Scully Royalty Ltd. (SRL) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 MFC Industrial Ltd. Earnings Conference Call. My name is Gwen, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Kevin McGrath, partner with Cameron Associates. Please proceed, sir.

Thank you, Gwen, and good morning. We appreciate your interest in joining us on MFC's conference call and webcast to discuss financial results for the 3-month period ended March 31, 2013. On the call with me today are Michael Smith, Chairman and CEO; and Rene Randall, Vice President. The company will make a brief presentation on the results announced this morning and open the call to questions. Today's call is being webcast on our website at mfcindustrial.com. Simply click on the tab in the Webcast section to access this webcast. The webcast will be posted on mfcindustrial.com for a replay, approximately 2 hours following the end of this call. The replay will stay on the site for on-demand review for the next 7 days. Certain statements in this conference call will be forward-looking statements, which reflects management's expectations regarding future growth, results of operation, performance and business prospects and opportunities. For detailed information about risks and uncertainties that could cause our actual results to differ materially from those expressed or implied, please refer to disclaimer for forward-looking information contained in today's press release on file with the Canadian securities regulators and on Form 6-K with the SEC. I'd now like to turn the call over to Michael to begin the discussion.

Thank you very much. Michael Smith from MFC. Let me first say to you that the strategy which we started 2 years ago, we haven't changed or have any intention not just to continue with the same forthright in the commodity business and also at the same time, looking for captive sources of production to help us grow. And I think that's important, and everything we do is really to create value added somewhere along the commodity chain. In the first quarter this year, we had very good sales growth. We actually had a 40% growth, sales growth year-on-year. But if you actually look at the fourth quarter of 2012, growth went from $112 million turnover to $207 million turnover, so the growth was much more in reality. And the reality of that is, we did 4 acquisitions in the fourth quarter of 2012. The revenue growth is fine and actually, we can see greater growth in revenues coming shortly from what we can see as far as orders are concerned. The issue of course during this quarter was the profits. The profits were substantially down. We were profitable and we did make $0.08 share. And when I look back and say what happened? I could say to you is integration costs, it's really a combination of lots of things. Mostly, as we put these companies together, we did not pay attention, as well as we should have to margins. We had some one-off expenses, which are really, everything from pension expense to which wasn't foreseen; to our normal depletion, which was a little higher than we believe, that was $7.7 million for the quarter. We certainly can do better. There's no reason why we can't. And then I think that we now, as we go forward, must focus on the bottom line, finish the integration, but get the integration expenses in line, but obviously the margins is really where the true value is, and we'll continue to do that. So in the future, I feel that we have a nice projectile as far as going forward. $207 million was a nice number for the quarter of revenues, terrible for the earnings and now we just must go and capitalize on that basis. Balance sheet is fine. We have $349 million in cash and equivalents in the bank at March 31 versus $280 million at December. Inventories were down a little bit, down by about 11%, so that was quite good. Let me give you a little feeling for our fixed assets, which I think is important. We have under property, plant and equipment, we have 2 items: One item is the midstream asset, which we are in the process of developing, which is a major part of our future and our future revenues; and power assets, which is the changing over now of our refinery in Uganda to a power producer, which is equal $78 million[ph] . The other major item in our fixed assets is our interest in resource properties, which comprise of 2 things: one is the royalty at which we have at Wabush Mine, which is $168 million is our carrying value; and $203 million, which is the carrying value of our producing -- not probable, just producing oil properties and gas properties. And we then have probable reserves of 97 million and we have a land bank of around 46 million. And that's of course all leaning towards natural gas pricing. On the liability side, short-term bank debt is up a little bit, $181 million accounts payable are down a little bit, so that just in normal course of business. But what is relevant, when you go to the liability section, you'll see on the long-term debt, our long-term debt now is $155 million. And that $155 million is approximately a 7-year term. It's all-in costs are 2.53%, and it's unsecured. When we did all these acquisitions, we also realized that we create a topsy-turvy situation to our working capital and really, we needed to have term debt to finance it correctly, and when we have completed that now. And I think the most important thing with acquisitions are that, we do not create any dilution to our shareholders' value. And I think that's the most important part of an acquisition. And