Ecora Royalties PLC (ECOR) Earnings Call Transcript & Summary

Thank you for joining us here today for the presentation of Ecora's Full Year 2022 Results. I'm joined by Ecora's Chief Financial Officer, Kevin Flynn. There will be an opportunity for analysts and investors to ask questions at the end of the call. Please follow the instructions as provided by the call operator. 2022 certainly delivered, we saw, record portfolio contribution, record earnings per share, a record pace of deleveraging and a record dividend cover. This was largely driven by nonrepeatable cash flows from our Kestrel royalty, which we reallocated during the course of the year to the acquisition of a high-quality, near-term portfolio of royalties from South32. We saw material progress in relation to our organic development-stage royalties over the course of the year, with much more to come in 2023. The fundamentals underpinning our portfolio today particularly those tied to future-facing commodities remain very strong and the commodity basket underpinning our royalty portfolio -- producing royalty portfolio today remains strong, albeit slightly lower than record levels seen over the course of 2022. The commodity prices underlying our portfolio performed very strongly in the course of 2022. And you can see on this slide on the left, very strong performance in the first half of the year. Over the course of the second half, those commodity prices, which were at record, if not near record levels, were softened slightly, albeit these commodity prices, even into 2023, remain very high relative to where we were in prior years. And thus, the business is very well positioned 3 months into 2023 for continued strong performance. 2022 represented another year of delivery on our key strategic objectives. And looking back, there have been 3 distinct phases that have framed our execution. The first strategic imperative represented the replacement of Kestrel income and the stabilization of our royalty portfolio's income profile such that following the Kestrel runoff, the business had a stable revenue line into the future. And that phase was largely completed with the acquisition of the Voisey's Bay royalty into 2021. The next key strategic imperative was to change the complexion of the business from being a stable revenue profile to one of growth. And that arguably was completed following the acquisition of a portfolio of royalties from South32. We now find ourselves in a third phase with the strategic imperative being to add greater scale and add greater diversification, both in terms of commodity exposure, but also in terms of counterparties. This slide really hones in on the previously mentioned second strategic objective, which we feel was achieved in 2022 to enhance the company's growth profile. And one can see that from a base today of slightly under $40 million, our portfolio of future-facing commodities in production, at construction stage and in development in the medium term has a path in excess of $100 million of income per annum. The energy transition is expected to drive seismic changes in terms of the world's need for future-facing commodities. The scale of this challenge is hard to comprehend. And to bring it to earth, we've included a few sort of practical examples on this slide. So in order to achieve the net-zero scenario, which is what globally we're all shooting for, by 2040, it's estimated that the current stocks of internal combustion vehicles would need to be substituted for something like over 700 million passenger electric vehicles or slightly under 400,000 wind turbines, which is the equivalent of 1,300 of today's largest current offshore wind farm and from a battery capacity, something like 100x Tesla's current 135 gigawatt per hour battery Giga factory. And this challenge is enormous, but for Ecora, we see that as an opportunity, and opportunity to deploy capital, but also some very strong structural trends to which we've aligned our commodity exposure. And we can see that as we look at how our portfolio composition has evolved from 2021 to 2022, but certainly, when one goes even further back to 2014, when our portfolio is almost 100% weighted towards coal. At year-end 2022, approximately 85% of our basket was weighed towards future-facing commodities with the bulk of that being base metals and copper and nickel and cobalt but also including uranium and vanadium. And what we've also achieved in 2022 is the repositioning of our portfolio such that it is a healthier mix of producing assets but also development and near-term royalties. And with that, I'll hand it over to Kevin to cover the financial highlights of the year.

