Scully Royalty Ltd. (SRL) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to MFC Industrial First Quarter 2012 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. And now I'd like to turn the conference over to Michael Mason of Allen & Caron Investor Relations. Please go ahead.

Thanks, Emily. Good morning, and welcome to the MFC Industrial Ltd. Investor conference call to discuss the results for the first quarter of 2012. I'm Mike Mason of Allen & Caron Investor Relations. Many of you received a copy of the press release. It was released this morning, May 15 at 7:30 a.m. Eastern. If you did not receive a copy of the release, it is posted on the MFC website and in our Client section of our website at www.allencaron.com. You may call our office in New York at (212) 691-8087, and we can e-mail it to your right away. It is also posted on Yahoo! Finance and other Internet sites. A replay of the call will be available through May 23 and may be accessed from North America by calling (877) 344-7529 and entering conference number 10013875. International callers should dial (412) 317-0088. This call is also being broadcast live over the Internet and may be accessed on the company's website at mfcindustrial.com. A replay of the webcast will be available immediately following the call and will continue for 7 days. Certain statements in this call will be forward-looking statements, which reflect management's expectations regarding future growth, results of operations, performance and business prospects and opportunities. For detailed information about risks and uncertainties that could cause actual results to differ materially from those expressed or implied, please refer to the disclaimer for forward-looking information contained in today's press release and filed with the SEC and Canadian Securities Regulators. The company will make a brief presentation on the results announced this morning and then open the call to questions. I would now like to turn the call over to Mr. Michael Smith, CEO of MFC Industrial. Hi, Michael.

