Nova Royalty Corp (OTCQB:NOVRF) Q3 2022 Earnings Conference Call November 17, 2022 10:00 AM ET
Company Participants
Alex Tsukernik – President and Chief Executive Officer, Director
Bill Tsang – Chief Financial Officer
Conference Call Participants
Justin Stevens – PI Financial
Operator
Hello, everyone. Welcome to the Nova Royalty Corporation Third Quarter 2022 Conference Update Call. Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked, could constitute forward-looking statements that are subject to risks and uncertainties relating to Nova Royalty’s future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements.
The risk factors that may affect results are detailed in Nova Royalty’s third quarter 2022 management discussion and analysis and other periodic filings and registration statements. You can access these documents under the company’s profile at sedar.com. I’d like to remind everyone that this conference call is being recorded today Thursday, November 17th, 2022. On this call, management of Nova Royalty Corporation will be quoting dollar figures. All figures are in Canadian dollars unless otherwise noted. Participating on this call will be Alex Tsukernik, President and CEO of Nova Royalty; and Bill Tsang, CFO of Nova Royalty.
At this time, I would like to introduce Mr. Alex Tsukernik to provide an update on the quarter. Please go ahead, Mr. Tsukernik.
Alex Tsukernik
Thank you very much, operator. Hello, everyone. And great to see all of you today. With me on the call is Bill Tsang, Nova CFO, who will go over our financial results from the quarter. And Brian Ferrey, our VP of Corporate Development and Strategy will be available for Q&A. Nobody Nova released its third quarter 2022 financial results and corporate update as market closed yesterday. You can find our consolidated financial statements and MD&A on Nova Royalty website or under our profile on sedar.com. It was another excellent quarter for Nova, as we saw consistent progress across our world class copper project portfolio. And we’ve seen really strong progress on the acquisition front for new opportunities. To reiterate our core strategy, starting on slide 3. Nova remained focused on building the world’s premier copper investment. Ever since Nova was founded in 2018, our vision has been clear, to provide our investors with the most efficient way to participate in copper, which we see as the core commodity of the electric age. Royalty model is the most efficient way to invest in any commodity, giving our investors exposure to all projects and commodity price upside while insulating them from any capital or operating costs commitments.
Nova’s portfolio of large scale, tier one assets provide a diversified and long-term multi decade exposure to the next generation of major copper projects with additional exposure to strategic nickel projects. We believe strongly that copper is vital to the global energy transition, and has a critical role to play as the essential commodity of this 21st century energy supply chain. While electrification and decarbonization to continue, critical verticals such as wind, solar, and EV, will all require significant amounts of copper. The macro backdrop for copper sees demand doubling by 2035. According to the most recent study by S&P Global Market Intelligence, and that is driven primarily by the needs of the global energy transition.
We see the opportunity in copper is generational. We already own royalties on a significant proportion of next generation for major copper projects, and key sources of future copper supply. And we aim to continue consolidating royalties on intelligent digital assets. I’d like to touch on how the copper markets behave in Q3, 2022. The price of copper continued to decline in Q3, going from $3.74 per pound at the beginning of the quarter to $3.47 per pound on September 30. Since then, the prices rallied to approximately $3.74. But we believe that we’re still in the early days of the cycle. The world will need 10s of major new mines, copper mines in the next several decades to accomplish the needs of the energy transition, and the required price of copper to accomplish that is well, well in excess of current levels. At a time of rising interest rates, higher inflation and overall higher risk levels. It requires a unique combination of a strong motivated operator and an exceptional project with decades of potential production to greenlight the build of a major multibillion dollar mine.
