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Terra Nova Royalty Corporation Reports Second Quarter Results for 2010

08/16/2010

NEW YORK, Aug. 16 /PRNewswire-FirstCall/ -- Terra Nova Royalty Corporation ("Terra Nova") (NYSE:TTT - News) today announced results for the second quarter and six months ended June 30, 2010.  Unless otherwise noted, all dollar amounts are in United States dollars.

In 2010 we separated (the "Separation") into two distinct owned and operated businesses: a mineral royalty and natural resources business conducted by Terra Nova Royalty Corporation; and an industrial plant technology, equipment and service business (the "Industrial Business") conducted by our former subsidiary KHD Humboldt Wedag International AG and its affiliates ("KID"). As a result of the Separation, as of March 31, 2010, we no longer consolidate the results of the Industrial Business.

For the three months ended June 30, 2010, which was the first quarter that reflected the results of our mineral royalty and natural resources business, Terra Nova reported revenues from our resource property of $4.9 million, operating income of $0.8 million and a net loss to our shareholders of $0.3 million, or $0.01 per share on a fully diluted basis.  As at June 30, 2010, Terra Nova had cash and securities of $84.9 million and working capital was $98.3 million (excluding a dividend payable of $37.3 million).

The following table sets out a summarized income statement for just our resource property segment and directly attributable direct costs, expenses and taxes:

Three Months Ended June 30, 2010



All amounts in thousands


Income from interest in resource property(1)

$   4,949(2)


General and Administration expenses



Arbitration

208


Expenses

309


Amortization

347



864


Income before tax

4,085(3)


Mining tax

1,089


Net income from  resource property

$     2,996(3)


(1) Income from interest in resource property is subject to seasonal and cyclical fluctuations.

(2) Revenue in the second quarter of 2010 reflected an increased price for one of the five component pellets, which increased the royalty rate per ton from C$5.163 in the first quarter of 2010 to C$5.995 in the second quarter of 2010.

(3) It should be clearly noted that our overall income before tax and net income included $3.4 million and $3.3 million respectively, in additional costs, expenses and income taxes not directly related to our resource property business.







For the six months ended June 30, 2010 (which include revenue and expenses of the Industrial Business for the first quarter of 2010), Terra Nova reported revenues from our resource property of $8.8 million, revenues from our former industrial subsidiary of $101.6 million, operating income of $11.0 million, and a net loss to our shareholders of $18.8 million, or a net loss of $0.62 per share on a fully diluted basis.  

Chairman Michael Smith commented, "We have separated our company into two distinct owned and operated businesses. The Separation, among other things, lets both entities focus their management efforts and capital resources on their respective businesses and provided our shareholders with ownership stakes in each.

The Separation was and is being effected, in part by:

  • distributing to our shareholders 8.6 million shares of KID (being about 26% of its issued shares and outstanding shares) on March 30, 2010, effectively tax free for shareholders;
  • distributing to our shareholders 7.6 million shares of KID (being about 23% of its issued shares and outstanding shares) on July 1, 2010, for which there was Canadian withholding tax of 15% for U.S. residents;
  • we currently expect to distribute an additional 9.4 million KID shares to shareholders (being about 29% of its outstanding KID shares) without withholding taxes in the third quarter of 2010; and
  • retaining the balance of the KID shares at this time."

Mr. Smith continued, "Our disappointments for the first half of 2010 are:  

  • our general and administrative expenses are still way too high;
  • we have not completed any significant new acquisitions, but we are pleased that we controlled our risk appetite in assessing new opportunities;
  • we have not cut off expenses related to the former Industrial Business quickly enough;        
  • the dividend out of our interest in KID shares has taken longer than we had initially intended; and
  • GAAP precludes us from applying discontinued operations accounting to KID, which makes the comparative figures in our financial statements confusing and incomparable.              

These will be key areas for management to improve upon."

Wabush Royalty - Recent Developments

There were three key developments relating to our royalty interest in the Wabush iron ore mine (the "Wabush Royalty"):

  • we received a positive decision from the arbitration panel relating to our claims against the mine owners and received an award for damages for an aggregate royalty underpayment of approximately C$11 million and we are also seeking to recover interest and expenses of approximately C$4 million;
  • a prospective increase in the published pellets pricing rate later this year; and
  • we have given notice under the royalty agreement underlying the Wabush Royalty to renegotiate the base royalty rate.

