Business Context and Reporting Period
This Form 6-K, filed on January 31, 2011, by Terra Nova Royalty Corporation (referred to as "Terra Nova" or the "Issuer"), reports the completion of a business acquisition. The filing details the acquisition of Mass Financial Corp. ("Mass"), a transaction finalized on November 15, 2010, via a tender offer and subsequent compulsory acquisition. Following the acquisition, Terra Nova amalgamated its wholly-owned subsidiary with Mass. The report includes unaudited pro forma financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as of June 30, 2010, reflecting the combined entity.
Key Financial Metrics (Pro Forma)
The following metrics are derived from the unaudited pro forma condensed consolidated financial statements for the combined entity (Terra Nova and Mass) as of June 30, 2010, and for the periods ended June 30, 2010, and December 31, 2009. All figures are in thousands, except per share data.
Balance Sheet Highlights (As of June 30, 2010)
- Total Assets: $873,495
- Cash and Cash Equivalents: $306,514
- Total Liabilities: $315,801
- Debt (Current + Long-term): $153,211 (Current: $104,899; Long-term: $48,312)
- Total Shareholders' Equity: $540,002
Income Statement Highlights
- Revenues (Six Months Ended June 30, 2010): $166,159
- Net Income (Six Months Ended June 30, 2010): $13,448
- Net Income Attributable to Terra Nova (Six Months Ended June 30, 2010): $12,541
- Basic EPS (Six Months Ended June 30, 2010): $0.23
- Revenues (Year Ended December 31, 2009): $326,912
- Net Income (Year Ended December 31, 2009): $7,573
- Net Income Attributable to Terra Nova (Year Ended December 31, 2009): $7,334
- Basic EPS (Year Ended December 31, 2009): $0.13
Material Changes and Transaction Details
The primary material change is the acquisition of Mass Financial Corp. Terra Nova acquired 93% of Mass's outstanding Class A common shares via a tender offer on November 15, 2010, and the remaining shares via compulsory acquisition. The consideration was one Terra Nova common share for each Mass share acquired, resulting in the issuance of 24,992,122 new Terra Nova shares.
Pro forma adjustments significantly altered the financial presentation:
- Revenue Adjustments: Significant eliminations were made to remove inter-company transactions and results from Terra Nova's industrial plant technology business, which was spun off in Q1 2010.
- Asset Valuation: The pro forma balance sheet includes a preliminary fair value increase of $18,000 to Mass's resource properties.
- Goodwill: The transaction resulted in the elimination of Mass's historical goodwill ($4,793) and the recognition of a potential "Excess" of net identifiable assets over purchase cost of $38,575, which would be recognized as a gain under IFRS. This gain is not reflected in the pro forma income statement as it is a one-time item.
- Debt Conversion: Certain convertible bonds held by Mass were converted into equity prior to the transaction, reducing debt liabilities by $2,610.
Outlook, Risks, and Contingencies
Accounting Standards: The company adopted IFRS effective January 1, 2010, with exemptive relief from Canadian securities commissions. The pro forma statements differ from prior Canadian GAAP statements.
Purchase Price Allocation: The final purchase price allocation is preliminary. An independent appraisal is required to determine the fair value of acquired assets and liabilities. The aggregate purchase price is sensitive to Terra Nova's share price at the closing date. A $1.00 movement in share price could impact the purchase price by approximately $25 million, affecting goodwill or negative goodwill recognition.
Share Price Volatility: Future share price may be impacted by the transaction, future distributions of KHD Humboldt Wedag International AG (KID) shares, and the outcome of an Arbitration Award regarding past royalty underpayments.
Management Commentary: The transaction was structured as a combination based on fully-diluted net book value, adjusted for specific items like the KID distributions and the Arbitration Award, resulting in an approximate one-to-one share exchange ratio.
Investor Verification Checklist
- Verify the final independent appraisal of Mass's assets and liabilities to confirm the preliminary fair value adjustments and the "Excess" gain calculation.
- Monitor Terra Nova's share price volatility, as it directly impacts the final purchase price and potential goodwill recognition.
- Review the status and potential payout of the Arbitration Award regarding past royalty underpayments, as this affects net book value and future distributions.
- Confirm the finalization of the amalgamation between the Terra Nova subsidiary and Mass.
- Assess the impact of the spun-off industrial plant technology business on future revenue streams, as these results are excluded from the pro forma statements.