Thank you, Mike. First of all, I would just like to review the results of the first quarter and then -- and maybe talk a little bit about the balance sheet, the effect of what has happened in the first quarter, touch on the major projects and how I see the outlook for 2012. And then I'll talk a little bit about the share market. But let me, first of all, address the profit and loss for the first quarter. The revenues were up nicely. Profit was up. GA costs were down. I think the 2 disappointments in that particular quarter was plastics. That industry has -- margins have dropped substantially, and that industry is going through a more difficult time. So there was no major contribution from plastics in that particular business event for this particular quarter. The one that was really a disappointment, a substantial disappointment, was the Wabush Royalty. This is the second quarter where we have not achieved what we believed we would. The first, in the fourth quarter of '11, Wabush had a lot of mechanical breakdowns. And in the first quarter of this year, they also had been delayed to deliver on time through the weather and other reasons. To us, that's disappointing. Cliffs is a very good operator, but we certainly haven't achieved what we believe we would have in normal circumstances. This is a major long-life asset for us. It has 19 years worth of life left. So it's something that we are concerned and cherish about. On the positive side, the royalty rate which we received from Cliffs was up a little bit. So -- but it didn't offset the lack of production. And we are still hoping we will now see a pickup in the second quarter as they are showing no major problems that they have identified to us at this time. In reference to the balance sheet, I think the most important thing is that cost of sales [ph] are up a bit just to see something adjusted. Inventory is up a little bit, but that's because of the acquisition of Kasese Cobalt is about 40% of the increase. Plant property and equipment is up by $29 million, and that is directly attributable to Kasese Cobalt. Bank debt is down by $23 million. So if -- and also, our cash on hand is down by $58 million. So if you take payment down off the bank debt and the acquisition of Kasese Cobalt, that brings us back to where we were before. Working capital is $343 million. Ratio is still good or satisfactory. And we have the book value of $8.92 a share. So the company is still quite healthy. Let me touch now on the projects. The Pea Ridge project, which is a major project, which is still just really getting underway, is on schedule. And we have completed the historical reserve report, which you have all the ability to access. And we're in the process now of doing a current historical reserve report of the iron ore property, and we anticipate that to come out in September, hopefully sooner. In the meantime, we have proceeded with rehabilitation of the site. We've done 3D seismatic on the site, and we've been doing some new drilling on the tailings, which is really a separate business as far as we're concerned. And we are analyzing those results now. Also, we're analyzing the old core samples, which will also assist us with this current reserve report. And we've ordered the pumps for the de-watering, and that is -- will start later in this year. And the most important thing, I think, what you want to see and what you have to see is -- and understand is the economics of the mine. And I think that's what we all need, is to understand the effect of -- and it's just the effect on what happens with this mine on MFC when we go into production. The next project, which I think we should talk about, is Kasese Cobalt. Kasese is a company which we've been involved with because we've traded the cobalt. Kasese's life is unlimited. Its management now has to change from the management of operating management to a management where we proceed with the ability to liquidate or to rationalize the assets which are left. That takes a different type of management, a management who is not so much involved with people and can be a little more discreet as far as how we handle different political situations. You must remember this -- Kasese is the only major employer in this town. It is in the 45 miles from the Congo border, difficult place. And so it was -- it's best that the MFC people, who have a lot of experience with this type of company, handle the final days and do this on budget, on time. What MFC is looking to achieve out of this, of the MFC side, is a long-life asset. There is one long-life asset, which is a hydroelectric power plant, which if we are successful and if done right, that will give MFC a continuous source of income in the future. But we have a long way to go to get there, and it will take time. But it's 17 months worth of production while the phase-out occurs, and then with proper negotiations, the power plant should survive the company to the future. In India, we are very pleased that we have signed an agreement now to proceed to extract iron ore again for a brand-new site. This is not an existing site where mining has occurred in the past. This is a site where we know there is iron ore there. We know the quality. We've seen the drills and have drilled the property ourselves. But we have to get the normal brand-new permits, which we will do. And we have done that in the past on the 2 existing facilities we have. And that will take about -- they say 18 months, but I think it will take about 2 years, to be realistic. We are also operating and working on some other projects, which I cannot go into with you now, but we are working towards our goal. And our goal is to get captive sources of business to fulfill a global supply business, is to have -- 40%, 50%, 60% of everything we do is from our captive source, and that's where we see the value added to the margins. And that's what we're working on very, very hard. Our taxes for the period were in line. Our [indiscernible] buyback program is still underway with the registered shareholders and responses being good. We don't know how the street shareholders will react, but they've got till the 21st of this month for us to make a decision whether we wish to extend or not. I will say one thing. My attitude towards the outlook for 2012 is better. 2011, I don't think -- I know I didn't have a good year. I don't think many people enjoyed that year. 2012, we seem to have a greater amount of positiveness. And we're seeing most of our businesses, even a small zinc refinery which we have, is making a positive contribution. So we're seeing orders. So we're seeing people doing things. And if this positive attitude continues, we should have a good year without pursuing other major, major projects. And I think the share market itself would, at some point, appreciate us more when we can demonstrate the effect of these new projects mathematically. But the most important thing for us to do is to have certified reports that will demonstrate what Pea Ridge will do and also what the other projects will do, and then people can see the effect on the company. That's all I have as far as my review, and I'd like to now turn the questions -- turn over to questions that anybody might have.

[Operator Instructions] And our first question will come from Graham Tanaka of Tanaka Capital Management.

Just thread [ph] up, I just wanted to get a feel for what the cost of Blue Earth was all in? To get shareholders effectively, you're getting $52 million out, right? What was the cost all in?

0.

0. Okay. Great. No complaints.

Right. It's a nice way to end that movie, Graham.

On the new property in Goa, what is the size of that property? And maybe you can compare it to the existing property. And what kind of capital requirements might it need? And what could the revenue flow be eventually?

I can't go into revenue flows, but I can give you just some general outline. It will be about 70% of our existing property, and it would take, say, 2 years, I think realistically 2 years, to bring online and really is an extraction facility. So the capital costs are very minimal. It's more mechanical equipment and the organization of the mine, and those costs, I think the original cost for the Goa operation was $2 million only. So it's a very low-risk, high-reward but low-quality, low, low, low-quality iron ore.

So -- and the revenue flow of the current Goa is roughly what?

We don't segment it out Graham, so I can't comment. March 31 is like we're halfway through the season on Goa. We've had 4 ships, and we're trying to do another, I think, 4 to 5 ships before season ends, before the monsoon or the winds finishes.