Royalty Rate and Non-Published Price Effect

The Wabush Royalty is paid quarterly and is based on the tonnage of iron ore pellets shipped by the mine operator. One of the major components in the calculation of the Wabush Royalty rate payable is based on the most recently published prices of a basket of five particular iron ore pellets.

Historically, iron-ore benchmark prices were determined in the first quarter of the calendar year through negotiations between the major producers and their most significant customers.  These prices were then generally adopted by the other suppliers when published.

The significant increase in benchmark prices from 2007 to 2008 was resisted by the major Chinese steel mills in particular, who also refused to accept the lowered benchmark pricing offered in 2009. This led major iron ore suppliers to announce a move to quarterly benchmark pricing for 2010, and culminated in the negotiation of proprietary pricing agreements with specific customers that were not published.  As a result, the related royalty rate component for our Wabush Royalty payments for the first half of 2010 was based on 2009 prices.

Increased prices for two of the five component pellets in the pricing basket have been recently published.  If all five component pellets increase their prices to the 2008 levels, our royalty rate will be C$7.74 per ton.

Wabush Royalty Forecast for 2010

Based upon current markets, published pricing, historical production levels and publicly disclosed information of the mine owner, our current 2010 annual forecast for the Wabush Royalty revenues is set forth in the table below. Although management believes it is reasonable, there can be no assurance that the forecast will be achieved and actual results may be materially different than those set forth herein. See "Risk Factors" in our Form 6-K for June 30, 2010.

Projected royalty income 2010

Scenario A

Scenario B


-- Tonnage

4,515,000

4,815,000


-- Royalty rate

$              6.24

$              6.99


-- Gross royalties

$   28,153,000

$   33,637,000


Note: This table does not include any proceeds from arbitration awards.







Both Scenarios are based on the assumption that, due to the acquisition of a 100% interest in the Wabush mine by the operator, as well as increases in price and demand for iron ore, production at the mine will return to 2007 to 2008 levels.

Scenario A follows an assumption that uses the actual royalty rates received for the first half of 2010, and assumes that the royalty rate for the balance of the year will be the current calculated rate based on published benchmark prices to date.

Scenario B adopts a slightly more optimistic view and assumes that benchmark prices for all iron ore pellets will be re-established at 2008 levels and prices published by the end of the third quarter of 2010. Therefore, this scenario projects the royalty rate will increase from the C$5.96 per ton received in the second quarter of 2010 to C$7.74 per ton for the third and fourth quarters of 2010.

International Financial Reporting Standards and the Fair Value of the Royalty Interest

As of January 1, 2011, we intend to change our financial reporting standards from Canadian GAAP to International Financial Reporting Standards.  Pursuant to IAS.16, Property, Plant and Equipment, we currently expect to increase the value of the Wabush Royalty asset to its fair value. If this were implemented as of December 31, 2009, based upon our current valuation including current royalty rates and forecasted demand, we currently estimate it would result in a value for the existing royalty of $200 million and we estimate the pro-forma effect on such an increase would be as follows:

All amounts in thousands, except per share data


Carrying value Dec. 31, 2009

$    27,150


Valuation increase

172,850


Revised book value*

200,000


Long-term income tax provision

(51,850)


Increase in shareholders' equity

121,000


Shares outstanding (000's)

30,285


Increase in shareholders' equity per share

$      4.00


* note: The increase in value has been calculated using a discount rate of 8%






The above-mentioned valuation does not take into consideration the current positive pricing development.

Rights Offering

On July 27, 2010, we announced a rights offering (the "Rights Offering"), pursuant to which, each holder of our common shares of record as of August 6, 2010, received one transferable right (a "Right") for every common share held as of such date.  Every four Rights entitle a holder to purchase one common share at a price of $6.60. The Rights will expire on September 2, 2010. The Rights are currently traded on the New York Stock Exchange.  A maximum of 7,571,227 common shares will be issued pursuant to the Rights Offering.

The Rights Offering makes us financially stronger and increases our shareholders' equity.

Book Value

We view our book value per share as a key indicator of our overall financial performance.  Our book value per share as at June 30, 2010 and pro forma to give effect to the next distribution of KID shares and the Rights Offering (assuming it is fully subscribed) is set forth below.

As at June 30, 2010

Actual

Adjustments

Pro Forma



All amounts in Thousands, Except Share Data


Shareholder's equity

$      206,567

$        3,712(1)(2)

$      210,279


Number of common shares

30,284,911

7,571,227(1)

37,856,138(1)


Net book value per share

$            6.82


$            5.55


Step-up in the fair value of Wabush Royalty



3.20(3)


Total net book value per share



$           8.75(3)


(1) The maximum number of shares issuable pursuant to the Rights Offering is 7,571,227 for total gross proceeds of $50.0 million, which is included in pro-forma shareholders' equity.

