Business Context and Reporting Period
This Form 6-K, filed on January 31, 2011, presents the amended unaudited interim financial statements for Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag International Ltd.) for the three and nine months ended September 30, 2010. The filing reflects the company's early adoption of International Financial Reporting Standards (IFRS) effective January 1, 2010. The company has transitioned from an industrial plant engineering business to a focused mineral royalty company, primarily deriving revenue from the Wabush iron ore mine in Newfoundland and Labrador, Canada.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 2010):
- Total Revenue: $101.6 million (down from $366.2 million in 2009 due to deconsolidation of the industrial business).
- Income from Resource Properties: $13.7 million (up 60.3% from $8.6 million in 2009).
- Operating Income: $15.7 million (up from $8.8 million in 2009).
- Net Loss: $16.1 million attributable to common shareholders (compared to a net loss of $1.0 million in 2009).
- EPS (Basic & Diluted): $(0.52) per share.
Liquidity and Balance Sheet (As of Sept 30, 2010):
- Cash and Cash Equivalents: $133.3 million (down from $420.6 million at Dec 31, 2009).
- Total Assets: $385.6 million (down from $951.7 million at Dec 31, 2009).
- Total Liabilities: $54.9 million (down from $510.6 million at Dec 31, 2009).
- Shareholders' Equity: $330.7 million.
- Long-term Liabilities: $46.6 million (primarily deferred income tax liabilities).
Cash Flow (Nine Months Ended Sept 30, 2010):
- Operating Activities: Used $14.8 million in cash.
- Investing Activities: Used $286.0 million in cash (primarily due to the cessation of consolidation of the former subsidiary KID).
- Financing Activities: Provided $38.5 million in cash (driven by a rights offering).
Material Changes Versus Prior Period
The most significant change is the deconsolidation of the industrial plant engineering and equipment supply business (KID) effective March 31, 2010. Consequently, revenue from this segment dropped to zero for the second and third quarters of 2010. While total revenue decreased, income from the Wabush Royalty increased significantly due to higher royalty rates and increased iron ore shipments (2.65 million tons in 2010 vs. 1.99 million tons in 2009).
The net loss for the nine-month period widened to $16.1 million compared to $1.0 million in the prior year. This deterioration was primarily driven by a $22.7 million provision for income taxes (including capital gains taxes on KID share distributions) and an $8.0 million foreign currency transaction loss, which offset the gains from the royalty business and a $11.2 million arbitration award related to past royalty underpayments.
Guidance, Outlook, and Risks
Acquisition of Mass Financial Corp: The company successfully completed the acquisition of Mass Financial Corp in late 2010, acquiring 100% of its shares. This transaction is expected to diversify the company's operations into commodities and financial services.
Dividend Policy: On January 10, 2011, the board adopted an annual dividend policy and declared a 2011 cash dividend of $0.20 per share, payable in quarterly installments.
Royalty Renegotiation: The company has served formal notice to the Wabush mine owner to renegotiate the royalty rate calculation, citing changes in global iron ore pricing mechanisms. The outcome and timing of this renegotiation are uncertain.
Risks: Key risks include the company's heavy reliance on the Wabush Royalty for revenue, lack of control over mine operations, fluctuations in iron ore prices, and the integration risks associated with the Mass Financial Corp acquisition.
Investor Verification Checklist
- Verify the status and terms of the ongoing royalty rate renegotiation with the Wabush mine operator.
- Confirm the integration progress and financial impact of the Mass Financial Corp acquisition.
- Review the details of the $11.7 million arbitration award collection and its tax implications.
- Assess the sustainability of the new dividend policy given the shift in business model and cash flow requirements.
- Monitor the remaining 20% stake in KID and the associated voting rights held by the Custodian.