Thanks, Marc. Turning to our performance indicators, which I'll discuss in more detail as I go through these slides. The record portfolio contribution was largely driven by our short-life Kestrel royalty, which is producing fantastic cash flow for the business in its final few years within our private royalty land. Our remaining longer-term core portfolio continues to grow also, and there remains good upside potential, as Marc will discuss later on. Our adjusted earnings per share increased as a result of the record income in the year, but as I'll discuss on Slide 12, the shares issued as part of the South32 acquisition meant that adjusted earnings did not increase to the same extent as our revenue. And finally, our dividend remains well covered. And even with Kestrel stepping down in the year ahead, should still remain well covered in the run-up to the South32 portfolio coming online. Turning to Slide 11. So here, we have split our portfolio contribution into what is now the core portfolio of the business. The portfolio we've effectively been strategically repositioning to over the last 8 years and reflecting the fact that Kestrel is now short term, albeit a significant royalty as it begins its transition outside of our private royalty lands. The average royalty income received from Kestrel over the last years is around about $40 million. And one of our first key strategic imperatives, as Marc outlined, has always been to build a portfolio to replace that revenue. And it's pleasing to see that our core portfolio almost achieved this in FY '22 at $36 million. And these assets, along with the growth we put into the business in the last 24 months, should see a portfolio of non-Kestrel assets, delivering annual income of over $100 million in the medium term. I'll run through these assets briefly. Voisey's Bay first. We received 19 deliveries during the year compared to 21 in the previous year. The increased cobalt prices were higher, particularly in H1 with average sales of $38 a pound before falling to around about $23 per pound in the second half. We expect around about 13 to 15 deliveries in financial year '23, a year in which we always anticipated would be the lowest in terms of volume as the underground transition is expected to gather significant momentum from 2024 onwards. Pricing has continued to fall in the year-to-date trading around about $17 to $18 a pound due mainly to supply restraints in H1 2022 easing and a slowing down in the Chinese economy over the last 6 months. Income from Mantos reached $6 million during the period as they continue to make progress with their debottlenecking project, which saw volumes increase by 8%, also in a stronger pricing environment. Looking ahead, we hope to see the trend for higher volumes continuing in FY '23 as Capstone evaluate the potential to increase throughput from 7.3 million to 10 million tonnes per annum. Next to Maracás. Pricing here offset a small volume reduction. Pricing on average was about 15% higher in the period indicating that the operator might be achieving higher margins for the portion of their sales going into the battery market. Largo revised down its guidance during FY '22, but are now guiding 10% higher sales volumes in 2023. And along with the completion of ilmenite plant, should now allow for some near-term upside. The decrease in revenue from LIORC reflects the reduction in total dividend from $6 per share to $3.10 per share. Financial year 2021 was a very strong year for iron ore prices and these softened noticeably in 2022, but still remain relatively high in the context of the last 5 years. Broker consensus for LIORC dividends for 2023 is around about $2.60 per share, which will be a 16% reduction on financial year '22. McClean Lake is a relatively stable source of income, generating around about CAD 400,000 to CAD 500,000 per month. And the good news story here is that Cameco has reversed its intention to operate the underlying Cigar Lake mine at 75%. So our normal revenue from this asset should remain unaffected in the year ahead. We saw higher volumes coming through from Four Mile in the period, along with higher pricing, but as per previous results, we are deferring this cash on the balance sheet until the result of the appeal in the legal case in Australia, which we expect to come through later on in the year, which could see some cash released to the income statement from that point. Other royalties include EVBC and here we are in dialogue with the operator as to how to assist them managing their liquidity over the course of the next 12 months, given that their cost base has at times exceeded the gold price. We'll provide an update on this with the half year numbers, but in the meantime, we're expecting a deferral of cash flow into 2024. And finally, by no means least Kestrel, despite volumes within the private royalty land reducing by 20% to just over 4 million tonnes in the period, the pricing achieved more than doubled, as stability really returned to the market in 2022 and the price no doubt benefited from the noticeable increase in the thermal coal market as the price of energy rebased. In times of increasing prices, the royalty also benefits significantly from the ratchet structure, which as a farewell gift from the departing royalty increased noticeably on the 1st of July. By way of illustration, the weighted average royalty rate in the first half of the year was 13.2%, and this increased to almost 23% in the second half, and it's around about these levels currently with the spot price of $350 a tonne. Looking forward, we'd expect to receive around 50% of the FY '22 volumes in 2023 from Kestrel, which, although will still generate very healthy cash flow, will nonetheless result in an inevitable decrease in portfolio contribution for 2023. Turning to Slide 12. The royalty business model should provide healthy margins. And in the current year, this is certainly the case. Our adjusted earnings in dollar terms increased by 68%, which is the same percentage as our portfolio contribution. And this is really in stark contrast to the underlying mining sector, which is grappling with inflation and the associated margin erosion. However, at Ecora, our cost base, in fact, remained largely in line with the previous years. And as always, we'll continue to focus on cost discipline in the year ahead. As I said -- as said previously, one of our key focuses is on per share metrics, especially in relation to how we deploy capital and finance acquisitions. During the year, we issued 43.6 million shares to South32 as part of the finance package to acquire their portfolio of battery metal royalties. This acquisition was a strategic decision taken to recycle nonrecurring Kestrel revenue into royalties, which do not yet generate cash flow, but are expected to do so by the middle of the decade. But, however, as income does not accrue on day 1, there is inevitable dilution to the adjusted earnings number in the short term, which is going to be more than compensated for by stellar accretion when the royalties commence generating cash flow. Slide 13 summarizes our balance sheet. I won't spend too much time on this as we'll be dealing with the liquidity and debt profile of the business on the next slide. Here, we can see the Kestrel royalty was valued at $106 million at the end of the period, whereas most of the group's other assets are included in amortized cost, so do not necessarily reflect their true market value. Included within other liabilities this year is the large tax payable on the Kestrel income, which is due to be paid in June next year. Turning to Slide 14. Here, we can see how the strong income generated in the period enabled us to pay down debt much faster than expected, resulting in net debt reducing from $90 million to $36 million at the end of the year, having invested almost $400 million over the last 2 years. In fact, the group was almost debt-free at the time of entering into the South32 transaction. We expect net debt to increase as we go through financial year 2023 as we pay the tax on the Kestrel royalty income, along with the remaining stage payments to South32. We are very pleased to modify our existing borrowing facility during the year. First of all, we negotiated the removal of the scheduled $25 million step down, which preserved the overall headline at $150 million. At the same time, we negotiated the provision of a $50 million accordion feature, which would bring the facility up to $200 million for suitable future investments. And finally, we extended the term of the facility by a further 12 months to the first quarter of 2025. In terms of firepower, we remain well capitalized. And even once our debt peaks during the fourth quarter of 2023, we should still have liquidity, inclusive of LIORC and Treasury shares, in excess of $100 million, with a further $50 million accordion on top. And that's a good segue into the next Slide, 15, on capital allocation. We've been very careful in terms of capital allocation over the past 24 months and selectively increasing our gearing levels to transact on $400 million of acquisitions. The conviction we had in terms of Kestrel cash flows proved well founded, and we were able to use these cash flows to delever in the run-up to the South32 transaction, a transaction which was structured to provide balance sheet strength through 6 quarterly stage payments. As I mentioned previously, we're well capitalized in order to continue our growth strategy, but the transactions we're looking to undertake need to have the ability to contribute towards our per share key performance indicators in order to provide for shareholder returns. Our dividend of 7p remains constant, although we are rebasing this to $0.085 per share on the average FX rate over the past 12 months. This works out to be around $0.02125 per quarter. And at this stage, our main financial outgoing will be determined in the same currency as our income is earned. We continue to enjoy strong support from our lending institutions, which are amongst the largest Canadian blue-chip banks and who should be isolated from the current volatility in the banking sector. As such, the business is well placed and capable of acting quickly and opportunistically as deal flow arises. And with that, I'll hand back to Marc.

