Nova Royalty Corp. (OTCQB:NOVRF) Q2 2022 Earnings Conference Call August 11, 2022 12:00 PM ET
Company Participants
Alex Tsukernik – President and Chief Executive Officer
Bill Tsang – Chief Financial Officer
Conference Call Participants
Justin Stevens – PI Financial
Operator
Hello, everyone. Welcome to the Nova Royalty Corporation Second Quarter 2022 Conference Update. 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 second 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, August 11th, 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, sir.
Alex Tsukernik
Thank you, operator. Hello, everyone, and thank you for joining us today. It’s always a pleasure to interact with the investment community and we have some exciting things to discuss today. So certainly we’re looking forward to it. With me on the call is Bill Tsang, Nova’s CFO, who will go over our financial results from the quarter; and Brian Ferrey, our VP of Corporate Development and Strategy, who will be available for Q&A. Nova released its second quarter 2022 financial results and corporate update at market close yesterday. You can find our consolidator financial statements and MD&A on the Nova Royalty website or under our profile at sedar.com.
Starting on Slide 3. Nova’s ultimate goal from the beginning was to build the world’s premier copper investment. We continue to do so in the second quarter of 2022, adding to our portfolio of tier-one copper assets and advancing discussions on a number of other exciting opportunities. When we found Nova in 2018, our vision was to provide our investors with the most efficient way to participate in copper. The royalty model and Nova’s portfolio of large scale tier-one assets offers just that. The royalty model gives our investors exposure to all project and commodity price upside, while insulating them from any capital and operating cost requirements, the inflation of which is well known in our industry today.
We believe strongly in copper, both for today and in the future. Copper has a vital role to play not just as a critical input for today’s economy, but also as the key driver of the 21st century energy supply chain. The ongoing transition to renewables is still at a very early stage. What’s started a few years ago as an environmentally focused effort to reduce the usage of fossil fuels is now increasingly driven by national security and basic energy supply concerns among countries everywhere. The key ingredient in all the key renewable technologies from electric vehicles to wind and solar is copper and the opportunity that we see from Nova today is in generational terms as we are consolidating royalties on the key deposits of a critical commodity.
Before we get into the portfolio update and financial results, I’d like to spend a few minutes to address these and developments in the copper market. Since the beginning of Q2, we’ve seen copper decreased from 4.74 per pound to as low as 3.18 before recently rising to approximately $3.16. While much attention has been focused on near term industrial demand, [indiscernible] clearly stated the following in its 2Q earnings release. The output for copper’s fundamentals in the medium or long term remain extremely favorable with demand for copper expected to double over the next 15 years. Substantial new mine supply development will be required to meet the goals of the global energy transition. And current prices for copper are insufficient to support new mine supply development, which is expected to add the future deficits.
While I could spend a long time in the macro, in summary, this reflects our view as well. So the copper price could be heading for a perfect storm of decreasing supply and increasing demand. At a time of decreasing production in the two largest copper producers in Chile and Peru K the required supply response will need to come to the next generation of major advanced projects. These are the types of mines that comprise the heart of Nova Royalty portfolio and the value of which – and the scarcity of which will become only apparent over time.
Turning to Side 4. Nova has built a foundational portfolio of royalties that represent a significant proportion of the next generation of the world’s major copper projects. And we are very excited about our position for the future. These are the generational assets that have the potential to deliver decades of royalty revenue.
We took a quality first approach to building the portfolio and acquired the royalties on Tier 1 assets in support of mining from the jurisdictions that are being actively advanced for production by industry leading operators, such as First Quantum, Lundin Mining and Hudbay, just to name a few.
We presently own royalties on four of the top 10 open pit copper development projects in Americas. First Quantum, Taca Taca; Lundin Mining, Josemaria; Hudbay’s Copper World; and Teck & Newmont, NuevaUnion. Of those top ten we believe that Taca Taca, Josemaria and Copper World are three of the top four most advanced projects in this group with construction decisions highlighted in the future for all three projects.
We also own the royalties on two of the largest and most advanced projects and Chile’s second largest topical. Los Andes Copper’s Vizcachitas project, and Glencore & Anglo American’s West Wall project. Located only 15 to 20 kilometers from each other, both deposits have significant existing measured indicator resource estimates, approximately 1.2 billion tons at 0.45% copper equivalent at Vizcachitas and 861 million tons at 0.5% copper at West Wall. Both have meaningful exploration potential, easy access to infrastructure and are surrounded by truly some of the largest mines in the world. Operator and jurisdiction quality are among the key metrics that we use for those projects.
