Flora Wood - Director, IR Ben Lewis - CFO Brian Dalton - Co-Founder, President, CEO & Director

Jacques Wortman - Eight Capital

Thank you, Brian. Good morning, everyone, and welcome to our Q2 conference call.

Our press release and filings were done yesterday after the close and are on our website and on SEDAR. This event is being webcast live, and you'll be able to access the replay along with the presentation slides on the webcast and added to our website.

Brian Dalton, CEO; and Ben Lewis, CFO, will both be speakers, and for the Q&A, we have with us Chad Wells, VP Business Development; and Stephanie Hussey, Director of Finance. We switched up the order today.

Ben's going to be speaking first on the financials, and he'll then turn over to Brian for his overview and a look ahead. And after Brian, we'll go to the Q&A.

So getting started on Slide 2, we have the forward-looking statements that supplies everything today both in our formal remarks and during Q&A. And with that, I will hand over to Ben.

Thank you, Flora. And good morning, everyone.

We had a good quarter with $16.5 million in royalty revenue, $13 million in EBITDA and earnings per share of $0.12 per share. Our earnings included a couple of noncash items that I should point out, including a gain of $1.9 million and a fair value adjustment of derivatives.

And offsetting this an $800,000 onetime charge to extinguish our old debt facility. This morning, I'll mainly focus on a few changes arising from recent business activities, our debt refinancing and the resulting liquidity improvement.

Starting with the income statement. You'll notice that we began consolidating Potash Royalty revenue after we acquired an additional stake in the Potash Royalty Limited Partnership at the end of March.

We now show that Potash Royalty [Technical Difficulty] on the face of our income statement and also report a noncontrolling interest in the statement of earnings, representing the earnings of the other non-percent minority holder of that Potash partnership. This accounting change was effective for the full quarter and makes our actual revenue, earnings and cash flow just a little more transparent to the financial statement use, not always the result we get in our world of infinite accounting rules but a refreshing change.

Note that we still report our thermal and met coal revenue in earnings from joint ventures, since these royalties are held in partnerships that we jointly control. So you still have to dig a little deeper to get our true royalty revenue figure.

I'll refer you to the MD&A and the Segment and Information Note 16 in the financial statements for the full picture on royalty revenue. Reflecting on potash, again, for a moment.

Ignoring the effect of the acquisition I just mentioned, second quarter potash revenues are still up 24% from the comparable period in 2017 with volumes of 15%, very nice. Thermal coal revenue of $3.3 million this quarter is down around $800,000 from last quarter, but most of that change is coming from Sheerness Mine sequencing changes as we move on and off higher-royalty-rate lands.

On a six month basis, you'll see coal royalty turns down 24.5% over the period when comparing last year, but revenues are actually up year-over-year as we've been on higher-royalty-rate lands. Looking at costs.

We have higher depreciation and amortization in the seconds quarter compared to the first quarter with higher sales but lower on a year-over-year basis. The difference is due to lower production units from the 777 Mine, offset by a higher contribution from potash where depreciation on the potash assets is spread over a much longer reserve life.

First half G&A comps were higher than normal with some onetime costs relating to the Potash acquisition. We have professional fees of roughly $2 million in the first half relating to due diligence, the Potash acquisition and other legal fees.

G&A in the second half of the year should be lower and allow us to end the year closer to the $6 million annual level. And finally, on the income statement.

Income taxes were lower than in the first quarter, averaging out something closer to our statutory rate in the first six months. On the balance sheet, you'll notice that the potash consolidation moved a couple of things around when you compare it to our December balance sheet.

Our royalty and streaming interest assets increased by about $123 million related to the Potash Royalty assets. And the joint-venture asset line decreased by the cost of our original investment, all as a result of the switch to consolidation accounting.

On the liquidity side, we ended the quarter with $52.2 million in cash after our term debt repayment under the old facility. Going forward, our new term debt facility will require principal repayments of $5 million each quarter, which is a comfortable repayment level, given our diversified royalty portfolio and also given our Project Generation model, which sees very little in expenditures on any one of the projects.

We have a slide in our presentation addressing the change from the former credit facility to the current, and I'll summarize for you. Basically, we upsized by $100 million, extended the term by 5 years until June 2023 and obtained more flexibility to go after development-stage assets, which enable us -- which will enable us to grow our business.

The better credit terms, that have resulted in improved revenues as we continue to grow the company, our proven repayment history and our continuing strong relationship with our lenders. For those of you modeling our expected interest expense, we improved the premium paid over the days on the floating portion.