Thank you, Kevin. Looking back at 2022, key developments in the portfolio, which Kevin has touched on to a degree. So keeping a brief. We saw record coal prices driving a record contribution at Kestrel, the implementation of a new royalty rate. At Voisey's Bay, the transition from the open pit operation to the underground mining is now fully underway with expected ramp-up coming in the years to come. At Mantos copper, we saw the completion of the debottlenecking project. First, we saw a final investment decision taken at West Musgrave with construction now underway. At Piauí, we saw the completion of a starter plant, which saw first production towards the middle of last year. And at Santo Domingo, the completion of Mantoverde-Santo Domingo District Integration Plant, which identified material cost savings. Looking ahead to 2023 in the next 12 months, we anticipate the busiest year in terms of our organic portfolio growth that I've seen in my 10 years at Ecora. First, the continued transition from the underground operations at Voisey's Bay to full ramp up starting in 2024 and onwards. At Mantos Blancos, a Phase 2 of an expansion study expected in the second half of the year at Santo Domingo, an updated feasibility study also in the second half of the year. At Piauí, the project finance construction process continues. We're also seeing first production at the starter plant at Maracas, the commissioning of an ilmenite plant at Nifty, continued progress is expected in relation to restart project financing. And last but certainly not least, the ongoing construction activities at West Musgrave. Turning now to look at the cobalt market. We've seen in the past 12 months, prices move from sort of mid-cycle levels to peak levels and back down to levels which are approaching the cyclical lows. So there a number of factors that have been driving this change. First of all, we've seen new supply entering the market as a byproduct from the Indonesian nickel mines. And we've also seen softer demand from portable consumer electronics following a boom post -- during the COVID period. Looking ahead, the medium- to long-term outlook remains very positive for cobalt. Simply as -- even if one assumes a level of new battery chemistries, which ultimately is a positive thing towards achieving our global net zero objectives, in absolute levels, demand for cobalt remains robust, and the trends are very supportive in the medium to longer term. To date, the group has realized a weighted average cobalt price of slightly under $30 per pound since the acquisition of the Voisey's Bay cobalt stream, which is well in excess of our investment case, and we're very pleased with how this asset has been performing. Turning now to commodity selection. Most of you will not be surprised that as we think about growing our royalty portfolio from a commodity selection perspective, it's really more of the same. First, by that, we mean we continue to focus on commodities that are required to achieve the electrification of energy consumption, including cobalt, copper and nickel, lithium, manganese, tin and so on. And secondly, we continue to look for mining operations that produce commodities in a relatively cleaner or greener way. 2022 represented a step change in our sustainability disclosures. We've introduced a new framework, which is centered around our role as a responsible business, but also as responsible investors. And we've aligned our disclosures with the UN Global Compact, Sustainable Development Goals, and from a carbon perspective, we've set emission targets and objectives, which leverage best-in-class guidance from the science-based targets initiatives for small- and medium-sized enterprises. Over the course of the year, we saw the benefits of our disclosures where we saw a material improvement in our Sustainalytics ESG risk score from previously a severe-risk classification to a low-risk classification, which is an incredible achievement and a step change in terms of the risk assessment and risk profile of this company. Looking ahead to 2023, our commodity basket remains very strong relative to prior years. We anticipate a number of organic growth catalysts throughout the year. We continue to seek further growth in a disciplined and methodical way focusing on per share metrics, per share EPS growth and per share net asset value growth. We'll continue to seek to improve our revenue mix, really targeting those commodities that we allocate in the basket of future-facing. And as always, we really seek to continue to enhance our sustainability reporting and disclosures such that holistically, our business is understood to be at the forefront of the mining sector's integral role to achieving the energy transition. So thank you very much for joining us today, and we'll be happy to take any questions you may have.