none of these 4 acquisitions, which we have done in the fourth quarter did. And at the same time, we maintained our balance sheet and our financial ratios. And with this final financing, which we completed in the first quarter of this year, our ratios and the financings now, to put those acquisitions in long term are in place. And our working capital was $393 million. Our current ratio is 2.25. Our asset test was 1.45, and our shareholders' equity was $754 million, and book value per share of $12.06. We did have credit facilities at March 31 of $405 million. In addition to that, we also have what we call hedge facilities, which are a different series of credit facilities. And those hedge facilities are the hedged items, which we are -- want to take some of the risk out in the future. In that particular case, they would be iron ore and they would also be natural gas. And we have taken hedge positions on both those products outside of the $405 million credit line. Maybe we could talk a little bit about Pea Ridge. In the last month, over the last, we've now got greater insight to Pea Ridge. Pea Ridge is an iron ore development, which we're doing with a partner in St. Louis, Missouri, and involves the tailings in an underground facility. And we have been working for months now in getting the process or how to process the product or tailings especially economic. And I think we are now to the point where, we can say, we have sight. We don't have reality, but we have sight. So I'm hoping by the time we next speak to each other, we can give you some more clear definition. But I am pleased now at least at Pea Ridge, I can see where it would before it was all for the technical people. And but we, from a management point of view, can get ready to understand it and hopefully we'll have a positive outcome. And the Wabush Mine itself, we are still projecting 3 million tons for the year, and in the first quarter, we received a price per ton of $9.35. We do have arbitrations still pending with Cleveland Cliffs on 2 different issues, and we anticipate that to go on. I think we have opportunity here is actually set for the latter part of the year when snow flies in Newfoundland [ph]. We have recently engaged a COO, which I think is important, and I'll introduce you to him at our next conference call. We are still working on a CEO. We have identified 2 and are negotiations. And I think it's important that we fulfill these positions, especially with the growth which we're now having, we need to bolster our senior people. We have been hiring quite a bit on the, what I would call the up and comers, the true hard workers, and we've been doing that here -- Hong Kong, Europe, and that's working out quite well. It's important with these senior people that they, in my mind, that they have a well[ph] package. But also, they must have passion to do this job, and I've got to make sure that, that is combined to make a success, to success out of it. With the natural gas project, natural gas, we enjoyed a price for the end of the third -- first quarter of $3.41 per thousand cubic feet. That is up substantially from we bought it and price is actually higher now, just over $4 per thousand cubic feet. But we didn't buy this just to say, "Okay, let's be a gas developer and let's parlay on gas prices." We want to create some more value added to this, value added to our buyer. Our land bank value added by quitting midstream facilities. And we have entered into agreement on a nonexclusive basis with one potential partner. While his engineers do their work, our engineers are doing our work. And in the meantime, we are proceeding with the development of one of the midstream operations in the place called Mazeppa and we may bring that partner in. We don't need to financially. But it might be interesting because there's other midstream operations, which we could also do. And they also involve the assets which we are currently negotiating with some sale on at a place called Niton in the northern part of British Colombia. I think the most important thing when you look at the company today is that our balance sheet is intact. We're okay. Our sales are going to go up. We just must make sure that we now focus on the bottom line to get the profits, and I think we have a, but that chance for an exciting year. I think that's all my statements this morning, and I very much welcome all of your questions.

[Operator Instructions] Our first question comes from the line of Joe Pratt with Wells Fargo.

First question would be, I have an oil friend who basically said, "Well, if they --", he knows natural gas processing facilities. They said, "well, if they spend $300 million at Mazeppa," that he would expect -- assuming you own 100% of it, he would expect a return on that of the existing facility, combined with that expenditure, would throw off somewhere between 10% and 15% cash flow. Is that an approximate a return to expect from that facility?

Our numbers say 20%, Joe, but I think we should defer to your friend and not be so optimistic. But our numbers are saying 20%. I think the one thing we have at Mazeppa, which gives us some -- a large leg up, to be frank with you, is the rail. We have a rail site approved and in use. And you just cannot get rail in Alberta. And so that's one of the reasons why I think our people are more optimistic on the returns, especially on the fractioning of liquids.

So that would be you'd consider -- what you consider being a proper number to be $300 million as an investment in that unit?

