Altius Minerals Corporation
Management's Discussion and Analysis of Financial Conditions and Results of Operations
Three and six months ended June 30, 2022
This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the Corporation's consolidated financial statements for the three and six months ended June 30,2022 and related notes.This MD&A has been prepared as of August 8, 2022.
Management's discussion and analysis of financial condition and results of operations contains forward-looking statements.By their nature, these statements involve risks and uncertainties, many of which are beyond the Corporation's control, which could cause actual results to differ materially from those expressed in such forward-looking statements. Readers are cautioned not to place undue reliance on these statements. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Additional information regarding the Corporation, including the Corporation's continuous disclosure materials, is available on the Corporation's website at www.altiusminerals.comor through the SEDAR website at www.sedar.com.
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Description of Business
The Corporation manages its business under three operating segments, consisting of (i) the acquisition and management of producing and development stage royalty and streaming interests ("Mineral Royalties"), (ii) the acquisition and early stage exploration of mineral resource properties with a goal of vending the properties to third parties in exchange for early stage royalties and minority equity or project interests ("Project Generation") and (iii) its majority interest holding in publicly traded Altius Renewable Royalties Corp. (TSX: ARR) ("ARR"), which is focused on the acquisition and management of renewable energy investments and royalties ("Renewable Royalties").
The Corporation's diversified mineral royalties and streams generate revenue from 12 operating mines located in Canada (10), the United States (1), and Brazil (1) that produce copper, zinc, nickel, cobalt, potash, iron ore and thermal (electrical) coal (see Appendix 1: Summary of Producing Royalties and Streaming Interests). The Corporation further holds a diversified portfolio of pre-production stage royalties and junior equity positions that it mainly originates through mineral exploration initiatives within a business division referred to as Project Generation. The Corporation holds a 59% interest in ARR, which through a jointly controlled entity, Great Bay Renewables LLC ("GBR"), holds royalties related to renewable energy generation projects located primarily in the United States. Certain funds managed by affiliates of Apollo Global Management, Inc. (the "Apollo Funds") represent the other party to the joint venture.
Additional information on the status of these royalty interests is available in Appendix 2: Summary of Exploration and Pre-Production Stage
Royalties and Appendix 3: Summary of Operational and Development Renewable Energy Royalties of this MD&A.
Strategy
The Corporation's broader strategy is to grow a diversified portfolio of long-life royalties related to assets and commodities that benefit from and support sustainability linked, macro-scale structural trends, including the transition from fossil fuel to renewable based electrical generation; transportation electrification; lower emission steel making; and agricultural yield demand growth.
The Corporation seeks royalty interests in projects with large reserve and resource lives in order to maximize the potential for future option value realization. Extensive resource lives are considered by the Corporation as excellent predictors of project life extensions and production rate expansions. Such occurrences typically require capital investments by the operators, but as a royalty holder Altius pays no share of the costs incurred to gain these potential incremental benefits. In addition, long life assets provide exposure to multiple commodities cycles and to the inflationary impacts of production and development costs over time, to which the Corporation is not exposed, that naturally result in higher nominal commodity prices. The long average resource lives that remain for most of our current portfolio of royalties is a key strategic differentiator for Altius within the broader natural resource royalty sector.
Altius also grows its portfolio of Mineral Royalties by originating and adding value to mineral projects through scientific research and exploration and environmental/social licensing initiatives and then retaining royalties upon their sale or transfer to mining/development companies. This is the core function of our Project Generation business, which has a strong track record of internally creating pipeline royalties as well as earning substantial profits from the eventual monetization of corporate equity interests that are often received in addition to the long-term retained royalty interests. The Corporation believes that the royalties it creates internally can provide long-term investment returns in addition to those gained through acquisition related activity and represent another unique strategic differentiator for Altius.
Whether considering its organic Project Generation business or M&A based mineral royalty acquisitions Altius exercises counter-cyclical discipline. Commodity markets are notoriously cyclical and individual asset valuations can change dramatically in accordance with commodity price and sentiment fluctuations. Our mining royalty and mineral property acquisitions are primarily made during periods of
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low cyclical valuations, while operator funded organic growth investments and equity gains/liquidity events typically become more pronounced during periods of better cyclical valuation and sentiment.
Altius has also expanded its focus into royalty financing of the renewable energy sector through its founding interest in ARR, which provides direct exposure to the global transition towards cleaner energy sources. Through investments in US-basedutility-scale wind and solar project developers and operators: Tri-Global Energy ("TGE"), Apex Clean Energy ("Apex"), Longroad Energy ("Longroad"), Northleaf Capital ("Northleaf"), Bluestar Energy Capital LLC ("Bluestar") and Hodson Energy LLC ("Hodson"), ARR has begun building a portfolio of renewable royalty interests that currently represent a combined expected nameplate capacity of 3,510 Megawatts (Appendix 3) of generation capacity. In March 2021, the Corporation completed an initial public offering of ARR on the TSX. The Corporation retains approximately 59% of its common equity.
Outlook
Most of the commodity prices that are relevant to Altius have been strengthening over the past few years, although in the case of base metals and iron ore prices have retreated recently due to recessionary fears that are impacting near term demand outlooks. The other impact of the lower prices has been to dampen short-term appetite for capital investment in much needed replacement and growth based supply capacity, which we believe to be a bullish indicator longer-term given the magnitude of looming supply deficits over the next several years. Broader market conditions generally still favour an approach of relying upon organic growth from existing royalty holdings over M&A based growth however the Corporation is poised to seize upon external opportunities that may present themselves during the current period of weak sentiment being expressed by competing capital sources.