[Operator Instructions]. We take our first question from Richard Hatch from Berenberg.

Marc and team, and thanks for the really good set of numbers. Just a bit of a technical question for me just on the financials. Kevin, just on the payables increase that you've posted on the current liabilities. I guess that, that is partially South32, but also there's some tax in there as well. So could you, by any chance, just quantify what the tax number is that we need to plug into our models and when that gets paid, that would be very helpful.

Yes. Thanks, Richard. Yes, so the tax payable is about -- well, we've a couple of tax payables, but the big one is about $15 million, $16 million, Richard, which is basically the tax on the record Kestrel results that's payable in June of this year. And you're right, I mean, the current liabilities increase there is reflecting that on South32 stage payments.

Okay. And then, Marc, just on the cobalt pricing. I saw Jaguar has suspended the Idaho operations overnight, given sort of softer cobalt prices and also some CapEx issues and cost inflation issues. I mean, do you -- what's your viewpoint on the sort of the evolution of cobalt prices. Do we have a softer period for the next sort of 18 months or so, just while we work through some of this extra supply before it squeezes up? Or do you think sort of higher cost operations coming out of the market give the opportunity to support the price like we saw with Glencore when they reduced operations in Zambia?

Richard, thanks for the question. Probably helpful to break it down into short term, medium and long term. So in the short term, what we've seen is cobalt prices trade up from lows of around $15 per pound, and it's currently on the metal side anyways in the range of $17 to $18 that's for an alloy grade product and say, 16% to 17% of grade according to fast markets. So by the end of the year, it will probably be trading, at least if you look at sort of market forecast, somewhere in the range of where we are today in $20 per pound. There are a bunch of factors that could really move this. So the first is there's a dispute between CMOC and the DRC government, which has seen some pretty sizable volumes in the DRC accumulate as inventory. And the market is really pricing that those market -- those volumes come to market very quickly in the short term. So that depending on how that dynamic plays out could be a positive catalyst or could see prices go sort of sideways or slightly upwards based on where they are today. The other thing that you're seeing actually is that the supply chains in China, particularly on the battery-grade cobalt or the battery precursor material cobalt, has been accumulated and in part, you've seen some disruption in terms of volume supply chains as a result of COVID, and a lot of those restrictions in China are coming to an end now. So as those built up inventories destock to normalized level, that should be a positive on the cobalt price. And then the last piece is the metal market. The metal market has been very strong. The metal market continues to be somewhat inelastic in terms of demand and relatively speaking, has performed much better than sort of battery grade hydroxide.