That ship to work to Australia, China or...

All goes to China. China takes everything today, I'm afraid. I shouldn't say I'm afraid. I'm happy actually.

Okay. So on Pea Ridge, which is, of course, the big acquisition, maybe you could help us out a little bit with what your current estimates are on kind of the value, how the results are coming in on the asset evaluation and what you might have to do in terms of an opportunity to revalue the asset upwards?

Well, as you know, under the Canadian securities rules, I'm limited on what we can state. But where we're at on Pea Ridge, we have quite a development program with that partner, and we're online with that development program. The in-part of the development program, and during this period of the development program, lots of things are happening, some core samples to drilling to rehabilitation, actually, of just the site. I mean, it's amazing what is going on there now. But what we must end up with is what we call an economic report which is in compliance with the rules in Canada. Off that report, that really backs up all the material that we believe the economics are and allows us then to use that for if we want the banks if we need to do that or we can give it also to you. So it's like every month, we're working towards that, but we can't give it to you until it's done. So I'm sorry that's a -- it's a very difficult one, but I can say to you is that we're on schedule and that goal would be to give that to you by the end of the year.

Just a general curiosity about what's going on, on the trading operations, which is also pretty large, and sometimes you don't talk about it. How's that going with the outlook for the rest of the year?

It's quite good at this stage. I don't know why, Graham. If you were sitting here in November last year, you would be saying it's not going good, and what's going after? There's nobody doing anything. But as of January, things have -- people are doing things. Business isn't bad. Revenues are up, and people -- things are happening. Financings are occurring, which is really interesting. They're occurring in different ways, but money is in the system. It was quite positive from that point of view. Even the smallest of our companies, Graham, I'm surprised, did okay. I had no complaints in the first quarter. And I don't see any change for the second. Usually, of all the companies we have in different parts, they usually have a loser somewhere, right? Or one has a hiccup, one falls down a bit. It's like everybody went to work and they didn't bother in the fourth quarter of the last year.

You did mention that things are stabilizing, improving, the markets -- and I just was wondering, you're saying that's good for MFC. But at times, I know that you've talked about how this locations and capital markets are under duress or maybe in an environment which creates more opportunities for MFC. So I'm wondering if what's happened is the opportunities are now maybe coming closer to fruition because we've had duress that's shaken up the trees and now you could maybe look for some of the food. Is that what's going on now in terms of timing?

Yes, you're perfectly right. Nothing we are doing is a normal transaction, right? We are happy to create value added for it, but we've always done that. We are seeing banks now becoming more realistic also with their credits, right? They're, I should say, telling the truth, but they're facing reality that they have problems. And I think that's good opportunities for us. And I see more of that.

So how many large projects -- how many projects are you working on in total? And how many of them are large projects?

A substantial size, which would be very, very large will be 2.

And did you have -- are any of these new or these are the ones you've been working on?

One I've been working on for 1.5 year. But it should be getting close, Graham. We've been through life and death many times, and we say you must go through death 10x until you join the family.

The other one, is that a relatively new one? Or is that you've been working on?

For a while. For a while.

We can only -- and I know we can't really get specifics on it, but in terms of just your pipeline or backlog of deals, is that at a point now where you're happy you have plenty of deals or you're adding to it? Or are you telling the guys, "Hey, we've got so much, that was just..."

We certainly are not facing capacity in any way, Graham.

So...

We can always do with more projects.

[Operator Instructions] And our next question comes from Jeff Geygan of Milwaukee Private Wealth Management.

You indicated that your P&L revenues were somewhat impacted by the plastics business, specifically a contraction in the margins on that. Can you tell us what percentage the plastics are of that business and when you expect margins to return to something that might be more normal?

Unfortunately, I cannot. We do have a habit of, when the margins disappear, to talk -- to walk away from that industry and just monitor it. And I do know that the plastics has not come back as of this month of May. So we are doing some things in plastics, which we are contracted to do where margins are all right. But we certainly are not going out and looking for new business as the margins have just disappeared completely. I think you've just got to react in our business just like you do in other business. And probably it's a little easier for us to react.