Potential Growth Catalysts
Earlier this year Lundin Mining announced the discovery of a new copper-gold mineralized system referred to as Saúva that is located 15 kilometers north of the Chapada Mine, on mining property over which we hold a stream interest. With nearly 35,000 m of drilling completed at Saúva in H1 2022, Lundin has defined a mineralized area measuring approximately 1200 meters by 950 meters while mineralization remains open in all directions. Lundin has recently stated that it expects to publish a maiden resource for Saúva early in 2023 and that it is beginning to incorporate the discovery into its ongoing expansion planning scenarios at Chapada.
Lithium Royalty Corporation ("LRC"), of which Altius is a co-founding 12.6% shareholder, continued to build out its royalty portfolio with the total number of project royalties acquired since inception in 2018 amounting to 20.These include a tonnage based royalty on Allkem's producing Mt. Cattlin Mine in Australia and gross royalties on each of Zijin Mining's Tres Quebradas project in Argentina, Sigma Lithium's Groto do Cirilo project in Brazil and Core Lithium's Finniss project in Australia. In 2021, Zijin Mining acquired Tres Quebradas by way of its acquisition of Neo Lithium and each of Sigma and Core announced project construction decisions. LRC has commented recently that it is evaluating various corporate alternatives including a potential public listing or a corporate level transaction.
Adventus Mining Corporation ("Adventus") continues to make meaningful progress in Ecuador with its recent announcement of an investment protection agreement for the Curipamba-El Domo copper-gold project with the Ministry of Production, Foreign Trade, Investments and Fisheries. This follows its entering into of a comprehensive project finance package for the project earlier in the year. Altius retains a 2% NSR royalty on the Curipamba project.
With respect to iron ore, the Rio Tinto controlled Iron Ore Company of Canada ("IOC") mining complex in Labrador is continuing to operate within recent production ranges while continuing to benefit from structural premium pricing levels for its high-quality iron ore products,
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which include blast furnace and direct reduction pellets and concentrates. These premiums highlight the increasing importance and value of high purity inputs, which result in lower unit-based carbon and other emissions during steelmaking. IOC has also recently permitted new mining areas that are expected to significantly expand the life of its operations and is also making significant capital investments designed to increase incremental production levels.
Champion Iron Ore is completing studies concerning the potential development of the Kami Iron Ore project in the Labrador Trough as it considers next growth opportunities to follow completion of its current expansion of the neighbouring Bloom Lake mine. Kami contains significant resources of iron ore that are believed to be amenable to producing ultra-pure concentrate products, including those that could serve the growing Direct Reduction/Electric Arc furnace steelmaking segment. Champion has commented that its studies will include options to increase planned iron-in-concentrate grades beyond that considered by the previous project owner within its prior feasibility studies. Results of these studies are now expected to be reported in the first half of 2023.
Potash fertilizer markets continue to show strength with Midwest US potash prices holding at levels not seen since the 2008 - 2009 period. We are seeing an increasing benefit from these higher prices as lag impacts subside and expect to benefit in future periods from production expansions that have been signaled recently by the mine operators to address an ongoing global supply deficit.
Revenues from thermal (electrical) coal royalty interests are expected to continue to diminish, with only Genesee expected to provide a meaningful contribution during the next few years before its planned conversion from coal to natural gas-based fueling. The decline and ultimate elimination of thermal coal-based revenue from Altius's portfolio is expected to coincide with the ramp up of royalty revenues from a growing list of renewable energy projects to which the Corporation has exposure through its majority shareholding in ARR. With the recent investments by ARR into operating stage projects, in addition to its prior development stage investments, the potential addressable market for and adoption of its royalty-based funding has significantly expanded. The Corporation's internal and various analyst estimates of net asset value for its indirect renewable royalty interests has already eclipsed that of its residual coal royalties - marking a successful result to our goal of transitioning from coal to renewable energy exposure.
Within the Project Generation business, demand for new projects from third parties continues to be relatively strong although the recent decline in junior equities markets has weakened access to exploration capital in addition to reducing the value and liquidity of our retained equities portfolio. We continue to actively invest in project generation activities with a goal of adding new early-stage mineral prospects for sale, while also actively managing our portfolio of related equity interests.
AngloGold Ashanti ("AGA") continues to advance several new gold deposit discoveries at its Silicon Project in Nevada with pre-feasibility and concept studies underway in addition to ongoing delineation and discovery focused drilling programs. The Corporation is currently considering value creating alternatives for the 1.5% NSR royalty it holds on the project with these including a potential sale or non-precious metal royalty asset based swap transactions.
Non-GAAP Financial Measures
Management uses the following non-GAAP financial measures in this MD&A and other documents: attributable revenue, attributable royalty revenue, adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), adjusted operating cash flow and adjusted net earnings (loss).
Management uses these measures to monitor the financial performance of the Corporation and its operating segments and believes these measures enable investors and analysts to compare the Corporation's financial performance with its competitors and/or evaluate the results
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Altius Minerals Corporation published this content on 08 August 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 08 August 2022 21:54:08 UTC.