We’re glad that our Royalty portfolio has exposure to multiple such projects that actively move into production. And together represent a significant proportion of the most advanced public projects in the Americas and the entire Western world. Moving to slide 4. Looking at our strategic acquisitions, Q3, 2022 was characterized by progress on both of our strategic pillars. Pillar one. Royalties on large-scale long-life tier one development projects in stable jurisdictions, and pillar two, royalties are sustainably profitable producing mid-sized mines that can operate successfully across commodity price cycles. We’ve been hardest worked in Q3 to continue to build our portfolio and make good headway during the quarter. As mentioned last quarter, we’ve placed a great strategic importance on acquiring royalties and mid-sized sustainably profitable mines to build a cash flow bridge between today and later this decade when we expect some of the larger tier one projects will come into production. With a long-term foundation set, balance and cash flow profile of the portfolio is the next key step in the resolution. To put this into perspective, adding a cash flowing royalty of a similar size or profile of Aranzazu, which is still a very small part of our portfolio would put the company into being sustainably profitable, with tremendous long-term upside and optionality that’s already evolved. We’re going to knock discussions and continue to advance several deals on producing and near-term producing assets. This is exactly the environment when you want to be doing deals. The current softness in a copper sector continues to present us with attractive acquisition opportunities that had not been there previously, both in terms of third-party royalties and the origination opportunities. Of course, we cannot have said that it was done, but we have a full pipeline of investment opportunities and will remain very active, we really look forward to updating the market at the appropriate time.
Turning now to slide 5. Like to provide an update on some of our key assets in Q3, 2020. Aranzazu delivered another quarter of strong operational performance, Aranzazu sold 12.7 million pounds of copper equivalent in Q3 2022, up 10% from Q3, 2021 and 9% higher than in Q2 2022. Aura reported record highs for ore process at Aranzazu in Q3, 2022, processing 313,000 tons in the quarter, and surpassing the estimated maximum capacity of 100,000 tons per month. Reported copper grades at Aranzazu were 10% higher, and gold grades were 2% higher than Q3 of last year. This was due to mine plan sequencing and high-grade material at the Glory Hole deposit. Copper concentrate production was 9% higher during Q3 2022 than in Q3 2021.
Ever since we bought Aranzazu royalty, we’ve seen multiple quarters of record production. And we would like to commend Aura for the great, great job they’ve done operating this mine. We’re confident that the strong performance and the revenue generation will continue. Aranzazu guidance for 2022 remains largely unchanged, Aura is now using lower copper price assumptions for its gold equivalent production guidance. Aura’s new production guidance for Aranzazu for 2022 is 109,000 to 110,000 ounces of gold equivalent, down from 115,000 to 120,000 ounces of gold equivalent. The company has stated that under the previous price assumptions for copper and gold, the forecast will be higher by 8,000 ounces.
Turning now to our key development assets. Several of our large-scale royalty assets were actively advanced in Q3 2020. At Taca Taca, First Quantum continued with project pre development, permitting and feasibility activities during the quarter. First Quantum submitted two environmental permits regarding key infrastructure at Taca Taca. The primary Environmental and Social Impact Assessment for Taca Taca was submitted to the Secretariat of Mining of Salta Province in 2019 and First Quantum anticipated the approval of the ESIA in late 2022. Water supply studies and pump tests to support the application for a water permit were steadily advanced in 2022 and are expected to be completed in early 2023. First Quantum is also engaging with the government regarding key aspects of an administrative and fiscal regime for investment into Argentina.
As we mentioned before, we, Nova, are very excited about the overall level of support for major mining projects in Salta, and [inaudible] one Province of Argentina, which we believe have a chance to emerge as key major copper mining hubs in a decade to come. First Quantum expects to continue permitting work and government engagement at Taca Taca throughout the year. At Josemaria, Lundin Mining continue to advance commercial agreements and permitting with national and provincial authorities in Argentina and as advancing work towards the baseline capital cost estimate and project execution schedule. Plant engineering including procurement of long-lead equipment is ongoing and was 33% complete as of the end of Q3 2022, Early work is continuing on site, including the preparation of platforms for the cap and batch plant, additional fuel storage and increasing capacity. Lundin Mining reported that its incentive spent approximately $300 million US at Josemaria during 2022, which approximately half $150 million was spent as of the end of Q3. For the remainder of 2022, Lundin also reported that it expects to continue advancing the building of additional camp capacity, internal access roads construction, access road maintenance and water and geotechnical work. Lundin expects to publish an updated technical report on the project in the second half of 2023.
