Business Context and Reporting Period
Company: Scully Royalty Ltd. (SRL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2021
Filing Date: December 29, 2021
Currency: Canadian Dollars (C$), unless otherwise noted.
SRL is a diversified holding company with its core asset being a 7.0% net revenue royalty interest in the Scully iron ore mine in Newfoundland and Labrador, Canada. The company operates through three segments: Royalty, Industrial, and Merchant Banking. The filing includes a letter to shareholders, management discussion and analysis, and unaudited interim condensed consolidated financial statements.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 (Restated) |
|---|---|---|
| Total Revenue | C$46.8 million | C$25.7 million |
| Net Income (Attributable to Shareholders) | C$9.8 million | C$(1.1) million loss |
| Earnings Per Share (Diluted) | C$0.65 | C$(0.07) |
| Operating Cash Flow | C$(5.7) million used | C$(9.1) million used |
| Total Assets | C$519.6 million | C$509.1 million |
| Shareholders' Equity | C$364.9 million | C$361.5 million |
| Cash and Short-term Securities | C$76.0 million | C$82.1 million |
| Long-term Debt | C$35.9 million (Bonds) | C$38.1 million (Bonds) |
Segment Performance (Revenue):
- Royalty: C$31.9 million (68% of total revenue), up from C$11.7 million in 2020.
- Industrial: C$10.3 million, up from C$8.5 million in 2020.
- Merchant Banking: C$4.6 million, down from C$5.5 million in 2020.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 82% year-over-year, driven primarily by a 172% increase in Royalty segment revenue. This was caused by a 100% increase in the average price of 65% Fe iron ore (to US$212/tonne) and increased mine production.
- Profitability Turnaround: The company moved from a net loss of C$1.1 million in H1 2020 to a net income of C$9.8 million in H1 2021.
- Cost Increases: Costs of sales and services rose to C$21.0 million from C$10.9 million. This increase was largely due to a C$3.5 million loss on derivative contracts related to iron ore price hedging and the absence of a C$3.1 million credit loss reversal recorded in the prior year.
- Dividend Policy: In April 2021, the Board approved a cash dividend policy. While no cash dividends were declared in H1 2021, the company expects the first payment to occur in Q1 2022 following receipt of Q4 2021 royalties.
- Stock Dividends: To improve liquidity, the company issued a 9% stock dividend in May 2021 and an 8% stock dividend in November 2021 (subsequent to the reporting period).
Outlook, Risks, and Contingencies
Management Commentary & Outlook:
Management expects the Scully mine operator to ramp up production to at least 6 million tonnes per annum, with capital improvements expected to yield results in calendar 2022. The company plans to rationalize its Industrial and Merchant Banking segments, though the classification of these as "discontinued operations" has been postponed pending certainty of sale.
Key Risks and Contingencies:
- Legal Dispute: SRL is involved in a dispute with a European Bank regarding alleged guarantees of a former parent company. The claim amount was proposed to increase to approximately EUR 91 million (C$133.8 million). Management disputes the validity of the claim and does not expect a material adverse impact, though the outcome is uncertain.
- Commodity Price Volatility: Revenue is highly sensitive to iron ore prices. In Q3 2021, a decline in iron ore prices resulted in a negative adjustment to royalty payments for Q2 shipments, reducing the Q3 royalty to C$844,907 despite production of 676,183 tonnes.
- Liquidity: The company maintains a net cash position (C$55.6 million cash vs. C$35.9 million long-term debt). However, operating cash flow was negative due to increased receivables and restricted cash.
- Related Party Transactions: Significant receivables (C$35.3 million) are held from a company controlled by the Chairman, related to working capital and cash management.
Investor Verification Checklist
- Royalty Calculation Audit: Verify the status of the third-party forensic audit regarding royalty calculations and the impact of the Q3 2021 negative price adjustment on future payments.
- Legal Exposure: Monitor the European Bank litigation, specifically the proposed amendment increasing the claim to C$133.8 million and the company's counterclaim.
- Related Party Receivables: Assess the collectability and nature of the C$35.3 million receivable from the Chairman-controlled affiliate.
- Segment Rationalization: Track progress on the sale or spin-off of the Industrial and Merchant Banking segments, which are currently not classified as discontinued operations.
- Dividend Execution: Confirm the declaration and payment of the first cash dividend expected in Q1 2022.