Scully Royalty .(SRL) - 2024 Q4 - Annual Report

Letter to Shareholders Update on the Scully Mine The company's primary asset is a royalty on the Scully Mine, whose operator has new funding and plans to restore production capacity - The company holds a royalty interest in the Scully iron ore mine, entitling it to 7.0% of revenue from shipped iron ore and 4.2% from tailings, with a minimum annual payment of $3.25 million[9] - The Scully Mine produces premium-grade ore with over 65% iron content, which traded at an average 13% premium (US$14/tonne) over the 62% Fe index in 2024[12][13] - The mine's operator, Tacora Resources, emerged from CCAA in September 2024, backed by a new consortium of investors including Cargill, Millstreet Capital Management, and O'Brien Staley Partners, with a US$250 million equity injection[18] Historical Mine Production (Tonnes Shipped) | Year | Tonnes Shipped | | :--- | :--- | | 2019 (H2) | 1,100,000 | | 2020 | 2,600,000 | | 2021 | 2,800,000 | | 2022 | 2,700,000 | | 2023 | 3,500,000 | | 2024 | 3,100,000 | - Tacora has commenced a multi-year capital investment plan to restore the Scully Mine to its historic nameplate production capacity of six million tonnes per annum[25] Dividends The company has resumed its cash dividend policy, declaring a $0.37 per share dividend for February 2025 - The company resumed its cash dividend policy, declaring a dividend of $0.37 (US$0.26) per Common Share to be paid on February 21, 2025, to shareholders of record on January 24, 2025[30] Rationalization of Non-Core Assets The company is divesting non-core assets, resulting in an $18.6 million non-cash impairment loss in 2024 - Certain assets and liabilities were classified as held for sale as of December 31, 2024, representing approximately 20% of consolidated total assets after impairment[32] - These assets held for sale generated $9.0 million in revenue and a net loss of $4.5 million in 2024; a non-cash impairment loss of $18.6 million was recognized in connection with this classification[32][33] Assets and Liabilities Held for Sale (as of Dec 31, 2024) | Category | Amount (C$) | | :--- | :--- | | Total Assets | 88,500 | | Total Liabilities | (18,107) | | Net | 70,393 | Liquid Assets The company maintains strong liquidity with $165.1 million in total liquid assets, despite a strategic decrease in cash balances Liquid Assets and Working Capital (in C$'000s) | As at December 31 | 31-Dec-24 | 30-Jun-24 | 31-Dec-23 | | :--- | :--- | :--- | :--- | | Cash | $19,052 | $35,897 | $78,252 | | Short-term securities | $23,487 | $10,259 | $12,958 | | Receivables | $42,274 | $72,450 | $70,330 | | Classified within assets held for sale: | | | | | Cash | $32,704 | $32,015 | — | | Short-term securities | $4,638 | $3,471 | — | | Receivables | $42,905 | $8,668 | — | | Total liquid assets | $165,060 | $162,760 | $161,540 | | Working Capital | $136,831 | $141,416 | $143,972 | 2024 Financial Results The company reported a net loss of $20.6 million in 2024, driven by lower revenue and a significant non-cash impairment charge Financial Position Summary (in C$'000s) | Metric | 31-Dec-24 | 31-Dec-23 | | :--- | :--- | :--- | | Total assets | $438,095 | $452,467 | | Total liabilities | $127,770 | $122,797 | | Book Value | $302,277 | $322,459 | | Book Value per Share | $20.39 | $21.76 | - Revenue for 2024 decreased to $35.3 million from $54.9 million in 2023, primarily due to the disposition of energy interests and decreased royalty income[42] - The company recognized a non-cash impairment loss of $18.6 million on assets classified as held for sale[43] Net Income (Loss) Comparison | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net (Loss) Income Attributable to Shareholders | ($20.6 million) | $1.4 million | | (Loss) Earnings Per Share (basic and diluted) | ($1.39) | $0.09 | PART I ITEM 3: KEY INFORMATION The company faces risks from volatile iron ore prices, high competition, and significant revenue concentration in the Scully Mine royalty - The company's financial results are expected to fluctuate significantly due to varying iron ore prices, production levels at the Scully Mine, and the uncertain timing of merchant banking transactions[75] - A significant portion of revenue (approximately 57% in 2024) comes from the Scully Mine royalty interest, concentrating risk on this single asset and its third-party operator[95] - The company has no decision-making power over the operation of the Scully Mine and has limited access to technical or geological data, creating risks if the operator's interests are not aligned or if operations are scaled back[87][88][90] - The business is highly competitive, facing competition from larger merchant banks, investment firms, and mineral royalty companies with substantially greater capital and resources[80] - The operations of the company's European banking subsidiary are subject to extensive regulation, which could limit business opportunities and increase compliance costs[100] ITEM 4: INFORMATION ON THE COMPANY The company's core business is its Scully Mine royalty, supported by a merchant banking segment and a strategy of non-core asset rationalization - The company's core asset is a net revenues royalty interest in the Scully Mine, with a rate of 7.0% on iron ore shipped from the mine and 4.2% on tailings[135] - The company operates through two primary segments: (i) Royalty, which includes the iron ore mine interest, and (ii) Merchant Banking, which includes regulated merchant banking activities in Europe[136][148] Iron Ore Products Shipped from Scully Mine (tonnes) | Year | Tonnes Shipped | | :--- | :--- | | 2024 | 3,060,800 | | 2023 | 3,535,238 | - The operator of the Scully Mine emerged from CCAA proceedings in September 2024 with a US$250 million equity injection and new offtake and transport arrangements[142][154] - The company has a dividend policy and declared a dividend of $0.37 (US$0.26) per common share in December 2024[145] ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS Revenue decreased to $35.3 million and a net loss of $20.6 million was reported, largely due to an $18.6 million non-cash impairment