At Cooper World, Hudbay continued with permitting efforts in Q3 2022, Hudbay announced that a received approval from the Arizona State Mine Inspector for its amended Mined Land Reclamation Plan for the Cooper World Complex, which is a key Arizona state permit. Hudbay also reported that it submitted applications for an Aquifer Protection Permit and an Air Quality Permit to the Arizona Department of Environmental Quality. Hudbay expect to receive these two remaining state permits by mid-2023. In addition to permitting, Hudbay continues to advance pre-feasibility activities for Phase 1of Copper World, which includes conversion of inferred mineral resources to measured and indicated, optimization of the layout and sequencing of the processing facilities, and the evaluation of other upside opportunities. Pre-feasibility level engineering for the processing plant is at 85% completion as of September 30, 2022 and geotechnical and hydrogeological site investigation activities have been completed. Pre-feasibility engineering design and metallurgical test work are on track to be completed by the end of 2022, with the results of pre-feasibility activities expected to be published in a pre-feasibility study during the first half of 2023.
Looking ahead, Hudbay reported that upon receipt of the state permits required for Phase I, it expects to conduct a bulk sampling program to continue to de-risk Copper World by testing grade continuity, and metallurgical strategies in high-grade, near surface areas. Hudbay also reported that it intends to prioritize the completion of the PFS, state permitting, bulk sampling and a minority joint venture partner process in 2023, with feasibility study activities in 2024.
Vizcachitas. Los Andes Copper continued to advance their pre-feasibility study. Los Andes Copper conducted initial resource modelling for mine plan optimization work on general engineering, infrastructure planning, plant design, and environmental considerations in Q3, 2022. Los Andes also announced that it expects to resume drilling in Q4 2022, to expand resources of Vizcachitas beyond those being considered in the PFS. They expect to finalize the PFS by the first quarter of 2023.
I’m pleased to see so much work being done on all these major assets in Q3. I’m also very encouraged to see these assets all being advanced, and the commitment shown by these operators to develop these projects prudently and methodically. In this industry, which is — which can be extraordinarily challenging. It’s extremely important to make sure you do things right at the first time, especially if it’s an asset that is expected to last for decades. It bodes well for the future of these projects, to see them properly set up for success.
With that, I would like to turn it over to Bill Tsang, our Chief Financial Officer to explain those financial performance during Q3 2022.
Bill Tsang
Thank you, Alex and hello, everyone. Looking at slide 7, in Q3 2022, Nova’s revenue was $344,000, up from $182,000 in the comparative quarter. This is attributable to the royalty on producing Aranzazu mine. However, the Q3 revenue was also negatively affected by two factors, one lower copper prices and b, nonrecurring price adjustments related to the offtake agreement between the mine and Trafigura Mexico, S.A. There’s a contractual provision in the offtake agreement, where Trafigura can on a monthly basis, select an effective copper price determination period of either a, the average market price of the subsequent month after an invoice is issued or b, the average market price of the fourth month after an invoice is issued. Both alternatives are subject to cash adjustments. Since the beginning of 2022, Trafigura has selected the second alternative, the average market price of the fourth month after an invoice is issued. Without this adjustment, Nova Q3 2022 revenue would have been approximately$500,000 and more in line with the revenue we recognize in Q2 2022.
Nova recorded a net loss of $2.3 million or $0.03 per share for this quarter, compared to a loss of $1.7 million or $0.02 per share in the comparative quarter. The loss of this quarter was largely attributable to higher general administrative expenditures related to higher personnel recruitment costs, share based payments, interest expense, and foreign exchange loss. The company also recorded a higher office administration expense than the comparative quarter as a company scale up its internal capacity at the corporate level. In addition, $177,000 of deferred acquisition costs were expense as management’s determine one of its proposed acquisitions would not be completed. Now excluding the share-based payments, G&A expenditures during Q3 were approximately $1 million compared to $694,000 in the comparative quarter.