I think a little bit more, Joe, because right now, we started out saying, "Okay, what's the power generation capabilities that we could use ourselves? What's the power generation capabilities we can sell in to the grid this year and next year?" And we started out and said, "Okay, let's start out with 10 and we'll end up with 25 megawatts." Now our planning is pretty firm at 17 megawatts, around 1 going to 60. So that's quite encouraging, and that is underway now.

And that will require an investment of how many dollars to get all that?

I can't give you a precise number on the 60, Joe, because we are also be working with Austrian suppliers, right, have been so good to us in the past. And a lot of that will become the negotiation on the different products which we're ...

But the 20% is approximately return on roughly a $300 million number?

Absolutely.

Okay. Number two, Michael, and cut me off if I'm taking out too much time here. On Niton, once you get the joint venture in the place you wanted to be, what would you expect as a cash flow off of that?

Niton valued on our books at 1.25 net now. Niton is doing very well with liquids are -- is fine. It just depends how we do it. Do we do it on a joint venture basis? If Niton is also another midstream opportunity for us? It's just too soon to say. It's producing around 300,000 barrels of oil equivalent a day and other products. So it's a nice cash asset. It wouldn't be right for me to try and create return until the actual model is finalized and the venture partner is or the sale is consummated for all or part of it.

Okay. And then with regard you moving on to Pea Ridge, a $100 million investment has been mentioned in the past. If you were ever to get to that point, would you estimate a return from that $100 million investment? Or could you?

If we spend $100 million on Pea Ridge, we would expect a return, a substantial return, for sure. But the product that Pea Ridge would make are in demand today. The question is, how do we make it economic? And we would just want to make we do it -- make sure we do it right. And I will say Joe, if you spoke to me a week ago, I wouldn't smile, but now, I can least, I can smile on Pea Ridge. We're getting some breakthroughs. But the breakthroughs are not enough for me to come up to you and say, "We know we're going to do this now." So if we could go on the basis of Pea Ridge, let's wait and see. But now it's worthwhile seeing.

Okay, you're smiling be more because of engineering information about what's possible or what a partner says he could do or...

No, from the process. We have more information about process. Joe, having a partner for Pea Ridge is not an issue. Having the right partner is always an issue. But I've got a partner in Alberici. I have lots of connections in the China side that we could bring in partners. We don't want to -- we want to know what we've got first and at what price. I've got something to beat my chest about, right? And I've got something to say, "Come and join or not," right, and so on. Before, I think I've got a chance to see now.

Okay. Well and then last quite of comment here, It's just I was kind of surprised by the $207 million. I thought it was more than I expected. So I plugged it into my model. And it said that in some quarter this year, you could be hitting $250 million. Is that approximate?

Joe, I think that we can see greater sales than what we're seeing now. I'm just going to leave it at that. It's just that I wish that we have the earnings to go with those sales, and that's what we have to work on as well and growth through with the projects which we're involved in are there.

Okay. When would you expect the efficiencies to be achieved from the integration of the acquisition plus what you have before? When will that be up and running at the margin you want to see it running at?

All I can say, Joe is as soon as possible. We've got COO now, and that will help. So direction is being more focused than ever before.

Would the COO come internally or externally?

Internally.

Our next question comes from the line of Frank Rango with Purchase Capital Management.

I was struck by the NGL price that you're realizing, like over $90 a barrel. And in the Lower 48, most midstream companies are rejecting ethane and are not getting anywhere near those kinds of realizations. I'm just wondering how you get such a great number.

The marketing people are should be complemented. Is that what you're saying, Frank?

Yes, it's multiples of what anybody else from the Lower 48 seems to be realizing for NGLs. So I see that there's a superscript there that says sulfur. But it's hard for me to figure out how sulfur could cause such a high number relative to what other people seem to be realizing. My compliments. I just -- I'm curious how you're doing it.

Yes, I'd have to get back to you because I don't handle that directly. But Rene or myself will go back to you on that. Is there any more questions?'s

Our next question comes from the line of Eric Shanahan with Kennet Partners.

A lot of my questions are answered, but I have one. There were a few press releases that came out in Romania just discussing your relationship with olchim [ph] And mentioned about a $40 million receivable that you have outstanding with them and your potential involvement in the privatization. I was just wondering if you could comment on that. How are you marketing it and your thoughts are potentially what could happen in terms of your involvement?

