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, 2019 (Semi-Annual Report filed December 31, 2019)
Business Overview: SRL operates as an international merchant bank providing financial services, structured trade solutions, and proprietary investing. Its core asset is a royalty interest in the Scully Iron Ore Mine in Newfoundland and Labrador, Canada. The company is currently undergoing an internal restructuring to separate its operations into three distinct groups to better reflect asset values and eliminate the discount between its market price and net book value.
Key Financial Metrics
| Metric (CAD in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Revenue | $66,498 | $78,083 |
| Costs of Sales and Services | $74,223 | $94,820 |
| Net Loss (Attributable to Shareholders) | $(16,406) | $(31,973) |
| Loss Per Share (Basic & Diluted) | $(1.31) | $(2.55) |
| Cash and Cash Equivalents | $58,183 | $67,760 |
| Working Capital | $51,346 | $74,799 |
| Shareholders' Equity | $360,262 | $386,376 |
| Book Value Per Share | $28.74 | N/A |
| Long-Term Debt | $0 | $0 |
Note: All figures are in Canadian dollars unless otherwise specified. The company reported a net cash position with no long-term debt.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 14.8% to $66.5 million, primarily driven by reduced volumes and pricing in materials processing within the Merchant Banking segment. The "All Other" segment saw a revenue increase to $3.7 million.
- Improved Profitability: Net loss narrowed significantly to $16.4 million from $32.0 million in the prior year. This improvement was largely due to a substantial reduction in credit losses ($12.5 million in 2019 vs. $33.6 million in 2018) and lower costs of sales.
- Cost Reductions: Costs of sales and services dropped to $74.2 million from $94.8 million. Selling, general, and administrative (SG&A) expenses decreased to $11.8 million from $13.7 million due to reduced operational activity.
- Currency Impact: The Canadian dollar strengthened by 4.9% against the Euro compared to the end of 2018, resulting in a $10.0 million currency translation adjustment loss in equity (accumulated other comprehensive income), compared to $0.9 million in the prior period.
- Asset Composition: Inventories decreased to $6.4 million from $11.4 million due to improved working capital management. Assets held for sale increased to $4.1 million, relating to a subsidiary in dissolution.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Restructuring: Management is finalizing an internal restructuring to create three independently managed groups. Operating results for these groups will be disclosed separately starting with the 2019 annual report to help eliminate the discount between market price and net book value.
- Liquidity: The company maintains a net cash position with no long-term debt. Management expects to meet working capital requirements through cash on hand and operating cash flows.
- Iron Ore Mine: No revenue was recognized from the Scully Iron Ore Mine in the first half of 2019 as payments received are considered deferred revenue, creditable against future earned royalties. The mine operator recommenced operations in 2019.
Risks and Contingencies
- Legal Proceedings: The company is a defendant in a legal action regarding an alleged guarantee of a former parent company totaling approximately EUR 43 million. Management believes the claim is without merit and intends to defend it vigorously.
- Market and Credit Risk: Results are sensitive to global economic conditions, commodity price volatility, and credit risk. The company recognized $12.5 million in credit losses, including a $6.1 million loan write-off.
- Foreign Exchange: Significant exposure to the Euro and other currencies impacts financial results when translated to the Canadian dollar.
- Subsequent Events: In August 2019, a European subsidiary issued a EUR 25 million secured bond. Additionally, the company sold certain European metals processing subsidiaries in the second half of 2019.
Investor Verification Checklist
- Restructuring Timeline: Verify the completion status of the internal restructuring and the expected timeline for separate segment reporting.
- Iron Ore Royalty Status: Confirm the production levels of the Wabush iron ore mine and the timing of when deferred revenue will be recognized as earned royalties.
- Legal Exposure: Monitor developments regarding the EUR 43 million guarantee litigation and any potential impact on financial statements.
- Credit Quality: Review the composition of the $12.5 million credit losses and the remaining exposure to counterparties in the merchant banking segment.
- Asset Valuation: Assess the valuation of the $274.2 million interest in resource properties and the $4.1 million in assets held for sale.