Globally, we estimate that only 15 to 20 companies are capable of successfully financing permitting and building a major copper project. And these are the types of owners, operators for advancing the assets in our portfolio. Our royalties are located in supportive mining jurisdictions. Salta & San Juan provinces in Argentina, Arizona, Zacatecas in Mexico, Quebec, and Chile.
I would like to especially note that we believe we’re seeing the emergence of Argentina as a major copper production center, particularly in the province of Salta & San Juan.
Josemaria and Taca Taca are slated to be the first two major projects to be built in the coming years. However, major companies such as Pasco, BHP, Rio Tinto, and South32 among others have also made mining investments in these provinces, setting the stage for them to potentially become major global mining hubs in the coming years.
To myself, what stands out is the level of social support for this sector in these provinces that is mirrored in local government policy and added into the local business community. When I visited San Juan last year, I was truly amazed but the enthusiasm of the average person to the mining site.
That’s a great thing to see at a time when the industry is struggling from image perspective in so many locations. Lowest portfolios of the asset production with also the little need for outside capital before that occurs, Aranzazu mine at 1% in which we had acquired last year, covered approximately two-thirds of our general and administrative expenses in the first half of 2022. The mine saw record production in the first three fiscal quarters since we acquired the royalty on August 2021. And we particularly commend the Aura Minerals management team for that performance.
This is a valuable cash flow source for us while our May portfolio of production in the second half of 2022. Of course, we’re aiming to acquire additional royalties on similar assets to further build out the cash flow bridge from the present to the time that our generational assets enter production. We look forward to executing on those opportunities and further building what we truly believe will be the world’s premier copper investment.
Moving to Slide 5, our growth strategies focused on two pillars. Pillar one, large scale, long life, Tier 1 developing projects and stable jurisdictions, which formed the heart of our portfolio. And pillar two, sustainably profitable producing mid-size mines that can operate successfully across commodity price cycles.
I’m pleased to say that in the second quarter of 2022, we’ve made tangible progress in executing on our strategy in both fronts. In May 2022, we secured the rate to require a portion of the 0.5% MTI on Lundin Mining, Josemaria project in San Juan, Argentina. Josemaria represents one of the most advanced large scale copper development projects in the Americas and has a clear capital production.
Nova has rights to acquire approximately 16.7% of the royalty for transaction consideration of $2.4 million payable at the achievement of future milestones, which also included an advance payment of $100,000, which was a mix of cash and number shares. We also have offer for an additional 16.7% of the royalty and have the potential to grow our royalty interest and was truly exciting asset.
Shifting gears to the second pillar of our strategy, where are focused on acquiring royalties on mid-size, sustainable profitable mines. We continue to advance discussions on federal producing and near-term producing assets, adding more cash flowing and near-term cash flowing royalties remains a key priority for us. And just a note, adding another royalty of a similar profile at Aranzazu would make Nova into being sustainably profitable before its main assets come into production.
The current pullback in our copper sector has presented us with some excellent opportunities, both in terms of third-party royalties, but also origination opportunities, which will mark the diversification of our acquisition strategy. This is where the work that we’ve put in to build a strong diverse of portfolio really pays off because we truly believe that what Nova can offer investors is unique and the company becomes very investible as we exceed capital and more opportunities to come.
Turning now to Slide 6. I’d like to provide an update on some of our assets in Q2 2022, and it’s been great to see some of that progress. As mentioned earlier, Aranzazu will continue the strong operational performance without a solid quarter. Aranzazu has sold 11.7 million pounds of copper equivalent during Q2 2022 with sales 17% higher than the same period of last year compared to Q1 2022, which was the record quarter for the mine.
Aranzazu’s copper equivalent sales were down by 17%, predominantly as a result of lower grades. This was in line with Aranzazu’s mine plan and sequencing, aim to develop the mine to access higher grade areas for production later in 2022. We expect to see continued strong performance and revenue generation by Aranzazu with Aura guiding for second half production on a gold equivalent basis that’s similar to the first quarter run rate.
Aura produced 56,745 ounces of gold equivalent at Aranzazu in the first half of 2022 with 30,300 of gold equivalent ounces in the first quarter and 26,300 gold equivalent ounces in the second quarter. Aura is now guiding for full year 2022 production of 115,000 to 120,000 gold equivalent ounces at Aranzazu. It’s really been great this year with the performance of this asset quarter-on-quarter. We spent probably 18 months before acquiring the royalty on doing excessive due diligence and we really have not seen too many performances like the Aura team has delivered at this mine in terms of consistent improvements and royalty metrics. So again, our congratulations to them.