(2) The dividend of 9.4 million shares of KID is recorded on our balance sheet at $46.3 million and this amount is deducted from pro-forma shareholders' equity.

(3) After giving pro-forma effect to the "step-up" in the fair value of the Wabush Royalty pursuant to IFRS as described above and the issuance of common shares under the Rights Offering.









Mr. Smith concluded. "We are continuously reviewing potential new projects and opportunities to expand on our mineral and natural resources business, including working with a syndicate to purchase a resource company.  This project is still in the formation stage but has interesting possibilities.  During the current quarter, one project was consummated and subsequently resold. We believe that we are well positioned to grow Terra Nova, as we have a strong balance sheet, no debt and good cash flow.  We continually review the effectiveness of our strategy and are working on substantial opportunities, but are maintaining our financial discipline.  Our commitment is to enhance shareholder value."

Shareholders are encouraged to read the entire Form 6-K, which has been filed with the SEC, for a greater understanding of Terra Nova.

About Terra Nova Royalty Corporation

Terra Nova Royalty Corporation is active in the royalty and mineral industry.

Disclaimer for Forward-Looking Information

Certain statements in this news release are forward-looking statements, which reflect our management's expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Forward-looking statements consist of statements that are not purely historical, including any statements regarding beliefs, plans, expectations or intentions regarding the future. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. No assurance can be given that any of the events anticipated by the forward-looking statements will occur or, if they do occur, what benefits we will obtain from them. These forward-looking statements reflect management's current views and are based on certain assumptions and speak only as of the date hereof. These assumptions, which include management's current expectations, estimates and assumptions about our business and the markets we operate in, the global economic environment, interest rates, exchange rates and our ability to manage our assets and operating costs, may prove to be incorrect. A number of risks and uncertainties could cause our actual results to differ materially from those expressed or implied by the forward-looking statements, including: (i) changes in iron ore and other commodities prices; (ii) the performance of the properties underlying our interests; (iii) decisions and activities of the operator of our royalty properties and other interests; (iv) unanticipated grade, geological, metallurgical, processing or other problems experienced by the operators of our royalty properties and other interests; (v) economic and market conditions; and (vi) the availability of royalties for acquisition or other acquisition opportunities and the availability of debt or equity financing necessary to complete such acquisitions. There is a significant risk that our forecasts and other forward-looking statements will not prove to be accurate. Investors are cautioned not to place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future results. Except as required by law, we disclaim 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 about these and other assumptions, risks and uncertainties are set out in our MD&A filed with Canadian securities regulators and filed on Form 6-K with the SEC and our Form 20-F for the year ended December 31, 2009.

Corporate

Investors

Media


Terra Nova Royalty Corp

Allen & Caron Inc.

Allen & Caron Inc.


Rene Randall

Joseph Allen

Len Hall


1 (604) 683-8286 ex 224

1 (212) 691-8087

1 (949) 474-4300


rene.randall@terranovaroyalty.com

joe@allencaron.com

len@allencaron.com







UNAUDITED INTERIM FINANCIAL TABLES FOLLOW –

TERRA NOVA ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2010 and December 31, 2009
(Unaudited)
(U.S. Dollars in Thousands)


ASSETS


2010


2009


Current Assets






Cash and cash equivalents

$     71,202


$   420,551


Short-term cash deposits

--


6,916


Securities

13,666


16,432


Restricted cash

--


24,979


Note receivable

8,000


--


Accounts receivable, trade

--


96,982


Other receivables

5,789


36,179


Amount due from a former subsidiary                                

1,754


--


Inventories

--


80,815


Contract deposits, prepaid and other

773


53,893


Future income tax assets

    158


1,748


               Total current assets

101,342


738,495












Non-current Assets






Note receivables

--


1,672


Accounts receivable, trade

--


4,660


Investment in a former subsidiary

116,909


--


Property, plant and equipment

110


2,257


Interest in resource property

26,143


27,150


Equity method investments

--


73


Future income tax assets

2,426


13,405


Other non-current assets

          --


1,191


               Total non-current assets

145,588


50,408


                      Total assets

$   246,930


$   788,903













TERRA NOVA ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (con't)
June 30, 2010 and December 31, 2009
(Unaudited)
(U.S. Dollars in Thousands)