All right. With respect to your near concluding comment about your goal to have captive sources of, I thought you said in the range of 40% to 60%, maybe 40% to 50%?

Yes.

I'm trying to understand how close you are to that goal. Could you give us an indication of where you believe you stand today?

Yes. I think today we're -- of course, that's a variable depending upon what is happening. But we're 30% today, for sure.

All right. Moving to Pea Ridge for a moment, you had indicated that there are some new drillings related to the tailings and that you view that as a separate business. What is the potential of that business for MFC? And how did you come to identify that with respect to Pea Ridge where the previous owner did not?

Well, I think the previous owner always identified that. But we always agree with him that it will be -- it is a separate business. He said iron ore is a primary product for the mine, for the tailings. It's probably a different combination of minerals. That's why the drilling has taken place there, for us to determine that. It's easier and less capital to get to the tailings, and it probably will be quicker. And so that's why we're treating it entirely different. The process also will be different. Depending upon what minerals which we know are there or we want to harvest, the cost will be different. So it's interesting to treat it as a priority. Should you treat it as the highest priority or as a sideshow, well, I don't think we're there yet to determine that.

All right, all right. I'm eager to learn more about that. Jumping to Wabush for a minute, I have to believe that from time to time, there's ice on the St. Lawrence Seaway. So it would come as somewhat of a surprise if that was the only contributing factor to the change in volume or expected volume. Was there anything else affecting output there?

There was. There was one order that they had that got postponed from March to May.

So if we look at it on more of a trailing 12-month basis, will things normalize or kind of settle down?

They should, yes, because they're still estimating around the 3.7 million ton ship for the year. You should understand, with Wabush, we are asking for more royalty rate or higher royalty rate. And so there is some -- with Cliffs itself, at the highest level, there's some animosity, or you could say disagreement. But the local managers at the property in Wabush are very cooperative and tell us everything. They're really good. And so these are the answers that they've given us when we complain about the shipment sizes. And so it's like there's not a lot we can do about it and -- as we go ahead and continue to press for a higher royalty rate.

All right. And last question, and this may be obvious to others on the call, but I'm not that familiar with Uganda. However, there has been some trend on a global basis for nationalization of assets. Is there any risk with the hydropower plant there?

We don't see it. We don't see that as a risk.

Our next question comes from Bill Horn of First Angel Capital.

I just wanted to ask sort of a follow-up question on Blue Earth. Can you go into a little more detail on the accounting of that transaction? You had mentioned to Graham that the cost to MFC was 0. He said something about shareholders getting, I thought he said $52 million. I'm not sure where that number comes from. But can you just detail for us the accounting of this transaction? I mean, you value the transaction at $28 million. Shareholders seem to be getting $0.44. There's 15 million shares outstanding. Just work through the accounting for us, if you could.

Yes. Bill, the shareholders of Blue Earth were given shares and spun out of MFC back in 2006, I think the year was, at a no-cost basis, no withholding tax, no cost. Then Blue Earth, over those years, between 2006 through today, paid out $52 million in dividends. So the individual shareholder, which is what I was talking to Graham about, will receive a dividend with a no-cost basis. I think he's received $3.69 a share. So from a -- if I was Blue Earth shareholder, I would look at it as a fairly decent return. And now MFC buys the property and now goes into the next part of the Blue Earth life, which is really recovery and the power station, and looks for it to be a really a long-life asset with the cobalt going away.

Yes. I mean, the Blue Earth shareholders are flying a little blind here seeing how Blue Earth hasn't filed financials since 2007. So where is the $28 million going? Was there debt on the balance sheet?

Yes, there was a financial statement available. If you remember, Blue Earth is not a reporting company in the U.S., and it only reports in its home jurisdiction. If you want the financial statement, just e-mail them, and then they'll send you one.

Okay. Looking at Pea Ridge for a second and the technical report that came out on March 30, it described how the joint venture right now is focusing on the settling pond and that you've contracted with a company that's referred to as SalvageCo in the report. Is SalvageCo a joint venture between MFC and Alberici? Or is that an independent company?