We also saw progress at our key development assets, which are being actively in advance production. At Taca Taca, First Quantum is continuing with project pre-development and feasibility activities and expects to continue permitting work and government engagement throughout the year. They’ve guided to a production decision in 2024.
At Josemaria, the mining authority of San Juan, Argentina approved the Environmental Social Impact Assessment for the project in April of 2022.
Lundin Mining reported that it is currently advancing commercial agreements and additional sectoral permits with national and provincial authorities in Argentina, which it expects to complete in 2022 ahead of a construction decision.
Lundin also reported that it is completing basic engineering, which is approximately 23% complete, and study work for an updated technical report, which will include updated cost estimates and evaluation of potential scope changes in a feasibility study completed by Josemaria Resources in November 2020.
Lundin expect to publish the updated technical report in Q4 2022 and its stated that it intends to spend up to $300 million to advance development of Josemaria. As part of the technical report update, Lundin Mining also reported that it plans to complete a new Mineral Resource and Mineral Reserve estimate, which will incorporate approximately 31,000 metres of drilling that have been completed at Josemaria since the 2020 study.
At Copper World, Hudbay released the main preliminary economic assessment for the project. According to the PEA Phase 1 of the mine contemplates outage copper production of 86,000 tonnes per year, over a 16-year mine life in Copper World. And the private land portions of Rosemont at a capital cost of $1.9 billion.
This offers an alternative path to the federal permitting process that has challenged Rosemont. But they also outline the Phase 2 of the project that includes federal permitting for Rosemont that would take the total mine life to 44 years.
Subsequent to quarter end, Hudbay also announced that it received approval from the Arizona State Mine Inspector for its amended Mined Land Reclamation Plan for the Copper World Complex. Hudbay expects to submit applications for other key State and local permits for Phase 1 of the Copper World Complex in the second half of 2022.
Hudbay is currently preparing a PFS in the second half of 2022, preparing a definitive feasibility study in 2023 and the construction decision as early as 2024. Supported very frankly, we’re very pleased to the urgency with [indiscernible] project. Given a challenge of ramping up Copper projects, we believe that only really a handful of truly motivated operators will emerge as successful in doing so. And that is the group where Nova has focused its royalty position.
Vizcachitas, Los Andes Copper reported consistent positive results from drilling program. The company reported in 2022, that the completed drill complaint has shown that the 1.2 billion tonnes at 0.45% copper equivalent measured an integrated resource has considerable potential to grow in both size and grade. Los Andes has feasibility study on the project underway, which they expected release by the end of the year.
Before I hand the call over to Bill Tsang, provide an overview of our financial results. I’d personally like to take a moment to welcome the newest member of the Nova Board, Guy Elliott, who had joined the Nova Board as Audit Committee Chair in July. Guy joining us from KPMG, where he’s spent over 25 years as an audit partner in the Energy and Natural Resources group of the Vancouver office. Guy brings a vault of valuable experience in financial reporting, controls, filing and compliance. Nova grows and share as a company, Guy’s skill set is truly excellent fit for where we want to go.
With that, I’d like to turn the call over to Bill. So he’s got the company’s financial performance. Bill?
Bill Tsang
Thank you, Alex, and hello, everyone. Looking at Slide 8, in Q2 2022, Nova’s revenue was $0.5 million up from nil in the Q2 2021 period. This increase in revenue is attributable to the royalty on the producing Aranzazu mine, which the company did not happen to prior year period. Q2 quarterly revenues were approximately 30% lower when compared to Q1 2022, due in large part of sequenced decline in mining grades at Aranzazu and lower average realized metal prices.
As Alex mentioned earlier, the lower sales of production at the Aranzazu mine was largely grade driven and in line with the operator’s expectations and sequencing in the mine plan. Nova recorded net loss for the quarter of $2 million or $0.02 per share, compared to a loss of $1.4 million or $0.02 per share in the prior year period. Loss for this quarter was largely attributable to higher general and administrative expenditures, share based payments and interest expense, offset by our higher revenue net of depletion.
G&A expenditures, not including share based payments were approximately $1 million compared to $700,000 in the prior year period. The higher G&A cost was due predominantly to higher consulting fees related to our increased ongoing royalty acquisition initiatives and personnel recruitment costs.