Okay. Helpful. And then just -- sorry, my last one is just on BD, I mean, obviously, you got -- the balance sheet is going to see a little bit more leverage coming on over the next sort of 6, 12 months, but for good reasons, you made good money out of Kestrel, you've got to pay South32 for the portfolio of assets, which are really good into the medium term. If you were to look at the business development opportunities that you're seeing at the moment and then compare it to, say, this time last year, what are you -- how are you kind of seeing the market in terms of opportunities that you can act on? Are you seeing good ones that are just sort of coming away from you on price? Or is this sort of softness in some commodity prices at the moment? For example, nickel prices a little bit lighter, you got copper sort of holding the line at the moment, but you're seeing some commodity prices drift a little bit at the moment. So are you seeing any opportunities that present themselves in a period of sort of volatile prices?

Well, Richard, I think the short way to put it is we've always been really disciplined in terms of how we deploy capital really methodical in terms of putting together a business that is resilient in terms of being exposure to low-cost operation with strong counterparties. And yes, it's true we've seen some commodities trade down. We've also seen some commodities perform really strongly. And that's pretty much part for the course, given our broad commodity selection criteria. And in the last 12 months, one thing we have seen is a lot of folks are really moving forward to bring projects up the development curve, whether that be getting them up to the final investment decision or into construction. So a good chunk of the opportunity set today anyways is characterized by sort of being near-term conduction. But there continues to be opportunity across the spectrum, whether it be in production medium term, short term, long term. In terms of pricing, producing royalties typically tend to be the most -- tend to attract the lowest discount rates and the most interest but we continue to see opportunities across the set.

We currently have no further telephone questions. So I'd like to hand the call back over for questions from the webcast.

Thank you. First question from the webcast is from Euan at Liberum. In relation to Ecora expecting to have circa $100 million of facility headroom at peak debt, does this include the accordion?

Geoff, I'll take that. The $100 million at peak debt is in relation to both the undrawn facility and potential liquidity with our LIORC stake. So no, it doesn't include the $50 million accordion.

And a question from Tyler at RBC. We're potentially on the cusp of a dramatic increase in global mining projects, but also have the potential new sources of capital from auto and battery makers. How do you see the competitiveness of the royalty model evolving in the coming years? And how do you see the higher interest rate environment impacting the business?

Thanks for the question, Tyler. Generally, what we'd say is that new capital coming to the sector is a very good thing, first of all, because it's complementary to our product offering, which is never -- we never intended and we would never report that Ecora is the one-stop shop for full financing to get a mine into production. And generally speaking, we always partner with groups whether it be conceptually partnering with equity capital providers or debt capital providers. Significant class of investors is helpful and it's a good thing for the sector. More generally, in terms of the opportunity set, again, all this does is it broadens the investable universe. New capital to new projects, if we're not the full solution, basically means that we can -- new opportunities arise. And therefore, the investable universe multiplies and grows in scale. So all in all, we continue to be very positive especially as we see this new capital being longer dated into capital and very focused on long-term supply, which by definition means projects that are built with an intent to operate but also to -- that are built conservatively. And generally speaking, in line with what you really want is in terms of exposure to a mining project or a construction stage opportunity.

Thanks. And a question from Andy Wilson at the West Yorkshire Pension Fund. Is the current banking crisis providing us with more opportunities, and do you see this continuing after it is sorted?

It's probably a question of relative cost of capital. And while we don't -- to date, anyways, we haven't seen the challenges in the financials markets directly impacting any specific mining operators. What we have seen is an impact on equity market valuations. And in that context, royalty products, which are typically accretive or relatively more accretive than an equity issuance by definition are increasingly so. And therefore, the imperative for any CFO who's looking at his funding options and funding mix, the royalty product is increasingly attractive.

Thank you. There are no further questions from the webcast at this point in time.

Okay. Well, thank you very much all for joining us for 2022. As we mentioned, 2023 is certainly shaping up to be a very busy year, and we look forward to updating you on the developments as and when they come through.