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 six months ended June 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 a diversified industrial 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 Profitability (Six Months Ended June 30, 2010):
- Total Revenue: $101.6 million (down from $218.0 million in 2009 due to deconsolidation of the Industrial Business).
- Income from Resource Properties: $8.8 million (up 124% from $3.9 million in 2009).
- Operating Income: $6.8 million (compared to an operating loss of $0.1 million in 2009).
- Net Loss: $21.0 million attributable to common shareholders (compared to a net loss of $6.9 million in 2009).
- Loss Per Share (Basic & Diluted): $0.69 (compared to $0.23 in 2009).
Liquidity and Balance Sheet (As of June 30, 2010):
- Cash and Cash Equivalents: $71.2 million (down from $420.6 million at Dec 31, 2009).
- Total Assets: $407.4 million (down from $951.7 million at Dec 31, 2009).
- Total Liabilities: $87.5 million (down from $510.6 million at Dec 31, 2009).
- Shareholders' Equity: $319.9 million.
- Working Capital: $98.3 million (excluding a $37.4 million dividend payable).
Cash Flow (Six Months Ended June 30, 2010):
- Operating Activities: Used $18.5 million in cash.
- Investing Activities: Used $294.0 million in cash (primarily due to the disposition of cash held by the former subsidiary KID).
- Financing Activities: Used $11.2 million in cash (debt repayment and dividends).
Material Changes Versus Prior Period
The most significant change is the deconsolidation of the Industrial Business (KHD Humboldt Wedag International AG) effective March 31, 2010, following a plan of arrangement. Consequently, the company no longer consolidates the results of this business, leading to a sharp decline in reported total revenue and assets compared to the prior year.
Despite the deconsolidation, royalty income from the Wabush iron ore mine increased significantly. Income rose to $4.9 million for the quarter ended June 30, 2010, from $1.8 million in the same quarter of 2009, driven by increased iron ore shipments (941,033 tons vs. 385,627 tons).
The net loss increased to $21.0 million for the six-month period, primarily due to a non-cash provision for income taxes of $22.1 million related to capital gains on the distribution of KID shares and taxes on dividends received. This was offset by a recovery of restructuring costs and lower operating expenses.
Guidance, Outlook, and Risks
Outlook and Management Commentary:
- Royalty Renegotiation: The company has served formal notice to the mine owner to renegotiate royalty rates, citing changes in iron ore pricing mechanisms and profitability thresholds. The timing and outcome are uncertain.
- Arbitration: The company was awarded approximately C$11.7 million in damages for past underpayments by an arbitration panel, plus interest and costs. Settlement negotiations regarding the quantum are ongoing.
- Dividend Policy: On January 10, 2011, the board adopted an annual dividend policy and declared a 2011 cash dividend of $0.20 per share.
- Acquisitions: The company completed a tender offer to acquire Mass Financial Corp. in late 2010 and conducted a rights offering raising approximately $50.0 million.
Risks and Contingencies:
- Single Asset Concentration: Valuation is heavily weighted on the Wabush Royalty; performance depends entirely on the third-party operator (Cliffs Natural Resources).
- Commodity Prices: Revenue is sensitive to fluctuations in iron ore prices and market demand.
- Operator Control: The company has no decision-making power over mine operations or access to technical geological data.
- Financing: Future expansion may require additional equity or debt financing, potentially causing dilution.
Investor Verification Checklist
- Verify the status and expected settlement amount of the C$11.7 million arbitration award regarding past royalty underpayments.
- Monitor the progress of royalty rate renegotiation with the Wabush mine operator and the impact of shifting iron ore pricing models.
- Review the integration and financial performance of the newly acquired Mass Financial Corp.
- Confirm the company's ability to maintain liquidity given the significant reduction in cash reserves following the deconsolidation of KID.
- Assess the impact of the non-cash tax provision on future cash flows and the utilization of tax loss carryforwards.