More importantly, we chose to lock in interest rates for 80% of the term debt at an interest rate of approximately 5.4%. Considering the expected rate of return on the potash assets that we acquired with the credit, we're very comfortable locking in at this stage.

Our available liquidity, at quarter end, is $152 million, accounting cash and the undrawn revolver and does not take into account any of the value of our equity investments, which all combined, could add another $137 million to our potential liquidity. We declared a $0.04 dividend to be paid in September and still have our normal-course issuer bid in place to buy back shares at prices below the threshold, which we revisit quarterly.

So to sum up, we had a good quarter for cash flows and earnings. We have a strong balance sheet and liquidity that gives us flexibility to pursue both cash-flowing and development- stage opportunities, as they become available, and we'll continue to put emphasis on paying down debt.

Now I'll turn it over to Brian.

Thank you, Ben, and Good morning, everyone. Thank you for joining us.

Our second quarter saw improved royalty revenue relative to the first quarter and to the prior year comparable quarter. The improvement year-over-year was mainly attributable to higher volumes, especially in potash but also Chapada copper.

Our royalty revenues have been on a strong and steady uptrend since the industrial commodities market turned around in early 2016. But this is the first quarter since then that saw more of the benefits come from organic volume growth and price improvement.

I believe this is a strong testament to the quality of the work during our bear market buying spree and selectively identifying projects underlying extension- and expansion-based option value potential. As you will hear on the following update, we received a lot of good news of this type in the second quarter.

Chapada copper volumes during the first half of the year, running well ahead of last year and Yamana has stated that they expect to exceed guidance of 120 million tons as recent plant investments continue to deliver improved metal recovery. In addition, it has initiated studies to consider potentially significant capital investments and new plant- and mine-capacity additions.

Yamana is also having great exploration success, identifying higher-grade deposit expansions and in defining new potential deposits. Within what we believe is now emerging as a district rather than just a deposit per se.

Our stream exposure at Chapada encompasses the entire district scale and package held by Yamana and has no ultimate cap. Our other current base metal revenue comes from 777, Hudbay's mine in Manitoba, where we saw modest declines in both copper and zinc production as the working extended deeper and into more challenging mining areas.

On the positive side, however, Hudbay indicated that it is now expecting a next few years of production extending the mine life to late 2021 based upon its most up-to-date mine plan, while also stating that it continues to examine options for further incremental mine life extensions. Vale announced the cobalt stream financing to provide capital towards the new development of underground deposits at Voisey’s Bay that will replace the [indiscernible] deposit over the next few years and that will add approximately 15 years to the project mine life.

This royalty has not been paying over the past couple of years as a result of Vale's assertion around the deductibility of processing plants and state of capital cost and may have been forgotten by many of you. We disagree strongly with the Vale position and a trial to make determination of this issue amongst other historical underpayment assertions is scheduled to be hared in Newfoundland and Labrador Supreme Court next month.

This was our first full quarter of incorporating the recently increased Potash Royalty's ownership level. Our belief in a long-term increasing global requirement for potash fertilizer and prices currently sitting at below [Technical Difficulty] price requirements but encouraged by recent announcements from our royalty counterparties Nutrien and Mosaic.

They both -- spoke to the very strong and broad-based global demand and in the case of Nutrien, this was a company by increased corporate level potash sales guidance, presumably facilitated by further ramp-up at Rocanville. Overall improving prices with data from Mosaic indicating various regional gains in the range of 15% to 25% relative to year-ago levels.

These developments, together with the increased ownership levels, allowed potash revenue to overtake thermal coal as our second-largest commodity exposure and to now represent 23% of our diversity mix. Thermal coal revenue was lower in the second quarter relative to both the first quarter and the prior year comparable quarter but was well within the broader range we have been experiencing, after sales timing variability and mining progression across lands with varying royalty levels are considered.

The lower revenue this quarter was largely attributed to mine sequencing at Sheerness. Met coal revenue from Cheviot, part of Teck's Cardinal River complex was relatively flat this quarter as better prices offset lower production volumes.

We did, however, welcome an announcement from Teck this quarter that they have begun studying the development of another resource area that can extend the mine life by up to 9 years, taking it out to 2029. The potential new mining area under study is on our royalty land.

Our indirect royalty exposure to IOC, held through our shareholding of Labrador Iron Ore Royalty Corporation, turned into a very disappointing quarter relative to Quarter 1 and the comparable quarter last year. This was as a result of a nine week, but since resolved, labor disruption at the mine.

This was particularly unfortunate given the further widening of quality premiums that has been seen in the market. A particular interest in this regard is the increasing relevance of low aluminium content determining premium and iron ore pricing [ph].