Turning to the balance sheet on slide 8, at the end of Q3, the company had cash balance of $1.4 million compared to $0.9 million at the end of Q2 of 2022. No issues were shared during the quarter under the company’s at-the-market program. However, after the quarter end, Nova issue 968,700 common shares under the ATM program for gross proceeds of approximately $1.5 million. Currently, the company has cash balance of approximately $2.3 million. Along with expected revenue from Aranzazu, we have more than sufficient capital resources to cover the near-term working capital requirements.
Looking further ahead, Nova’s efficient liquidity and access to capital along with our exhaustive royalty covering a majority of the company’s G&A expenses. There’s also $17 million in available credit remaining on our convertible loan facility with BD Capital. And that concludes my comments that to you Alex.
Alex Tsukernik
Thank you very much, Bill. Moving to slide 9, wrapping up, in this quarter, we saw progress on all fronts, operational strength around Aranzazu as well as project work and advancement at Taca Taca, Copper Word and Josemaria and Vizcachitas. We remain active on the acquisition front. And continue to advance discussions around adding more producing royalties to our portfolio, a world class development project. Nova’s future is very, very bright. We’ve built a diversified multi decade foundation on royalties on large scale tier one assets and excellent jurisdictions. These projects are owned and are currently being advanced to production by industry leading companies with proven track records of success. We’ve reached the next chapter of the company’s growth story. We have a full pipeline of acquisition opportunities, and are focused on executing. As always, we’re working hard to deliver on our vision of providing investors with the most efficient way to participate in copper and nickel. I look forward to updating the market on our progress. And now operator, I’d like to open the lineup for questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Question on the line comes from Justin Stevens at PI Financial.
Justin Stevens
Hey, Alex, thanks for taking the question and the call. Obviously, good to see sort of the thing is going relatively well for Aranzazu. I mean, obviously, at one time, sort of adjustments here notwithstanding. I think we’re coming into a better market for copper. So hopefully there’s a cycle with the other way for you guys. Just a few questions from me. I mean, obviously, it seems like you’ve built a portfolio here that is in good exposure to projects, which are pretty key to their operators, given their positions and their respective production portfolios, and they really need Copper World to come in here. Also in the exhaustion of article 7 Josemaria next growth project for one being and Taca Taca obviously pretty key, I think to First Quantum’s growth profile here. I’m curious to see sort of the financing landscape for these projects with base metals prices where they are. I think everyone’s going to be coming to construction decisions and financing decisions and hopefully the next year or so. What do you think the operators are sort of looking at in terms of actually getting the capital together to put these projects into construction?
Alex Tsukernik
I think Justin, that’s a great question. If you look at the disclosure by Lundin and Hudbay, they’re both looking to bring in joint venture partners for the project. And I think that makes a lot of sense, because even when you have such strong companies, it’s just a lot of capital and expertise required to get just one done. And I think that’s probably consistent with the model of the industry has seen, you look at some of the bigger mines where this has continued that whether it’s [inaudible], or any number of others, you’re seeing them really sort of become club deals among multiple majors and mid tiers. So I think that is probably going to be in the future for most major projects being built. And obviously, you’ve seen that in the disclosure for two of our key projects, as well. So I think once you have multiple majors in there, obviously, everything becomes easier, you have multiple big balance sheets, I think from a financing perspective, whether it’s project equity somebody wants that, or that or any kind of financing arrangements, just seeing that combined that strength and back in the project will make everything much easier. And that’s really where the industry is heading. If you want to build a major copper mine, I think with very few exceptions, it’s going to require multiple big companies to do it, which really goes back to the supply pipeline, what it takes to get just one up and going when you’re going to need so many. And that I think ultimately will drive every revaluation and price of the commodity because you will need a higher price in order to pay for the capital required and the effort required in order to build just one of these. So from our perspective, we think it’s really exciting to see that because the royalty obviously, is not subject to any of the capital or operating costs, you’re able to benefit from the reinvestment in the commodity price cycle. So we’re really just at the very beginning of the cycle where people are beginning to realize the importance of copper, as far as overall energy supplies.