LIABILITIES AND EQUITY



2010


2009


Current Liabilities






Accounts payable and accrued expenses

$     2,326


$  191,746


Progress billings above costs and estimated earnings on uncompleted contracts

--


77,841


Advance payments received from customers

--


26,927


Income tax liabilities

553


18,092


Deferred credit, future income tax assets

158


1,748


Dividend Payable

37,326


--


Accrued pension liabilities, current portion

--


2,070


Provision for warranty costs, current portion

--


28,282


Provision for supplier commitments on terminated contracts

--


12,943


Provision for restructuring costs

        --


8,025


             Total current liabilities

40,363


367,674







Long-term Liabilities






Debt, less current portion

--


11,649


Accrued pension liabilities, less current portion

--


28,861


Provision for warranty costs, less current portion

--


25,711


Future income tax liability

--


14,210


Other long-term liabilities

        --


15,607


             Total long-term liabilities

        --


96,038


             Total liabilities

40,363


463,712












EQUITY






Capital stock

142,010


141,604


Treasury stock

(83,334)


(83,334)


Contributed surplus

5,737


7,232


Retained earnings

84,089


185,790


Accumulated other comprehensive income

58,065


68,496


Total shareholders' equity

206,567


319,788


Non-controlling interest

         --


5,403


Total equity

206,567


325,191








$  246,930


$  788,903













TERRA NOVA ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
For the Three Months Ended June 30, 2010 and 2009
(Unaudited)
(U.S. Dollars in Thousands, Except per Share Data)








2010


2009







Revenues

$            --


$ 105,847


Cost of revenues

--


(81,454)


Loss on terminated customer contracts

--


(2,558)


Gross profit

--


21,835







Income from interest in resource property

4,949


1,792


Selling, general and administrative expense

(4,124)


(22,454)


Stock-based compensation recovery - selling, general and administrative

--


1,305


Restructuring costs

--


(17)


Operating income

825


2,461







Interest income

784


1,631


Interest expense

(54)


(720)


Foreign currency transaction losses, net

(930)


(903)


Loss on settlement of investment in preferred shares of former subsidiaries

--


(9,538)


Other income, net

86


250


Income (loss) before income taxes

711


(6,819)


Provision for (recovery of) income taxes:





Income taxes

96


(293)


Resource property revenue taxes

(1,089)


(398)



(993)


(691)







Net loss

(282)


(7,510)


Less: Net loss attributable to non-controlling interest      

--


56


Net loss attributable to holders of common  shares of Terra Nova Royalty Corporation

$      (282)


$     (7,454)







Basic and diluted loss earnings per share

$     (0.01)


$       (0.25)







Weighted average number of common shares  outstanding





- basic

30,284,911


30,378,286


- diluted

30,284,911


30,378,286














TERRA NOVA ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
For the Six Months Ended June 30, 2010 and 2009
(Unaudited)
(U.S. Dollars in Thousands, Except per Share Data)








2010


2009







Revenues

$  101,585


$  217,975


Cost of revenues

(78,659)


(173,727)


Reduction in loss (loss) on terminated customer contracts

3,517


(2,051)


Restructuring costs, write-down of inventories

--


(1,121)


Gross profit

26,443


41,076







Income from interest in resource property

8,768


3,922


Selling, general and administrative expense

(26,096)


(37,517)


Stock-based compensation recovery - selling, general and administrative

1,415


416


Restructuring (costs) recovery

465


(6,773)


Operating income (loss)

10,995


1,124







Interest income

1,550


3,948


Interest expense

(570)


(1,414)


Foreign currency transaction gains (losses), net

(7,112)


680


Share of loss of equity method investee

--


(21)


Loss on settlement of investment in preferred shares of former subsidiaries

--


(9,538)


Other income (expense), net

(129)


1,065


Income (loss) before income taxes

4,734


(4,156)


Provision for income taxes:





Income taxes

(21,527)


(1,264)


Resource property revenue taxes

(1,956)


(889)



(23,483)


(2,153)







Net loss

(18,749)


(6,309)


Less: Net (income) loss attributable to non-controlling interest

(74)


60


Net loss attributable to holders of common shares of Terra Nova Royalty Corporation

$ (18,823)


$   (6,249)







Basic and diluted loss earnings per share

$     (0.62)


$     (0.21)







Weighted average number of common shares  outstanding





- basic

30,277,673


30,450,067


- diluted

30,277,673


30,450,067














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