IOC products are the very best in the world by this measure in addition to their high relative iron content. It is also worth noting that IOC expects to begin mining from the new Wabush 3 pit later this year as part of its continuing ramp-up of recently completed expansions.

Keeping with iron ore, in July, Champion announced the first quarter results since restarting Bloom Lake and shipping first concentrate April 1. In the quarter ended June 30, well, still ramping up full capacity, they had sales of CAD 120 million and operating cash flow of $38.6 million.

They also disclosed that their sales of $1.8 million metric tons of high-grade, 66% iron concentrate were priced at a premium of 35%, benchmark, 62% index. They also announced beginning of studies to explore further capacity expansion.

This excellent result in our estimation would not only bode well for our Champion convertible debenventure interests but also for increasing confidence in the merits of other potential Labrador Iron Ore trough development opportunities, allowing me the opportunity here to highlight all there on iron ore and its Kami project, which is located next to Bloom Lake and IOC and in which we have a large equity holding and an underlying project royalty interest. It would sound like I just said the words expansion, extension, new development, ramp-up a lot in that overview.

It's because I did. Each of these words, billions upon billions of capital expenditures, either made already or to be may -- or to be made, of which we have no share of the costs but a full share of the benefits.

This is the power of the lopsided option value equation associated with our diversified mining royalty model. We've been saying for some time that with the improved, broader, cyclical sentiments and when we made most of our major royalty acquisitions, value in today's royalties is becoming harder to find.

With that said, the more recent junior mining equity pullback has led to improved deal flow in preproduction-stage opportunities. It is quite remarkable that in some situations that we already [Technical Difficulty] just how nonexistent, the broader market is as an investment competitor, in fact.

We have therefore, been quite active during the quarter in negotiating for quality in equity interest and promising projects and expect to be able to close on some of these smaller deals in the second half of the year. Along this vein, during the first half of the year, we invested a total of $7 million, both directly into and alongside Lithium Royalty Corporation.

LRC is a private company in which Altius is a roughly 12% percent shareholder and holds one board seat. [Indiscernible] with LRC, we have signed a purchase and sale agreement on one royalty with another in advanced discussions.

The LRC team is comprised of several experts within the still very much in the lithium mining sector. And this modest investment allows Altius to benefit from their knowledge and to position and learn for the -- as we expect rapid evolution of transportation and electrification trends.

We also continue to progress our efforts to identify opportunities to develop a portfolio of renewable energy-based royalties. Under our platform we referred to as Blue Sky Renewable Energy Royalties that we have cofounded with a U.S.-based team of renewable energy investment and development specialists.

Several discussions are currently away -- underway with potential counterparties that are either developing new projects or operating existing projects. Altius also continues to consider utilizing the residual phaseout years of its coal-based electrical generation royalties as a funding source to create the long-term renewable energy portfolio.

Our last comments before we open it up to questions are on our Project Generation business. Over the past few years, we have vended out 41 projects and have other transactions pending.

Contrary to what you might guess, looking at the PSX [Technical Difficulty] exchange, demand for exploration projects is the strongest we've seen in our history, as both juniors and majors recognize a looming crisis in the industry due to the acute lack of exploration investment in the sector for 2012 onwards. We now have 27 positions in our junior equity portfolio, many of which had active drill programs underway this year.

Some of this drilling has been showing up exciting results, as you may want to keep track of, given the potential of a low-cost value creation for Altius' shareholders. Our portfolio information is available through the website for those who wish to dig deeper.

We talked about Evrim's high-grade gold and tranches in Mexico last quarter as a highlight. This time, the highlight is: perhaps, the toss-up between the infill drilling results at Adventus' El Domo deposits that has identified a thick and extremely copper-rich core zone; and results in Sokomon Iron, who announced drill results from three holes on a Moosehead gold project in [indiscernible] that included a reported intercept of 11.9 meters, a 44.96 grams per ton gold; and this was followed by a strategic equity financing.

Altius is a large shareholder of both companies and also holds the royalty related to the Moosehead project. Finally, we continue to make progress with respect to creating strategic partnerships and the IPO of our Lynx diamond discovery in Manitoba.

We'd share lots of news report on this in the coming weeks, in advance of beginning first drilling programs this coming winter. And that wraps up our formal remarks, and we'll turn back to the operator for the Q&A.

Thank you.

A very compelling overview, Brian. One quick question from me.

Can you speak to how you see Blue Sky kind of unfolding here in terms of opportunities you might see? Or maybe in terms of an initial rough time line?

It's hard to put a time line on things. It's -- we're introducing a new -- basically a new type of capital source into the overall capital stack for that sector.