And then second is the issues and supply and what the operators are going to need to build just one of these. Anglo American they just don’t care back up. And they had some interesting comments, they said that the basically the incentive price for copper is around $10,000 a ton to build one mine. But I’m not even sure if that’s enough, because you’re talking about one mine, if you’re going to need an extraordinary level of capital spending, in order to build a whole number of these to satisfy that the world needs. You may well have to go well above that. So we do think just to answer your question, kind of you’re going to need multiple people to build one of them more often than not, that will make it easier to finance and that will probably drive a higher price overall of a ton.
Justin Stevens
Make sense, yes, no. I’m going to just continuing I guess I’ll build on from that. I mean, what I’ve sort of been seeing, and I think you’re pretty sure you’d agree here. The big hurdle for a lot of these projects in capital, we can sort of talk about they are harm’s way, I think there’s ways to bring the capital into build these mega projects, ordinary these mega projects see a significant projects to help fill the supply gap if and when it really does start to bite. But I think it’s going to hold a lot of it back from sort of being able to be sold quickly as the permitting side of things. And obviously, I think your, the bulk of the projects, you’ve got extra key royalties on here or at least pretty well advanced in that side of things. And I think that’s going to be probably, I think, a very key consideration here, where if this sort of supply demand outlook regardless of how conservative I think you are, do you start to materialize the fact that you can’t spin up a project in two years, because that doesn’t even get to your baseline data. I think that having projects like that are that have already — had a permit application submitted more in advanced, I think gives a huge leg up in terms of just the ability to actually respond and move them ahead in a relatively timely manner. So I think that’s pretty key. And I think it’s something that needs to be top of mind for a lot of people looking especially at the base metal space, because these projects don’t come easy. And you need to do all the work before you can actually get the groundwork done.
Alex Tsukernik
Look, we spent I’d say the majority of our due diligence. I would say when we look at the world top down, we try to figure out where do you want to position yourself to think within permitting aspect and overall social governmental support isn’t beyond critical components. Because again, this is not an industry that which is welcome everywhere. And I think it’s important to acknowledge that fact. And one of the reasons why we like Salta [inaudible] Argentina is because the industry is very welcomed, which is why we’ve taken obviously a very strong view on that. And you see how Josemaria and Taca Taca are advancing. I think it’s clear that this is definitely going to be one of the major copper mining hubs. Same thing with Copper World. It’s a state permitting process in Arizona, fundamentally different from federal in the US, which has been quite challenged in certain places for sure. So it is very important for us but we position ourselves in places which will be hospitable to the sector. And we think that’s where the winners of this entire trend will be. So absolutely permitting, permitting of course, permitting and social support are beyond critical and as much as people talk about them, I don’t think they really understand how critical that is. Because oftentimes people talk about projects. They focus on technical and commercial, without thinking really about viability and the fact that some people just don’t want you in their neighborhood. It’s as simple as that.
Justin Stevens
Well, exactly, the technical and commercial aspects are definitely key. But if you ignore the profitability side, I think that’s also sort of at your own peril. Right. So it’s good to hear.
Alex Tsukernik
Yes, excuse me. My lights went out.
Justin Stevens
Okay, I can still hear you. Obviously, I think we’re on the same page regarding obviously, the importance of copper in the coming decade, and the expected supply gap, what’s going to be coming down the pipe here, but I’m curious about your thoughts on adding some more nickel exposure. Firstly, I think a lot of, are going to start to weigh in here in the coming years, and the key sulphide deposits are going to be pretty sought after, especially by the battery makers, I am curious what your thoughts are looking at the nickel side versus the copper side of the business?
