SRL

Business Context and Reporting Period

This Form 6-K filing by Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag International Ltd.) covers the quarter ended March 31, 2010, with the report filed on January 31, 2011. The filing presents amended unaudited interim financial statements prepared in accordance with International Financial Reporting Standards (IFRS), reflecting an early adoption of IFRS effective January 1, 2010. The company underwent a significant structural transformation during the period, completing an "Arrangement" on March 30, 2010, to separate its industrial plant engineering business (KID) from its mineral royalty business. Consequently, the company ceased consolidating KID as of March 31, 2010, and changed its name to Terra Nova Royalty Corporation to reflect its new focus on mineral royalties, primarily derived from the Wabush iron ore mine in Newfoundland and Labrador.

Key Financial Metrics

Note: Q1 2010 consolidated results include the Industrial Business only through March 30, 2010. Balance sheet figures for March 31, 2010, exclude the Industrial Business assets and liabilities.

Material Changes vs. Prior Period

• Deconsolidation of Industrial Business: The most significant change was the cessation of consolidation for the KID industrial business on March 30, 2010. This resulted in a massive reduction in reported total assets (from $951.7 million to $430.7 million) and liabilities (from $510.6 million to $67.0 million) compared to the prior year-end.
• Net Loss vs. Net Income: The company reported a net loss of $19.3 million for Q1 2010 compared to a net income of $0.8 million in Q1 2009. This loss was primarily driven by a $21.8 million provision for income taxes (including capital gains taxes on the distribution of KID shares) and a $5.6 million foreign currency transaction loss related to the deconsolidation of KID.
• Revenue Decline: Consolidated revenues decreased 9.4% to $101.6 million. On a comparable basis excluding divested coal/minerals revenue, industrial revenues were similar to the prior year. However, royalty income from the Wabush mine increased 79% to $3.8 million due to higher iron ore shipments.
• Margin Expansion: Despite the revenue decline, the gross profit margin for the Industrial Business improved to 26.0% from 17.3% in the prior year, driven by a reduction in losses on terminated contracts and the absence of inventory write-downs.

Guidance, Outlook, and Risks

Outlook and Strategy: Management intends to focus exclusively on the mineral royalty and natural resource business. Future growth is expected to come from acquiring additional royalty interests and natural resource projects. The company maintains a high level of liquidity with $97.2 million in cash, which it believes is adequate for ongoing operations and potential acquisitions.

Subsequent Events:

• Dividend Policy: On January 10, 2011, the company adopted an annual dividend policy and declared a 2011 cash dividend of $0.20 per share.
• Arbitration Win: In Q2 2010, the company won an arbitration against Wabush Iron Co. and others, receiving C$11.7 million in damages for past royalty underpayments.
• Acquisition: The company completed a tender offer to acquire Mass Financial Corp. in late 2010.
• Capital Raise: A rights offering in July 2010 raised approximately $50.0 million.

Risks and Contingencies:

• Concentration Risk: The company's valuation is heavily weighted on the Wabush iron ore mine royalty. Performance is dependent on the third-party operator (Cliffs Natural Resources) and global iron ore prices.
• Commodity Price Volatility: Revenue is sensitive to fluctuations in iron ore prices, which are influenced by global economic conditions and steel demand.
• Acquisition Integration: Risks associated with integrating the newly acquired Mass Financial Corp. and future royalty acquisitions.
• Guarantees: The company retains outstanding guarantees of approximately $143.6 million issued on behalf of KID prior to deconsolidation, though no claims have been made.

Investor Verification Checklist

• Deconsolidation Accounting: Verify the treatment of the $117 million investment in KID shares and the associated tax impacts on the $19.3 million net loss.
• Royalty Revenue Sustainability: Confirm current iron ore shipment volumes from the Wabush mine and the stability of the royalty rate ($1.685 CAD/ton base) to assess future cash flow.
• Outstanding Guarantees: Review the status of the $143.6 million in guarantees provided to KID to assess potential contingent liabilities.
• Mass Financial Corp. Integration: Evaluate the financial impact and integration progress of the Mass Financial Corp. acquisition completed in late 2010.
• Dividend Sustainability: Assess whether the declared $0.20 annual dividend is sustainable given the company's transition to a pure-play royalty model and its cash burn rate.