Bill, we're not focusing at all on the settling pond. This settling pond is very, very small. It's not -- it's a spillage. It's spillage, and so in the spillage, there is some value, okay, for iron content. And so Alberici and us own a company that is mining that. But we don't even view that to be anything -- I don't expect that to be -- maybe it'll teach us a little bit, maybe makes us a little bit of money, but it's not a priority in any way. The iron ore mine is the #1 priority as that's where the big return is. And then -- but short time, there might be in the tailings, and that's why we spent the time and energy. And that's part of the development plan, too, but not the spillage.

So I mean, this joint venture is this a 50-50 split between the 2 of you? Or what's the ownership of this SalvageCo?

Of the spillage company that is salvaging, that I think, we own 1/8 and they own 7/8. I could be wrong there by a couple of points, but it's not been -- it's interesting, but not...

Fair enough. Looking at Goa for a second, we're into May now. Has the mining season been suspended due to weather yet? Or you're still producing there?

Definitely producing. As you know, the problem with the weather is not much on the production side. It is on the shipping side with the winds in the harbor.

So shipping has been suspended?

I don't believe so.

Oh, not yet?

No.

And you'd had indicated, I believe, on the last call that you expected to be shipping, I think you said, 700,000 to 800,000 tons this year. Are we still on track for that? Can you give us an idea of what we've done in the first quarter in the way of tonnage?

All I can tell you is we did 4 ships. So I can't tell you the tonnage. But I'll be with [indiscernible] later this week in Hong Kong. I'll see how he has done as far as this. I know what his budgets are, but he has exceeded his budget. But he always exceeds his budgets. I always find that they -- the Indians like to make me happy.

On the buyback, can you give us any indication as to what has been committed so far in shares?

Yes. I can't do it on the street form shares because that come into the last second the way they sort it up the system. Certainly, we've had good response, I think, over 40% on the registered. And that, really, was a good number, too. So I'm pleased with that. And we'll let you know soon. If we extend, if it's worthwhile to extend, we'll come out and give you some numbers. But I -- we're...

When you say 40%, 40% of what?

Of the registered. There's 2 sets, right? Registered and street form. We want to get rid of both, but definitely want to get rid of the registered.

What is the share count on the odd-lot registered shares that you have?

I don't know the numbers. I don't know the percentage to date.

[Operator Instructions] And our next question will come from George Berman of JP Turner and Company.

Got a couple of questions. What is your exact ownership in the Pea Ridge project? Are you a 50-50 partner with Alberici or more?

50-50.

50-50. Okay. So that means you get part of the costs, and they get part of the costs?

Yes. It's very good.

Okay. In -- speaking global terms, since you have large operations in Vienna, Austria, which is right at the center of Europe, can you comment and give us your view on what the European situation might look like 3- and 6-months down the road and how you feel this will open up opportunities for MFC?

It's very difficult to be a macro guy in these changing times. All I can say to you is that as there's more problems in the market, that's where we will accelerate and do accelerate our growth. And I shouldn't be so negative, but the worse it gets, the better it gets for us. Right now, we are seeing ECAs or government-sponsored U.S. import, export bank. They're being very aggressive with their guarantees. We're seeing everybody doing things which are correct to making sure their credit flows. And credit is flowing at this particular point in time. So we're fairly optimistic. And the worse it gets, the more will be available.

Okay. Then a general question. The availability of information seems, on your company in general, seems to be very sort of noncommittal. There's very little that you kind of let go in terms of whether you could make an assessment of, well, this is what the company is worth. Are you -- do you plan on anything in terms of making the information flow more transparent for investors?

I think that criticism is there because of projects which we're involved in. And we're involved in projects, and sometimes major ones, and I can give you an example. Last year, we tried to do a major project, which was a couple of billion dollar project, and we had some banks who are willing to help us. And those banks are willing to give us around $130 million to take over this group of companies. And we put a lot of work, energy and effort into that. Suddenly, somebody leaked it to the press, and other people came out of the woodwork and says, "No, no, we'll do it for $100 million." And another person came out and says, "We'll do it for $50 million." I mean, here's a situation where you -- yes, we should -- we only want to say things when they're done. And definitely, yes, we are paranoid on when we're in the middle of a project. And we always are in some project that this course has huge competition, and it has been a big problem for us all over for years and years.

