Scully Royalty Ltd. — FY2021 Form 20-F
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter results filing. Financial amounts are in Canadian dollars unless otherwise stated; statements are prepared under IFRS.
Business context
Scully’s principal asset is a royalty on the Scully iron ore mine in Newfoundland and Labrador: 7.0% on mine shipments and 4.2% on shipments from tailings and other disposed materials, subject to a $3.25 million annual minimum. The company also operates Industrial and Merchant Banking segments and is pursuing plans to rationalize those businesses, but did not classify them as discontinued operations in 2021.
Key financial results
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Revenue | $71.291 million | $59.432 million | Up 20%; higher iron ore prices, mine shipments and natural gas prices |
| Costs of sales and services | $30.918 million | $26.870 million | Increase included loan fair-value expense and securities losses, partly offset by derivative gains |
| Selling, general and administrative expenses | $21.144 million | $19.901 million | About 30% of revenue versus 33% in 2020 |
| Income before tax | $17.547 million | $11.179 million | Improved |
| Net income attributable to parent shareholders | $7.564 million; $0.51 per share | $0.369 million; $0.03 per share | Improved substantially |
| EBITDA | $30.505 million | $24.530 million | Non-IFRS measure |
| Cash from operating activities | $(6.637) million | $(21.271) million | Still negative; receivables growth remained a significant cash use |
Income tax expense, including resource property revenue taxes, was $10.176 million, down from $10.967 million. The company attributed lower income tax expense mainly to a one-time deferred-tax-liability reduction from an internal reorganization; resource property revenue taxes rose to $7.887 million from $6.074 million. The cash-flow statement reports total income taxes paid of $9.526 million in 2021.
Segments, mine and financial position
- Royalty: Revenue was $40.335 million, up from $31.360 million; approximately 57% of total revenue came from the Scully royalty. Mine shipments rose to 3.184 million tonnes from 2.989 million tonnes, still well below the operator’s stated six-million-tonne annual target.
- Industrial: Revenue increased to $23.428 million from $17.666 million, mainly on higher natural gas pricing; the segment recorded a $4.739 million pretax loss.
- Merchant Banking: Revenue fell to $6.527 million from $10.406 million after exiting a marginally profitable business line; pretax income was $0.736 million.
- Liquidity: Year-end cash was $54.873 million and short-term securities were $19.256 million. Current assets were $145.654 million against current liabilities of $12.348 million; reported working capital was $133.306 million. Cash declined by $8.679 million during the year.
- Debt and obligations: Bonds payable were $35.227 million, down from $38.053 million, with a 4.0% nominal coupon and August 2026 maturity. A separate non-interest-bearing, fair-value-measured loan payable was $6.817 million with no fixed repayment date; its undiscounted contractual amount is substantially higher. Long-term debt-to-equity was 0.10. The company reported net cash under its stated debt measure, which excludes that loan and lease liabilities.
- Capital and valuation: Shareholders’ equity was $365.600 million and reported book value was $24.74 per share. The letter cited a US$8.86 market price and 0.45 price-to-book ratio at year-end. Two 2021 stock dividends increased shares by approximately 18%; 14,779,302 shares were outstanding at year-end.
Outlook, developments and risks
- The Scully operator is investing in capital improvements, staffing and operating efficiency, with benefits expected during 2022; production remains subject to operator execution. In first-quarter 2022 it shipped 767,630 tonnes, generating an approximately $11.8 million royalty payment before Newfoundland and Labrador’s 20% mining tax.
- The Platts 65% Fe iron ore index averaged US$185 per tonne in 2021 versus US$122 in 2020, but fell to US$102 during the second half before ending the year at US$140. Management cautioned that prices remained volatile.
- The board approved cash dividends of $0.25 per share, paid in March 2022, and $0.34 per share, announced for payment in May 2022. Future dividends are discretionary and depend on royalty receipts, operating results, financial condition and cash needs.
- After year-end, Merkanti agreed to acquire Sparkasse Holdings Malta, subject to regulatory approvals and then expected to close in the second half of 2022. Consideration includes cash, three annual payments of €2.5 million and a contingent payment tied to possible recovery of a previously written-off asset. Completion and expected benefits are not assured.
- Management highlighted commodity-price and production volatility, reliance on a third-party mine operator, limited access to mine technical and reserve data, COVID-19 uncertainty, foreign-exchange exposure, banking regulation and liquidity/counterparty risks. The company said it had sufficient liquidity and expected operating cash flows for foreseeable needs, while noting pandemic impacts remained uncertain.
- A legal action alleges a guarantee of a former parent’s obligations: approximately $68.4 million as stated at December 31, 2021, with a proposed amendment that could raise the claim to approximately $131.0 million. Management considers the claim without merit and does not currently expect a material adverse effect, but the outcome is uncertain.
- Other notable items include $2.497 million of share-based compensation, described by management as one-time in nature, and $2.320 million of securities losses. Management reported effective disclosure controls and internal control over financial reporting; the external auditor did not provide an opinion on ICFR effectiveness.
Important facts for investors to verify
- Whether the operator’s ramp-up toward six million tonnes annually is achievable, and how mine shipments, iron ore prices and the royalty formula translate into cash receipts.
- Recoverability and collection timing of $47.745 million in loans and current-account receivables from an affiliate controlled by the chairman, plus a $6.756 million indemnification asset. These balances represented a large concentration of financial assets.
- The status and potential financial consequences of the former-parent guarantee litigation, including the proposed increase in the claim amount.
- The final purchase consideration, regulatory approvals, financing and integration risks for the proposed Sparkasse acquisition; the filing’s projected combined-bank figures should be checked against transaction materials.
- The basis for book value and share-count comparisons: the filing reports 14,779,302 shares outstanding, while the financial statements show 14,856,581 issued shares including treasury shares.
- How management’s non-IFRS EBITDA measure reconciles to IFRS results, and whether future operating cash flow can support dividends and other commitments.