The company also recorded higher office and administration expenses as the company skilled up its internal capacity at the corporate level, including our new VP Investor Relations, new Audit Committee Chair, and a more mature internal infrastructure as we grow into a long-term industry player.
Turning to the balance sheet on Slide 9. At the end of Q2, 2022, the company had a cash balance of $900,000 compared to $900,000 at our last fiscal year end. Nova currently has a cash balance of approximately $2 million along with the expected Aranzazu revenue to come, we are positioned to cover the near-term working capital requirements.
In May, 2022 Nova drew $1.5 million on the Beedie Capital loan facility with a conversion price of $2.74 per share. In conjunction with the announcement that Josemaria royalty acquisition. No shares were issued during Q2 under the company’s At-the-Market equity program.
Looking ahead, Nova has sufficient liquidity and access to capital with the Aranzazu royalty covering the majority of our G&A expenses. There are also $17 million in available credit remaining on a convertible loan facility with Beedie Capital.
And that concludes my comments. Back to you, Alex.
Alex Tsukernik
Thank you very much, Bill. Moving to Slide 10. We’re a little more than halfway through 2022, and I’m more excited than ever by the world Nova is heading. We really are continuing to build the premier copper of the company. The world is in an interesting place right now. We find ourselves at a time of great challenge, and also incredible opportunity. Making them more important than ever for investors to be selective about what they choose still.
We can provide our investors with diversified multidict exposure to world class assets without exposing them to capital and operating cost inflation. Working at the world today, I personally cannot imagine a better risk reward scenario anyway. We have the right assets in the right jurisdictions run by companies and people who have proven that they can get things done. All of which are must has an advantage. While we’ve weighed an irreplaceable long term foundation of tier-one assets, we really just, we really find ourselves just at the beginning of our next [indiscernible]. We remain focused on adding more producing realties to build a cash flow advantage. From now until the major producing assets come online in the second half of the decade. We’re fully committed to executing this leg of our strategy, just like we were for the first one. And we have a lot of exciting opportunities ahead of us.
I really want to thank everyone, who’s been involved with lower from the very beginning, from our early shareholders through the team of over 20 people who help bring the company to where it is today, and really open the window to where I think can be a very exciting future.
Before we jump into Q&A, I want to let everyone know that Nova will be hosting our Virtual Investor Day on Thursday, September 27, to provide the investment community with a closer look at our strategy, assets and a position criteria. We’ll be providing more details, including webcast and the other information next week. We’ll look forward to further updating the market on our progress as we advance. And now operator, I’d like to open line up for questions.
Question-and-Answer Session
Operator
Certainly sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Justin Stevens of PI Financial. Please go ahead.
Justin Stevens
Hey guys. Thanks for the pretty comprehensive overview there on the assets and everything. So I don’t have too much left to ask. But on my side of things, I mean, given the expected supply gap for base metals and especially copper, and given that your portfolios tilt is pretty hard towards projects, which should coming to construction decisions in the next few years. Do you see your sort of priority for growth likely still being on the near-term project side, or you guys taking a look potentially more on the grass-roots side of things where evaluations are probably significantly cheaper at the moment?
Alex Tsukernik
Justin, this is an excellent question. Just in terms of maybe stepping back to how we look at things When we started the company, we mapped out the entire world. So from the perspective of every country, every region, every asset, every royalty holders, it’s something that we comprehensively pursue all the time. In terms of where we see opportunity today, it’s across the spectrum. However, in terms of what could add the most value to Nova, it is producing a near-term producing assets. There are of course earlier stage opportunities that we look at as well. But it’s simply a matter of where you spend your time and priority levels. But of course it’s something compelling on the earliest side came along. We will always be a buyer of that. No question.
Justin Stevens
Got it. That makes sense. And then, I mean, I’m also in pretty strong agreement, I think with your comments on Argentina potentially becoming one of the next top jurisdictions for mining in South America. Do you see any more opportunities for growth in emerging jurisdictions like Argentina given, especially the recent downturn in metal prices?
Alex Tsukernik
I think Argentina is a very unique case. We – when we started the company, I don’t think that was one of the people who thought Argentina bull camp. I think it’s always had the geology. I think everybody knows that, but I think what is happening right now is the country is very much at a returning point. I think you see it politically. I think you’re seeing much more over the surgeons among people who want to see a function in the economy than you’ve seen in a very long time, the mining sector has really been the forefront of those efforts. I mean, I think that’s why you’ve seen so much investment among blue chip names [indiscernible] First Quantum. This isn’t the question of one or two names.