Okay. And last question I have, on the Wabush situation, if you are not, say, friends and friends with the Cliffs situation, have you ever considered to cash out of the royalty agreement and sell it back to Cliffs?

We've looked at every opportunity for Wabush, and the biggest problem in the Wabush is that we have 0 tax basis. It seems to be a resource property, so whatever we would sell it for today, we would have to pay full income tax rate in Canada, which wouldn't be pleasant. So I think there's other buyers who will buy it other than Cliffs, but I just don't think this is the time. And until 2 things has happened, really, the most important thing on the value of Wabush is we need to get one method to determine the royalty rate before it's been a basket of rates. And then you take the average of the basket, where the baskets move, as well the iron ore price. So now that basket has actually dissipated, so there's is only one number or one method in the basket, so we have -- one of the things we're trying to do with Cliffs is to get them to agree on a flat percentage of Wabush to be our royalty. That will, in our minds, play a greater value as it takes the uncertainty, for somebody who is trying to value Wabush, of what they will actually receive. And that, I think, is a major key. If we were there, then I think in my mind, we look at Wabush entirely differently. I can look at it as a discounted revenue stream.

Okay. One last quick question, if I may. Being often in the Asian markets, Hong Kong, China, how would you speak about China at this point in time and their overall growth rate? Public reports talk about a crash-and-burn scenario there. And then you, for example, mentioned that they buy every shipment of iron ore they can. What do we, as MFC Industrial, have over there? How was the outlook for operations within China?

I think China is great, and I think that we're in the medical business there. And it's doing well, and it continues to grow. And we're building up local currency and not bringing that currency home. We would like to do more in China, but it's very competitive. You've got to be very careful for Chinese businessmen are very astute today. I don't see any slowdown. I see that China is going through ups and downs, but they seem to manage it always. And I'm very much a bull on China. And I live in Hong Kong and I enjoy it. I pay 7% to 16% tax on money I own on the island. I mean, what a wonderful incentive I have. If we could all have that kind of incentive, I'm sure we'd all work harder.

The next question comes from Mark Phelan of M22 Capital.

Can you just give me a sense of your trading customers or partners, however you want to call it, what percent of, I guess, Europe? If you can maybe in break it down on country or region within Europe. Obviously, it seems like Southern Europe, Italy, Spain, they seem to have very significant credit problems where credit doesn't seem to be flowing at all? And it seems like there's some discontinuity gap with kind of how you guys do your business. I'm just curious what your thoughts are on that.

You've got perfect countries like Germany, right, where the credit is just the most the unbelievable we can ever ask for anywhere. And then you have some problem countries like Bosnia. We like Bosnia because we have a relationship there with the government where we can get some government guarantees. Other countries as well. I mean, you look for anomalies where we cannot go to countries which are -- have no problems. So we're looking there, and we have to say, "How do we minimize this credit risk? And how do we get down to just the documentation risk, as we say?" I think 10% of that business is in North America only, and the rest is in more problematic markets.

I think in one of your earlier calls, you mentioned you don't really trade with, call it, Southern Europe. And is that fair to say? I mean, is that not you go there because it's having problems, there's opportunity there?

Yes, we go there for opportunities. But when you say Southern Europe, you're referring to Italy?

Yes, Spain, Italy, primarily.

Yes. I think Italy is too much fraud there for me. Spain, I think it's just a sad place, which is okay. I mean, that place can be an opportunity.

Got it. So I mean, in terms of headline risk, in terms of credit outflowing, you, a, don't see that really in your markets? And b, if you did, that would be more of an opportunity that there's how you look at things?

Yes. But what would really though -- would how -- if they just froze, right, if the bank markets froze, then it's beyond serious, right? But if credit just becomes tighter, that's the opportunity for us. And there is credit available, but it's tight, but it's available, so it's good.