A couple things with that. Old client that we have done business with for years and years, always was we would call sub-prime but a profitable client for us. We did many financings with government's assistance for them, worked out quite well. Eventually the plant becomes too tired and cannot be run effectively and efficiently. Olchim [ph] is now in reorganization. We have some supply arrangements with them where we would sell product and we might do that in the future. From an exposure point of view, the only exposure we have is we would agree to sell some of that product as -- if they produce them in the future as a client. We hope they succeed as it's a major employer one town in Romania. 5,000 employees, I think.

Okay. So the headline number in terms of what they have outstanding to you, that's not accurate?

Correct.

[Operator Instructions] Our next question comes from the line of Bill Horn with First Angel Capitals.

. Just one housekeeping item here. I don't know if I heard you correctly. When you were talking about the one-time charge hits that you took earnings, I thought you mentioned a $7 million number. Was that the onetime charges, charge-offs to earnings? Or can you just clarify what that number was that you mentioned?

Yes. it's not really fair for me to say that one-time charges where we would kind of that back them out and try to reconstruct their P&L. But it's the type of thing like pension costs which we did not accrue correctly, and because there's been adjustments and change in legislation and such things as -- the normal thing of course is depletion, which was $7.1 million for the quarter, which is okay. But then you have some other amortization, we had some lease expenses for another $3 million. So it's like a whole bunch of items which are expense, which certainly our cost of goods, but nothing that we should seen or understood those expenses ahead of time, and ...

But that $7 million, was that net effect that you were referring to?

No, the $7 million was that's the actual of depletion turf [ph].

Oh, depletion. I'm sorry.

So there was a whole bunch. And Bill, it's -- I don't want to defend the P&L on the basis that, "Oh, we had some terrible one-time charges, that's what hit us." I've got to tell you, people didn't do as good a job as they should have in reference to those expenses.

Okay. A couple times in your discussion, you referenced the 4 acquisitions that you made in the fourth quarter. Certainly you had the ACC Resources and the Possehl. What are the other 2 acquisitions in the fourth quarter? I mean, Compton was certainly a third quarter acquisition. Can you just clarify what the other 2 are?

So last year we really did these acquisitions. We did KCCL, which was in March. And then we did ACCR Argentina, which is a separate stand-alone and also separate risk and revenue opportunity. And then we did ACCR New Jersey and of course and Possehl and Compton. I call Compton fourth quarter, even though you can say technically, you're right, it's second quarter -- third quarter.

Okay. So it's the 3 ACC entities plus the Compton that you were referring to as the 4 acquisitions in Q4?

Right.

No, that helps to clarify it. On Mazeppa, you have stated in your filings that it has the capacity of 90 million cubic feet per day in sour gas, 45 million cubic feet per day in sweet gas as their stated capacities. What is that plant operating at right now?

Bill, it's best that I give you an accurate answer to get a technical guy to talk to you or to get the guy who runs that business to talk to you. And then I'll have a Bob give you a call, Bob .

Okay. Now I appreciate that. Sort of in the same vein, you had indicated on a previous call that Mazeppa was cash flowing at about $4 million a month. Is that still an accurate figure?

Please, let me defer that to Bob. We'll forward to Bob.

Okay. I was also trying to reconcile the Wabush royalty. You had stated that production coming out of Wabush at just over 392,000 tons. Yet Cliffs in their quarterly reports had indicated Q1 production from Wabush at 700,000 tons. Can you help me to reconcile those numbers?

I do hope they didn't short us again on payment.

I hope not either, but that's what they publicly stated.

So Rene -- they sent us a report. And so Rene, give us...

It was -- we got paid up on shipment versus production. So I'm not sure if they were stockpiling on their production. But on the actual shipments, we were getting -- we got paid on the shipments. So that's -- I mean, I will look at the -- I'll talk to their people, but that's -- because I get a full report on what they actually ship. Now of course, the good news is, I mean, it's only from fourth quarter to first quarter, it's only dropped $0.02 a ton, which is very good still, considering the overall pricing out there.