Alex Tsukernik
Well, nickel, I think is really exciting. Assuming you have a project, which is going to be a critical portion of the supply chain. When you look at the sector, it’s smaller than copper, and you have fewer viable projects. So for instance, we picked up royalty on Dumont before because we started the project size and permitting space and overall profile would potentially make it a critical part of the EV supply chain in Quebec, which is really going to be the value hub in North America, judging by what we see right now. So we are very interested in taking up royalties and strategic nickel projects whenever that is available. The question really is just viability. So we do have some good nickels opportunities in the pipeline. When you look at the portfolio right now it’s about 85% to 90% copper. But we absolutely would love to add more nickel assuming that it’s nickel projects that are actually going ahead. The execution hurdles in nickel are higher than copper, I think people know that. So if you are able to pick up a strong nickel project that really is exciting for the portfolio. And we certainly would love to do that in the near future as well.
Justin Stevens
That sounds good. Lastly, for me, I mean, you’ve indicated you’re working towards adding more cash flow in your near-term cash flowing relative to the portfolio. I was curious if you could give us a bit more context on the state of the royalty market, as you see it on the base metal side and how you’re sort of looking at third party versus potential new first party royalties.
Alex Tsukernik
Yes, I mean, I think if I can make a general assumption, where we see opportunities in the innovation side is among private assets, where you can have a good project back like Dupont and you have some financing there as well. But it’s not necessarily a fully transparent situation where it’s a public, well, it’s a public company with access to capital, sort of just public equity. So we are seeing, I do think public equity can make things much more challenging. So I think a royalty company can, especially one that provides constructive terms, can be a very attractive source of capital at all types of private equity or instruments of that nature. And we are seeing some good bilateral negotiations, and discussions with private assets that are looking interesting. And so on the third-party side, obviously, that’s where we’ve focused so far, and they’ve had some very good success, and they can approach us on tier one assets. And that’s worked out very well. And we still see those, I mean, I’d say the nature of the deals has changed from the perspective of, we have an excellent portfolio already, which is moving ahead, and it doesn’t require a ton of explanation anymore.
So there are owners of other tier one royalties when we’re looking at Nova not so much as way to cash out or sell out, but as a way to diversify their exposure to a broader portfolio. So from that perspective, I think it’s really exciting. And we are seeing some good opportunity. So I think that they really go side by side. Those two, we can have an excellent origination opportunity. And then also some additional potential opportunities in a third party, which worked very well with existing portfolio and really just creates a much stronger company, overall. One that’s really hopefully in a position to be sort of one of the most attractive destinations for any competent nested out there. Because, again, if you have a diversified portfolio of top-notch royalties, with a balanced cash flow ladder and the production had for decades to come without capital or operating costs commitments, I think that’s as exciting as it gets in this commodity space. So we are really excited about the next leg of deals. When you look at the market, first nine months of the year, I think we’re really challenging for everyone because the world was really getting adjusted to sort of the new normal. And I think at this point, people are much more adjusted and I think ready to accept the terms of the market as they are and we are seeing much more, I think activity, productive discussions with the people we’re talking to. So we’re very excited about the next six months. We think it will yield some interesting things for sure.
Justin Stevens
Great, that was good to hear. That’s sort of the way, I’m sort of seeing the market too, now’s the time to be beat the bushes and getting things done. So look forward to seeing the news flow for the next couple of quarters here. I’ll leave it there. Thanks, guys.
Operator
Thank you. There are no further questions on the phone.
Alex Tsukernik
And we don’t seem to have any questions written in as well. So with that, I’d like to conclude the call and thank everyone for attendance. It’s always a pleasure to update you on what we are we’re doing. We’re still a very young company, as long as in public for two years. We have seen a lot of exciting growth and hopefully everyone here can see where the company is heading. Apologies for my lights going out. I guess that happens sometimes. And I want to wish everyone a great Thursday.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. And we ask that you please disconnect your lines.
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