Okay. And it's -- when you say it's available, it's mainly because you guys are relatively, yes, you're Australian -- Austrian-based company and the flow of credit there seems to be just more robust than other parts of the Europe. Is that fair to say? Or is that not?

I will say that's fair.

Okay. And just kind of going -- you guys seem to at least -- Mass Financial seem to have done very well relative to other people in '08, '09 when credit was very tight. Do you see that re-emerging in Europe or even in the global economy? Or do you think that it will go some other way?

It's so difficult to say. The greater the credit problem, the more of the opportunity. But I think everything is okay at this fiscal point. People are doing things. I mean, this business is happening. It's not as if we're creating [ph] something.

It doesn't remind you of what happened in '08, '09?

It does not. Not at all. Not at all.

I'm sorry. And one last question, just more specifically on Kasese Cobalt. Did MFC pay an outflow of $28 million in cash? Or was this some kind of non-accounting -- non-cash accounting?

No, it's cash. It's cash.

So we paid $28 million for the -- do we have 75% of equity as well above [ph] the debt? Or what is the...

So in reality, we have to 100% of the economic interest because we have the debt, as well as the shares. And that's so important in this transaction as it's a method for us to get preferential payment.

Understood. And obviously, within the next 17 months, you think you'll all get that cash back plus a reasonable return?

I think that we will be in good shape with this asset.

Got it. One thing I would say, Michael, just my last my point, is the other caller asked about, just kind of more transparency. You have a very interesting company and obviously a great record. It would be nice to have -- I understand your concerns on deals that are being negotiated, but once you own the asset, it would be nice to see a little more transparency on what those assets earn just because I think more people then will find your stock attractive, and obviously, they will have [indiscernible].

Our next question comes Graham Tanaka of Tanaka Capital Management.

Michael, it's Sam. I was wondering, can you remind me, does MFC own any Blue Earth shares?

Yes, they do.

Can you say how many you own?

9.9%.

9.9%?

Yes.

Okay. Switching to Pea Ridge quickly, can you say -- do you expect any revenues in 2012 from tailings or...

Sam, I shouldn't answer that.

That's fair. In the technical report, I think it said that SalvageCo would enter into a commitment to 2 customers for some amount of short tons. Can you talk about that a little bit? I guess that's not that even MFC.

The SalvageCo is doing okay. But it's a spillage, right? So it's nothing -- I'm not going to get an earnings per share on SalvageCo or an element of cash flow were I should worry. So if I can't get those 2, should I make that an investment? Maybe, maybe not. If it's part of an overall Pea Ridge, maybe it gets integrated into it. But to be frank with you, it hasn't been a priority.

Okay. So it sounds like -- I think the last time we spoke, you said that you were going to proportionally consolidate Pea Ridge at some point. That won't happen until Q3 at the earliest? Maybe Q4?

January of next year.

Can you talk a little bit more about the Blue Earth assets? I mean, so what's this hydroelectric plant? What's it earning now? And is there anything there that -- or current revenues?

Right now, it is part of the refinery even though it's a standalone. So from a P&L point of view, you can't really treat it separately. I can tell you that it's a 9.9 megawatt per hour power plant, and it should generate, in reality, 6.5 megawatts per hour. The reason for the difference is because of the lack of the water sometimes on the river. There's a series of 3, and this is one of them. Its long life, and to us, it is energy, electricity. And it's the type of business which we like. But we have a lot of work to get there. We must make sure that Kasese finishes its life in a proper way and on budget and clinically well. This is not an area of the world where you -- it's not like Manhattan. It's a little different, about 45 miles from the Congo border.

Have you entered into forwards for the tailings for the -- I guess at 17 months worth or...

No, not yet.

But you will plan on that at some point?

I think we'll look at that or we'll see the risk. And a lot of it's got to do with demand and work other people have.

Last quarter, you mentioned that there was an African asset you were looking at. I'm assuming that, that was KCCL. Or is there another one?

No, this is it.

And I guess there's a lot of concern on Europe. There have been a few questions already. Are you reducing your exposure anywhere else? Or at this point, are you actively going into any new markets? Or is it just still wait and see what opportunity is coming your way?