You should know also, Bill, we did audit them again last year, as we find this best when you're in litigation to audit the other side right away.

Well, hopefully, we'll see uptick of additional 300,000 tons for Q2.

Wouldn't that be wonderful?

It certainly would. Just one other quick question here. Ravin Prakash, The CEO of Magnum Minerals, you stated that, that operation had been written off and sold, subsequently sold. Is Ravin still employed by MFC?

He's a director, but not employed.

Okay, he's no longer in employment. Okay. He's a very nice gentleman, and I know he'd be with the firm for quite some long a time.

He's a nice man, no question.

Our next question comes from the line of Barney Harris with BJ Harris.

I'm new to following you, thanks to Kevin. And I'm a broker, and basically, I have a large client. The one thing that is very disappointed in is that none of the directors own stock, and a lot of companies are now requiring directors to do that. Have you got this in consideration? I know you yourself, Michael, have a ton of it. But I know people in putting mutual funds, they want to see more than one person buying that stock.

Well, I think that's a good question. It's just -- Rene, we have a plan for the directors to buy the stock.

We do. We just implemented it after the last board meeting.

But has that been now put into effect?

It has just gone into effect.

They couldn't probably do it until you have this report.

But Bernie, we've done something in this regard. I'm sorry to be evasive.

Once you get back to Kevin, he'll let me know.

Yes, we will. I think that's a very good point.

That was my only comment because I'm not that ...

Our next question comes from the line of Joe Betty with Pristine [ph] Financial Partners.

In the past, we talked about buybacks. And I guess last year, you kind of looked at it saying, "I guess we're only about a 15% discount to book." So you didn't have an interest then. But now with a 30% discount and when you look at other companies having success as far as far stock price for doing buybacks, would you now consider doing one given the huge discount?

Not yet. Not yet. I respect your -- it -- I respect your statement, Joe, and think you and I have been at this before. One of the problems is -- there's several problems. We have 43% of the amount of shares are held by insiders. So we lack a float, right? Some people are not so happy with us because we don't have so much float. But the two, we have a pretty aggressive growth program right now. Yes, we've managed to keep our balance sheet intact. We've managed to not create any dilution for our shareholders with our acquisitions. We want to continue with that. I just want to keep our balance sheet good-looking and ratios excellent for the next while.

Sure. Obviously having a strong balance sheet, especially when there's cheap assess out there to buy, makes a lot of sense. But in the case of our stock since it can be very accretive to book value, I think it would just make sense. I mean, I think there's -- I see new ETFs rolling out that's going to contain S&P 500 companies are doing buybacks. And they went back and said that these companies have done 11.5% per year for last 5 years compared to 5%. So I think there's more and more interest. There's a new ETF. We have enough cash in the balance sheet to do a buyback. I think it's something that you guys really should consider.

I'll look at that. What's that ETF called, do you know?

I'll send you an article that just came out yesterday. I'll email it over to you.

[Operator Instructions] There are no further questions at this time -- I'm sorry, we do have a follow-up question from Joe Pratt with Wells Fargo advisors.

Michael, I'm seeing natural gas probably a near-term forward month at $4.10. What would your realized price be relative to that $4.10?

So let's just say through the month of March, it was $3.41. That was realized. And of course we are realizing more as the price gone up. We have also done some hedging, Joe. So obviously at this particular stage, our realized price is high. So we've gotten lucky, but we're cautiously heading -- hedging some of it. And so from a price perspective, Joe, when this project initially, I think it was how much? Oh, here. When we announced the tender, it was $2.83 per thousand cubic feet. We did it -- when we completed the acquisition, it was $3.02.

Okay. But what ..

Pricing is in our favor, we can say at this point.

Okay. But I'm just trying to -- at what discount a sort of the spot prices $4.10, let's just say for the September quarter, if the spot price remained at $4.10 for the September quarter, what do you think your realized price would be? I'm trying to figure out what the Canadian discount is.

Oh, sorry. We translate everything into 1,000 cubic feet for discussion. So there is a Canadian different pricing mechanism. But we exchange that. Is that your question, Joe, or ...

No, it's just the price I'm seeing on my screen is -- might be some cushing or West Texas price, $4.10 per MCF. If that held that in the September quarter and that spot was $4.10, all during the September quarter, what do you think your realized price would be?

