Scully Royalty Ltd. — FY2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022; this is an annual report, not a standalone fourth-quarter filing. Financial amounts are in Canadian dollars unless stated otherwise. The company reports under IFRS. Its core asset is a royalty on the Scully iron ore mine, alongside Industrial and Merchant Banking businesses. Financial statements received an unqualified audit opinion; the auditor identified critical audit matters involving recoverable values of the mine and power plant and valuation of investment properties.
Financial performance and position
| Metric | FY2022 / year-end 2022 | Prior comparable period |
|---|---|---|
| Revenue | $63.7 million | $71.3 million in 2021; down 11% |
| Net income (loss) attributable to shareholders | $(23.4) million; $(1.58) per basic and diluted share | $7.6 million; $0.51 per share in 2021 |
| EBITDA (non-IFRS) | $(11.4) million | $30.5 million in 2021 |
| Operating cash flow | $30.6 million provided | $6.6 million used in 2021 |
| Investing / financing cash flow | $(4.7) million / $(17.2) million | $(1.0) million / $(0.4) million in 2021 |
| Cash / short-term securities | $63.7 million / $30.3 million | $54.9 million / $19.3 million |
| Working capital | $136.6 million | $133.3 million |
| Total assets / shareholders’ equity | $475.5 million / $325.2 million | $510.0 million / $365.6 million |
| Bonds payable | $35.5 million; 4% coupon, due August 2026 | $35.2 million at year-end 2021 |
- Reported net cash was $28.2 million when calculated against bonds payable, the debt measure used in the company’s net-debt ratio. The company also had a $7.4 million non-interest-bearing loan payable, measured at fair value, with no fixed repayment date; long-term debt-to-equity was 0.11.
- Costs of sales and services were $29.9 million versus $30.9 million; SG&A rose to $28.5 million from $21.1 million, mainly due to legal, consulting and expense reimbursement costs. Depreciation, depletion and amortization was $10.7 million.
- Approximate net margin was negative 36.7% in 2022 versus positive 10.6% in 2021, calculated from reported net loss/income attributable to shareholders and revenue. EBITDA margin was approximately negative 18.0% versus positive 42.8%, using the company’s non-IFRS EBITDA figures.
- Cash from operations benefited substantially from a $24.3 million decrease in receivables; the filing attributes the receivable reduction primarily to amounts due from an affiliate controlled by the Chairman. Dividends paid to common shareholders used $16.9 million of cash.
Material changes versus 2021
- Revenue fell 11%, primarily because Scully royalty revenue declined to $29.2 million from $40.3 million amid lower iron ore prices and slightly lower shipped tonnage. Industrial revenue rose to $28.5 million from $23.4 million, chiefly on higher natural gas prices; Merchant Banking revenue fell to $5.5 million from $6.5 million.
- The Platts 65% Fe iron ore index averaged US$139 per tonne in 2022 versus US$185 in 2021; the 62% Fe index averaged US$120 versus US$185. Scully mine shipments were 3.10 million tonnes, down from 3.18 million tonnes.
- A $31.4 million non-cash impairment was recorded when Alberta hydrocarbon assets were classified as held for sale and written down to fair value less costs to sell. The impairment was a major driver of the annual loss; excluding it and its related tax recovery, the filing says those production assets generated a $3.4 million net loss and the Group reported $0.8 million net income.
- Cash increased by $8.8 million. Operating cash flow improved from use of cash to generation of cash, while financing outflows increased largely because of common dividends.
- Year-end current assets included $34.7 million of assets held for sale, with $20.4 million of related liabilities. The hydrocarbon sale closed in March 2023 for a stated consideration of $25.0 million, subject to adjustments; $18.2 million was received at closing net of GST, with a further $2.5 million holdback subject to customary adjustments.
Outlook, management commentary, risks and contingencies
- Scully mine: The royalty is 7% on iron ore shipped from the mine and 4.2% on shipments from tailings and other disposed materials, with a minimum annual payment of $3.25 million. The operator targets ramping up to at least 6 million tonnes per year and is undertaking capital and operational improvement projects. Current shipments remain well below that target. The company does not operate the mine, has limited access to technical and reserve information, and cannot direct operating decisions.
- Capital allocation and dividends: The company is rationalizing its non-core Industrial and Merchant Banking interests, aiming to simplify its structure and focus on the royalty. Four cash dividends totaling $1.13 per share were paid in 2022. A further $0.23 per share dividend was announced for payment in May 2023. Future dividends are discretionary and depend on royalty receipts, financial condition, operating results and other factors; no earnings or production guidance is provided.
- Potential bank acquisition: Merkanti agreed to acquire Sparkasse (Holdings) Malta Ltd. for consideration broadly based on adjusted net tangible asset value, including cash at closing, three annual payments of €2.5 million and a contingent payment tied to recovery of a previously written-off asset. Completion depended on regulatory approvals, with a stated long-stop date in the first half of 2023. Verify subsequent completion, termination or revised terms.
- Litigation: The company and subsidiaries are defending an alleged guarantee claim related to a former parent. A proposed amendment would raise the principal claim to approximately $116.8 million (€80.8 million), plus interest and costs. Management considers the claim without merit and does not currently expect a material adverse effect, but says the outcome is uncertain.
- Related-party and credit exposure: At year-end, the company reported $27.1 million of current-account receivables, a $0.9 million loan and a $6.8 million indemnification asset involving an affiliate controlled by the Chairman, plus $3.8 million payable to that affiliate. Management states related-party arrangements are conducted at cost. Collection, recoverability and governance oversight are important investor considerations.
- Other risks: Earnings are exposed to iron ore prices and mine output, the operator’s financing and performance, customer concentration, investment valuation and impairment estimates, foreign-exchange movements, liquidity and counterparty risk, European banking regulation, litigation and tax audits. Some cash is held in RMB in China, where conversion and remittance restrictions may apply. Management concluded going concern was appropriate, citing cash, working capital and expected operating inflows; it also reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Actual post-year-end hydrocarbon sale proceeds, final adjustments and release or collection of the holdback, compared with the stated $25.0 million consideration.
- Scully mine shipment trends, progress toward the 6-million-tonne annual target, operator funding and the impact of iron ore prices on royalty receipts.
- Recoverability and timing of collection of the Chairman-affiliate receivables and indemnification asset, and the rationale for the substantial year-over-year SG&A and reimbursement increases.
- Current status and likely financial exposure of the alleged guarantee litigation, including any amendment, interest and costs.
- Outcome and total funding requirements of the Sparkasse transaction, including regulatory approvals and any merger plans.
- Dividend sustainability relative to recurring royalty cash flow, and valuation assumptions used for the mine, power plant and investment properties. The year-end share price was US$7.71 versus stated book value of US$16.20 per share, or 0.48 times book value.