | $(10.2) | $(1.3) |
| Cash provided by (used in) financing activities | $34.8 | $(0.9) |
| Cash and cash equivalents at year-end | $78.3 | $67.8 |
| Working capital | $88.6 | $74.8 |
| Current ratio | 5.46 | 3.75 |
| Total assets | $503.3 | $506.9 |
| Shareholders’ equity | $353.6 | $386.4 |
Revenue declined about 19%, largely following the disposal of metal product lines. Iron Ore Royalty revenue rose to $5.5 million from $1.7 million as the mine resumed operations; Industrial Equity revenue fell to $100.2 million from $131.6 million; and Merkanti Holding revenue increased to $7.6 million from $6.4 million. 2019 segment pre-tax results were $4.4 million for Iron Ore Royalty, a $15.8 million loss for Industrial Equity, $4.8 million for Merkanti Holding and a $10.2 million loss for All Other.
Reported earnings swung from substantial 2018 profit to a 2019 loss. The 2018 result included a non-cash $188.2 million reversal of prior impairment on the iron ore interest and a $25.1 million net gain on subsidiary dispositions. In 2019, subsidiary disposition gains were $2.2 million. Credit losses fell year over year but remained material, at $13.4 million, principally involving former non-core businesses. The filing does not present a standalone operating-margin measure; revenue less costs of sales and services was $16.7 million in 2019, before other expenses and items.
Liquidity remained substantial: current assets were $108.5 million against current liabilities of $19.9 million. Cash increased by $10.5 million, despite operating and investing cash outflows, primarily because of the bond issuance. Short-term securities were $14.2 million. Total long-term debt, defined by the company to include bond payables, was $35.4 million; the long-term debt-to-equity ratio was 0.10. The company also reported a $4.8 million non-interest-bearing loan payable with no fixed repayment date and $0.8 million of long-term lease liabilities. The filing states it had net cash after subtracting bond debt from cash.
Merkanti Holding issued €25 million of bonds in August 2019, generating approximately €24.3 million net proceeds. The bonds mature in August 2026, carry a 4.00% nominal coupon (4.41% effective rate), and are secured by investment property and real estate held for sale. No cash dividends were paid in 2019.
Outlook, risks and unusual matters
- Management said it expected to make progress toward maximizing long-term shareholder value in 2020, but provided no quantified earnings or revenue guidance.
- COVID-19 had not significantly affected operations by the filing date, but management expected potential adverse effects on results, cash flows and financial position; the magnitude and duration were not estimable. Management said liquidity, working capital, operating inflows and stress tests supported going concern for the following 12 months.
- Key exposures include volatile commodity prices and transaction-dependent merchant banking revenue; dependence on third-party operators and limited mine reserve information; counterparty and credit losses; foreign exchange risk; regulated banking operations; environmental and decommissioning obligations; and limited access to RMB held in China.
- The Cayman Islands was added to the EU’s non-cooperative tax jurisdictions list in February 2020. The company warned of possible reputational, commercial and tax consequences if the status continued.
- Long-term decommissioning obligations were $15.0 million, mainly for hydrocarbon properties. A legal action alleges a guarantee of the former parent involving approximately €43.8 million ($63.9 million); management considers the claim without merit but cannot assure the outcome. A subsidiary is also disputing approximately $3.0 million of payroll-tax assessments; $0.9 million paid in dispute had been written off.
- Related-party matters included a $6.4 million indemnification asset and a $0.8 million loan involving a company owned by the Chairman, expense reimbursements, and the sale of a loss-making metals business to a Chairman-controlled company for nominal consideration. The sale produced a $0.9 million non-cash accounting gain; the company also recognized $3.1 million of losses on guarantees associated with that business.
- Management and the auditor identified a material weakness in internal control over financial reporting related to IFRS 10 accounting for subsidiary disposals and foreign-currency translation reclassifications. Disclosure controls and financial reporting controls were reported ineffective at December 31, 2019; management said remediation was completed by the filing date. The 2017 comparative statements were restated for presentation, with no effect on net income, financial position or total operating cash flows.
Most important facts for investors to verify
- Whether the Scully mine sustains production and royalty payments above the $3.25 million annual minimum, and how royalty credits from prior years affect receipts.
- What drove the 2019 loss and the recurring earnings potential after metal-line disposals, credit losses and disposition gains; compare with the impairment-driven 2018 profit.
- Cash generation and liquidity by segment, including the quality and recoverability of the $6.4 million indemnification asset and other receivables.
- Bond terms, collateral coverage and any restrictions on proceeds from sales of pledged German properties; assess the separate loan payable’s stated contractual amount versus its fair value.
- Developments in COVID-19 impacts, the Cayman Islands listing, the alleged guarantee litigation and disputed tax assessments.
- Evidence that the reported internal-control remediation is effective, and the effect of IFRS 16 adoption and foreign-currency movements on comparability.