It's still a wait and see. Definitely, I don't have the problem with Europe like most people seem to have this week.

Our next question comes from David Erb of Merrion Investment.

I had 3 or 4, but most have been answered. I have one left on Wabush. You've mentioned in the past that the price mechanism within your contract has become obsolete. Now when you say you're in discussions about that, do you mean that you're in litigation? And is there not a requirement within your agreement to resolve that through some arbitration or something?

So when I referred to litigation, I really mean arbitration. And we're in arbitration with Cliffs on that matter, on a matter of -- not on that matter, but on that on several matters for us to get additional royalties. And it just so happens one of the issues we should address with Cliffs, which they understand, too, is that we need to have now a constant method to value the royalty than just have a variable that comes and goes. It's not good for them, and it's not good for us.

Is it fairly obvious to you what that solution should be?

Yes. A straight percentage of revenues like they do at other iron ore mines, which they have paid out royalties. And then the question, of course, is what's that percentage. That's where we are.

And is there any particular schedule that is dictated on the arbitration?

For sure, we'll start this year. The last arbitration we have with Cliffs, I think, took 2.5 years. And they always seem to have it in the winter where it's really cold there. And I think they -- I told them this time we're going to have it in the summer.

Our next question comes from Jeff Geygan of Milwaukee Private Wealth Management.

Just to clarify the number of registered holders that were tendering in your odd lot, is that 40% of those holding 99 or fewer shares?

Yes.

Okay. And more generally, how would you characterize your judge -- your performance in the last, say, 3 to 12 months in employing the capital that you're holding for us?

I think it can be better, definitely can be better. I think we're getting better. But we have room for improvement.

Our next question comes from -- is a follow-up from Bill Horn of First Angel Capital.

Just a follow-up on Blue Earth. There's been reports recently that a Chinese company Gingko is looking to invest in the Kilembe copper mine and tried to reopen it. That mine is where Kasese got their tailings feedstock from. Is there opportunities? Or is there potential here to be able to keep Blue Earth open beyond the 17-month timeframe that you've provided?

We don't believe it. We've looked at all those numbers. And Bill, what it comes down to is that the copper -- cobalt content is 0.17. And we need 0.22 to breakeven or -- and really get into 0.13 to make some money. And also, that the Chinese haven't -- hasn't shown any bona fide [ph] as well, so it's really -- it was so way off.

Very premature?

Yes.

Okay. On the Wabush, you made a comment to another caller about the potential or the -- excuse me, the capital gains tax implications of selling the Wabush royalties, say, back to Cliffs. MFC moved that asset into a numbered Canadian company last year for tax purposes, specifically for the operating tax losses to be able to offset the royalty income. But isn't it true that, that company has $400 million, $450 million worth of capital losses? Couldn't those be used to offset any capital gains tax implications?

Bill, if you remember, I said the Wabush property is -- has no tax basis and is treated as not capital. It is treated as ordinary. So whatever we do, we will be paying -- we disposed of the property today, and through any direct or indirect subsidiary, we would have to be [ph] ordinary income, which is the highest rate as we can ask for. We get no break. So it's a sad story. This is a resource property, and they don't give the breaks in Canada on it.

Okay. That helps to clarify it. Also, within that numbered Canadian company, there was an announcement that the company had just been issued a mineral exploration license in Uganda. Can you comment on that?

Yes. I know that they acquired another mineral property down there to do some exploration work which they thought they had some merit to.

Or what was the resource, do have any idea?

I think it's copper, gold.

Okay. I mean, you sound very hesitant. But MFC owns 99.4% economic interest in this. I would think it would be something very much aligned to MFC's interests here.

Unfortunately, Bill, the total capital expenditure cost and budget was $27,000. So I leave that to the people on the ground not to -- when they get something back this exciting, they should call. But I let them go on the $27,000.

Having no further questions, that concludes our question-and-answer session. I would like to turn the conference over to Michael Smith for any closing remarks.

I thank everybody for attending today and look forward to talking to you in the future. Thanks very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.