I don’t think we are a first mover identifying sort of promising jurisdictions. I think we’re pretty conservative. I think looking Argentina right now there’s so much momentum among serious names to really make it [indiscernible] of their strategy. I don’t think it’s a terribly revolutionary step for us to take at this point. What forges did they signed a deal with Rio and I think [indiscernible], which is in Salta which is Rio’s new project in Salta. I think would be one of their – one of the mines, which the source and lithium in this case. I think you have a unique combination of social consent in Salta & San Juan, geological strength. There’s not a lot of people who live in those provinces. When you look at the combined population of Salta & San Juan, it’s about 5% of the country’s population. And that’s actually where the bulk of your sort of valuable deposits are located.
So it’s a very unique situation. I think when you see how we’ve bought things, we’ve been very careful on the social consent front, because as much as this is often said in the capitals about improvement to mining situation, the ground is very different. When I was over in San Juan last year it was incredible. I’ve never seen recently so much just fundamental support for this sector. I mean the government is giving out interest free loans to business to startups, to service the mining sector Josemaria and Vizcachitas are the first ones to go.
So it’s really just a lot of inherent enthusiasm and the bottle is being checked. I think obviously there’s certain questions to be answered at the federal level in terms of how much the federal government will cooperate with the things that are going on locally. But I think you’re seeing all the signs of that occurring. So we are really excited about what we see for sure.
Justin Stevens
Great. I mean, that’s it for me. Looking forward to seeing some of the news flow from the underlying assets in H2, but I think you guys are at a good start here. Just need the market to sort of, I think realize that this supply gap for copper is Rio pretty much regardless of the new economy, so Taca Taca.
Alex Tsukernik
Yes. I think just commenting on what you said. I think there’s a lot of people who still think of copper as a purely industrial commodity that’s subject to the usual economy business cycle, but when you look at the issues, it’s really an energy supply commodity more than anything else. And when you look at the fundamental evaluation of what caused this secure supply, I think what you will see occur here over time is that people will fundamentally need to secure more copper in their pipeline to make sure that they can heat the homes, I think it’s going to be as simple as that.
Operator
[Operator Instructions] There are no other questions at this time. I will turn the conference back to Mr. Tsukernik for closing remarks.
Alex Tsukernik
Yes, we actually one of our shareholders who are unfortunately could not attend the call, but he asked a couple questions that we can address here on the call. And the first one is actually in regards to nickel and whether, because we also acquired nickel assets opportunistically as a secondary priority for the company and whether any of our nickel royalties could get into production in near future. If you go back to the history of Nova actually our first position was a nickel royalty on the Dumont project in Quebec. And the reason we had acquired it was because it is, it is the second largest nickel reserve in the world and fully permitted and ready really to start construction. And when you look at what’s happening out there right now, and there’s really a lack of available nickel projects out there, you certainly qualifies as a candidate to get into production in the coming years.
From what we understand is that there’s currently a strategic process being on by the project owner Waterton. And we’re keen to see the results of that. But when you look at this BHPs bid for OZ Minerals earlier, there’s clearly a lack of available nickel assets in first tier jurisdiction. So certainly we’re excited to see what happens to Dumont in the future. And then second question that was asked is that copper and nickel projects are much bigger than what you see in the precious metal side and they can pay us 50 plus years and above. And the question is whether the value of our portfolio has been factored into investor evaluations, or is this something that’s going to happen at the stages of preliminary economic assessment to or pre-feasibility study? When you look at the size of Nova’s assets and their prominence, these are the types of mines that go for 50 plus years and they continue to grow over time with histories and you guide.
And there’s very few of these really that are out there in the world. When you look at the global copper market, there’s less than one major mine built at the year and they get bigger. And so these are types of assets where even once you get into production, you don’t fully appreciate the value of them because when you, these are the types of things that big companies will continually investing in less billions of dollars into overtime. So we really built what we think will be multi decade generational portfolio that will continue to add value. So certainly they’re not appreciated right now in terms of where they are, because I believe right now we’re trading at a pretty big discount to net asset value, but even once you get into production and let’s just say, you’re trading at the massive value or above you’re still not really fully factored in because you’re talking about the handful of the most priced mineral assets on the planet.
And that’s what we think we’ve got and concentration within the Nova portfolio early. So again it’s still very early days here as we grow. We’re excited about what we have and what we can do. And obviously we’re very excited to come back in the future and tell you guys what we’re doing.
Operator
Ladies and gentlemen, this concludes your conference call for today. We would like to thank everyone for their participation and ask you to please disconnect your lines.
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