Scully Royalty Ltd. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. Although the request metadata says “2020 Q4,” this is an annual report, not a standalone quarterly filing. Financial statements are prepared under IFRS and presented in Canadian dollars (C$), unless stated otherwise.
Business context
Scully held a 7% net-revenue royalty on iron ore shipped from the Scully mine in Newfoundland and Labrador, plus 4.2% on shipments from tailings and disposed materials, subject to a C$3.25 million annual minimum. The mine operator continued ramping up after restarting operations in 2019. The company also operated Industrial and Merchant Banking businesses during 2020, but announced plans in April 2021 to rationalize those segments and focus on the royalty asset.
Financial performance and position
| Metric (C$ millions, except per-share data) | 2020 | 2019 |
|---|---|---|
| Revenue | 59.4 | 113.3 |
| Income (loss) before income taxes | 11.2 | (16.8) |
| Net income (loss), consolidated | 0.2 | (18.4) |
| Net income (loss) attributable to parent owners | 0.4 | (18.6) |
| Basic and diluted earnings (loss) per share | C$0.03 | (C$1.48) |
| Operating cash flow | (21.3) | (9.8) |
| Investing cash flow | 3.4 | (10.2) |
| Financing cash flow | (0.5) | 34.8 |
- Revenue fell 47.5%, primarily because metal-processing businesses disposed of in 2019 had contributed C$81.8 million of that year’s revenue. The mine ramp-up partly offset the decline.
- Royalty revenue increased to C$31.4 million from C$5.5 million; Industrial revenue declined to C$17.7 million from C$100.2 million; Merchant Banking revenue rose to C$10.4 million from C$7.6 million. The royalty represented about 53% of total revenue.
- Costs and other decreased to C$26.9 million from C$96.6 million, while SG&A declined to C$19.9 million from C$22.6 million. The company recorded a C$3.1 million reversal of credit losses, versus C$13.4 million of credit losses in 2019, and C$11.0 million of total income and resource-property tax expense.
- Cash from operations was negative C$21.3 million, principally reflecting a C$33.8 million increase in receivables. Cash declined to C$63.6 million from C$78.3 million; short-term securities were C$18.5 million. Working capital was C$113.1 million.
- Total assets were C$509.1 million, total liabilities C$140.4 million, and shareholders’ equity C$361.5 million. Long-term bonds were C$38.1 million; the company reported net cash under its debt-to-equity measure. The bonds have C$25 million face value, bear 4% nominal interest, and mature in August 2026.
- No cash dividends were paid in 2020. No operating margin or other directly comparable margin measure is clearly provided in the filing text.
Material changes, outlook and management commentary
- The operator reported 2020 mine shipments of approximately 3.0 million tonnes, up from approximately 0.95 million tonnes in 2019. The filing’s table labels these figures “in thousands of tonnes,” which appears inconsistent with the reported mine capacity of 6 million tonnes per annum; verify the units.
- Management cited a positive iron-ore outlook, noting the 65% Fe Platts index rose from an average US$106 per tonne in January 2020 to US$168 in December. It also reported a roughly 12% (US$13) 2020 premium for 65% Fe versus 62% Fe ore. Prices, production and royalty receipts remain dependent on global steel demand and the third-party operator.
- In April 2021, the board approved a cash-dividend policy, but declared no dividend. Management said a first payment was expected in the second half of 2021, subject to board approval, results, liquidity, working capital needs and other factors.
- The board approved proposed stock dividends of 9% in May 2021 and 8% in November 2021, subject to required exchange approvals. The company said these were intended to improve share liquidity, not dilute holders’ proportional ownership.
- Industrial and Merchant Banking were planned to be classified as discontinued operations and assets held for sale in 2021, as part of a rationalization plan expected to be completed within one year. At year-end 2020, those segments had C$260.7 million of assets in aggregate and generated C$28.1 million of revenue.
- Samuel Morrow was appointed CEO and a director effective May 1, 2021; Michael Smith continued as Executive Chairman. Smythe LLP became auditor in December 2020. The 2020 audit opinion was unqualified; the auditor highlighted valuation of resource assets and European real estate as critical audit matters.
Risks, contingencies and unusual items
- A European bank dispute concerns an alleged guarantee of approximately €43.8 million (about C$68.4 million). The company disputes liability and says it has legal opinions that the guarantee is invalid. A Cayman Islands temporary order restricts disposal of certain assets; the company appealed and expected a hearing in the second half of 2021. The order is not a monetary judgment. Outcomes and timing remain uncertain.
- Other contingencies include disputed payroll-tax assessments of C$3.5 million, of which C$1.2 million had been paid and written off, and ordinary-course litigation and tax audits. Management did not expect these matters to materially affect results, but acknowledged uncertainty.
- Customer concentration increased: one Canadian royalty customer represented approximately 53% of 2020 revenue. A C$10.1 million royalty receivable was collected in January 2021.
- Other receivables included C$20.8 million of current-account receivables from an affiliate controlled by the Chairman, plus a C$6.8 million indemnification asset and a C$0.8 million loan to that affiliate. Related-party balances and collection terms merit scrutiny.
- COVID-19 had not significantly affected operations by the reporting date, but management warned that further disruption could affect the mine, commodity prices, customers, cash flows and financial position. The company also faces iron-ore price, operator, reserve-estimation, foreign-exchange, liquidity, regulatory and counterparty risks.
- Hydrocarbon decommissioning obligations were C$14.1 million. Resource-asset carrying values rely on estimates of reserves, prices, production and discount rates; the auditor emphasized sensitivity of recoverable-value estimates. The filing reported no 2020 impairment of resource properties.
- Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2020. The filing also disclosed a material weakness identified with the prior auditor in 2019 related to IFRS 10 expertise and review controls; the 2020 auditor did not audit internal controls.
Key facts investors should verify
- Actual mine shipment volumes, royalty calculations and subsequent royalty collections; clarify the apparent shipment-table unit error.
- Whether the expected 2021 cash dividend was declared and paid, and the cash-flow and working-capital assumptions supporting any distribution.
- Progress, sale terms and proceeds from the Industrial and Merchant Banking rationalization, including how assets and liabilities are classified.
- Recoverability and timing of the large Chairman-affiliate receivables and indemnification asset, and the related-party governance safeguards.
- Developments in the European bank litigation and asset-restriction order, as well as the payroll-tax appeal.
- Potential dilution from the proposed equity-plan expansion and options for up to 1,307,000 shares, alongside the approved stock dividends and limited trading liquidity.
- Key assumptions supporting the C$211.4 million carrying value of the iron-ore royalty asset and the company’s sensitivity to iron-ore prices, reserves and operator performance.