So a lot of the work that's been happening is within educating the operators and developers about how royalty financing might work. And I have to say that over the past few months, we've had quite a lot of success in introducing that.

There are definitely some dynamics that play within that space right now that make -- we believe make that kind of financing something that is going to play an increasing role. Lots of term sheets out there getting beaten around.

Again, can't put a time frame on it, but again, quite optimistic that there will be deal flow here that will make this ultimately become a real business for us.

And I think when you first announced it you had said that there was one project that was going to be vended in from your partner away from the get-go. Maybe, you can't speak to that just yet because I don't know if it's actually closed the whole JV structure.

But anything you can say about that. And is it a paying opportunity?

Yes. The guys that we're working with as partners and really the experts that are going to be charged with a lot of on-the-ground deal hunting, have a couple of quite small royalties in their portfolio right now.

One is a hydro royalty with a solar component to it. These aren't going to be big deals that move the needle dramatically.

They are assets within their business that are coming in as part of their joining of the whole. And -- they're starting royalties, but they're obviously going to be -- they're much smaller than what we had anticipated being the target-size going forward.

And the word of the hundreds of thousands here not millions.

To get on some of the old things. I'm sure that you're watching the ongoing situation in Labrador very closely.

And I guess it -- what happens focuses now on Champion. If you can give a little insight as what you're seeing?

And also the status of the Rio Tinto project? I think it's Goethite Bay that's north of Carol Lake.

And also the prospects for Bitterroot now? And I believe that Altius retained one of the properties in Ireland, and the other ones are Adventus.

If you could say anything about Ireland, that would be good.

Thank you very much. I'll try to address all those parts.

So first on iron ore, yes, of course, it's something we watch very closely and, in fact, have been doing so for the best part of 20 years. What's happening with Champion and the whole Bloom Lake restart is extremely important.

Obviously, the Bloom Lake project, practically brought Cliffs down a few years ago. So it's got a certainly a mix taste in the market's mind, and, I guess, a lot of capital was sent to money having on that project.

So it's really gratifying now to see, the first half was -- dissolved in the marketplace and how the market has really just developed directly seeking more and more exactly the type of product that come out of Labrador and watch the Bloom Lake project scale back, done a little bit less, maybe little less frantically than first in its first iteration and just being carefully brought forward. And it's really fun to watch it play out right now.

And again, there are implications for all [indiscernible], as we watch that project evolve into a successful mining story. Again, I think they are pretty profound.

IOC, similarly, market is exactly seeking what it produces. When you consider the new premiums that are being applied for low alumina content in addition to the high iron ore content, when this is some of it, not the very best material available in the marketplace right now.

Goethite Bay is a -- for those who don't know, is a project that we optioned to Rio Tinto during the last cycle and that resulted in a pretty significant discovery, just to the north of the IOC operation. We haven't seen much in the way of activity there in the last little, middle -- I mean, deposit isn't broadly defined.

But it's not immediately in the crosshairs for development that we can see. Right now, IOC is developing its Wabush 3 pits to help feed its ramp-up.

But I -- again, in the very long term here, we anticipate that Goethite Bay could very much form part of the mining plan at IOC. But whether that's years or decades away?

I can't really speculate. And what was the next part of the question?

Bitterroot?

Bitterroot. Bitterroot, I don't have a whole lot to say.

We have a pretty small interest there. Most of you would know that we took a controlling position in their nickel project in Michigan, which basically covered a lot of the potential extensions of the geology related to the Eagle deposit, which is being mined by Lundin right now.

So we continue to work away on that project, geophysical surveys in this developing target. And it's part of a broader issue that we have underway, putting together projects of high-potential nickel salt by projects in several jurisdictions.

So we're quietly beavering away on that. We're pretty confident that at some point the nickel market will come our way, and we'll be able to show just how much we've done to get ready for that.

Don't underestimate our patience in these regards. And finally, the -- last question was did we hold back the projects from Adventus in Ireland.

I wouldn't exactly phrase it that way. What we had a second initiative on the exploring for zinc in the sedimentary basins in Ireland.

We also had an effort underway to look for -- a pretty unique idea really for Ireland, and that was to toss up red bed copper in the -- extreme southern part of the country. And that's a relatively early-stage project.

That is now being funded and advanced by First Quantum. And it's -- again, it's not -- that's wholly owned by Altius, the joint-venture to First Quantum.

Adventus, that's been -- well, it was all related to zinc assets in Ireland. So Mark, I hope I covered all of the -- all of the questions here.

Thank you, Brian, and I'd like to thank everybody for dialing in. If you have any other questions, happy to talk to you after the call, and we'll talk again in a quarter.