Realized price or realized cash flow?

Realized price per MCF. You wouldn't be getting $4.10, I don't think because a, you're got some hedging there; and b, maybe Canadian price, price spot is lower than the $4.10.

In some times of the year, it could be higher. Some times of year, it could be lower. It is not something you can -- we've hedged that at above $4.10, Joe.

Yes. Oh, you've hedged above $4.10.

We have another follow-up question from Bill Horn of First Angels Capital.

Michael, just one quick question. You announced this letter of intent with a partner for joint venture related to your midstream facilities. Is that in reference solely to the Mazeppa facility? Or is it a broader joint venture that may include the Niton midstream facilities as well?

It is nonexclusive and is solely for Mazeppa. We wanted to do other ones as well, Bill.

You may look at other joint ventures with the Niton midstream facilities as well?

Yes, or do it on our own. We think that's a good -- that could be a good steady cash flow of long-term business.

What's the size of the Niton midstream facility?

I don't know. Rene has that information. He can provide that to you.

Your next question comes from the line of George Berman with JP Turner and Company.

First, I wanted to second the opinion of the -- one of the callers. I think trading at such a low value over net asset value, a buyback program would really help us all in our cause here. Secondly, I came a little bit late to the call. Could you sort of flesh out a little bit opportunities and possibilities you see with the 2 acquisitions that you made in the commodities trading activity area?

I think the integration of those businesses into our existing business allows us to go into different areas and also then exposes us to different industries and to some degree, gives us better margins. So if you take our balance sheet and our ability to finance and our ability to then put in different systems, it should be a win, win, win overall. And that's what we're working at every day.

And those cost synergies essentially have not come through in this quarter yet?

The economic benefit is not there in this quarter. The revenues are there, but the margins were elusive.

Next question. Describe for me what opportunities are you seeing in the European market? There's been numerous articles written about European banks needing to offload some credit to private enterprises in a variety of industries. And I know that your -- one of your big operations is I think in Vienna, Austria, right?

Yes.

Do you -- are you still looking at possible scenarios, opportunities there to step in where the bank wants to be removed from say financing or various other things?

We have discussions going on with banks like that today. But to be very frank with you, we were not giving up on our discipline. We must be patient and we must make sure that we don't inherit their problem. And we have one that's been going on for a few years. And many of the projects which we have do go on for years. And yes, Europe seems to have more problems than elsewhere. So I'm encouraged that we can do more there in Europe. But we just got to keep that patience.

Okay. Any update on the developments there that you have in the African continent with the power plant of the mine that you took?

That's going on okay. We are on schedule on time. One of my guys just left for there this morning. We have it's -- we want to be in the power business before the end of the year and that's our goal. And we see -- things very smoothly. When things go smoothly in Africa, you mustn't sleep with both eyes closed. So I'll meet him when I'm in Jersey this weekend, I'll be back and I'll see if he's had a good night sleep or not.

We have another follow-up question from Joe Pratt with Wells Fargo Advisors.

Michael, I'm looking at the liquidity section. It seems to say to me net debt went from, well, in effect net cash position of $111 million at the end of December to $140 million at the end of March. How did you get net cash to go up by $30 million without the operating profit doing that?

Two things, Joe. One we borrowed long term. If you look at our long-term debt, it went up to $152 million. So we borrowed over 7 years of low rate with the government assistance in Austria, and also cash profits.

Okay. But that taken care of in the transaction. So as netted out, I don't understand the -- if your debt went up, your net cash position is going to reflect that.

Net debt went up as well, so they both went up. What page are you looking out, Joe?

I'm looking at Page 3 of a -- under the liquidity section. That says that net debt at the end of December 31, 2012, was negative. Net debt negative $110 million, which means that's a cash figure, net cash figure, cash net of debt, all debt, I assume. And at the end of March, it was $140 million.

It was -- so Joe, that's just long-term debt.

Okay. got it, Michael.

You'll see the words of the beginning.

Yes, got it.

Okay. good.

I will turn the call that over to Mr. Michael Smith for closing remarks.

We thank you very much, and we encourage you to call with any questions and we sincerely appreciate your interest in the company. Thanks very much.