Rationalization of Non-Core Assets The company classified non-core assets as "held for sale," resulting in an $18.6 million non-cash impairment loss in 2024 - The company is rationalizing non-core assets to simplify its corporate structure and focus on its iron ore royalty[227] - Assets held for sale represented about 20% of consolidated total assets and generated $9.0 million in revenue and a net loss of $4.5 million in 2024[229] - A non-cash impairment loss of $18.6 million was recognized in connection with the classification of these assets as held for sale[231] Results of Operations Revenue fell to $35.3 million in 2024, leading to a net loss of $20.6 million due to lower royalty income and a large impairment Selected Operating Results (in C$'000s, except per share) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Revenue | $35,302 | $54,944 | $63,689 | | Net (loss) income | ($20,588) | $1,391 | ($23,398) | | (Loss) earnings per share | ($1.39) | $0.09 | ($1.58) | Revenue by Segment (in C$'000s) | Segment | 2024 | 2023 | | :--- | :--- | :--- | | Royalty | $20,053 | $35,323 | | Merchant Banking | $6,221 | $7,374 | | All Other | $9,028 | $12,247 | | Total | $35,302 | $54,944 | - The decrease in 2024 revenue was mainly due to the disposition of energy interests in March 2023 and decreased royalty income; a single customer in the Royalty segment accounted for 57% of total revenue[238] EBITDA Reconciliation (in C$'000s) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net (loss) income for the year | ($20,268) | $1,399 | | Income tax expense (recovery) | $1,245 | $8,798 | | Finance costs | $2,493 | $1,763 | | Depreciation, depletion and amortization | $7,221 | $7,929 | | EBITDA (loss) | ($9,309) | $19,889 | Liquidity and Capital Resources The company maintains strong liquidity and a low net debt-to-equity ratio of 0.06, despite a decrease in cash from investing activities Net Debt-to-Equity Ratio (in C$'000s) | Metric | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total debt | $36,545 | $36,107 | | Less: cash | ($19,052) | ($78,252) | | Net debt | $17,493 | N/A | | Shareholders' equity | $302,277 | $322,459 | | Net debt-to-equity ratio | 0.06 | N/A | Summary of Cash Flows (in C$'000s) | Cash Flow Activity | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Operating activities | ($31,543) | $26,181 | $30,637 | | Investing activities | $2,760 | ($6,307) | ($4,677) | | Financing activities | ($1,157) | ($3,815) | ($17,192) | | (Decrease) increase in cash | ($26,496) | $14,535 | $8,844 | - The decrease in cash to $19.1 million from $78.3 million was primarily due to the purchase of securities, an increase in receivables, and the classification of assets as held for sale[296] - In August 2024, the maturity of the company's €25.0 million bonds was extended from 2026 to 2033, and the interest rate was increased from 4.00% to 5.70%[304] ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details executive compensation, board structure, and employee data, including $2.1 million in aggregate officer compensation for 2024 - Aggregate cash compensation paid to directors and officers during fiscal year 2024 was approximately $2.1 million[351] Executive Officer Compensation Summary for FY 2024 (C$) | Name and Principal Position | Salary | Non-equity incentive | All other compensation | Total compensation | | :--- | :--- | :--- | :--- | :--- | | Michael J. Smith, Executive Chairman | $650,080 | $82,000 | $280,730 | $1,012,810 | | Samuel Morrow, President, CEO & CFO | $532,694 | $160,034 | $330,347 | $1,122,066 | - As of December 31, 2024, the company had 71 employees[370] - As of December 31, 2024, there were 1,516,120 stock options outstanding under the 2017 Equity Incentive Plan[371][378] ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Two major shareholders control over 49% of common shares, and the company has significant related party transactions Major Shareholders (as of April 24, 2025) | Name | Amount Owned | Percent of Class | | :--- | :--- | :--- | | Peter Kellogg, group | 5,293,276 | 35.7% | | Lloyd Miller, III | 2,008,407 | 13.6% | - The company has arrangements with a company controlled by its Chairman, resulting in a receivable balance of $22.4 million as of December 31, 2024[386] - In 2024, the company paid royalty expenses of $0.7 million to a company in which it holds a minority interest and that is a subsidiary of the Scully Mine operator[387] ITEM 8: FINANCIAL INFORMATION The company faces a significant legal claim of approximately $121 million, which it deems without merit, and maintains its dividend policy - The company is a defendant in a legal action related to guarantees of a former parent, with the claim amounting to approximately $121 million (€81 million) plus interest and costs as of Dec 31, 2024; management believes the claim is without merit[392] - A dividend of $0.37 (US$0.26) per Common Share was declared in 2024, to be paid on February 21, 2025[394] ITEM 10: ADDITIONAL INFORMATION The company is a tax-exempt Cayman Islands entity with anti-takeover provisions and potential PFIC status risks for U.S. shareholders - The company is an exempted company organized under the laws of the Cayman Islands and is not subject to taxes on profits, income, gains, or appreciation in that jurisdiction[404][430] - The company's Articles of Association contain anti-takeover provisions, such as authorizing the board to issue preference shares and limiting shareholders' ability to requisition meetings[421][429] - The company does not believe it is currently a Passive Foreign Investment Company (PFIC), but its status is not guaranteed for any taxable year, which could result in adverse U.S. federal income tax consequences for U.S. Holders[441] ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks from interest rates, foreign currency, and equity prices, which it manages with financial instruments - The company is exposed to market risks including changes in interest rates, foreign currency exchange rates, and equity prices[456] - Derivative instruments may be used to manage certain exposures to commodity price and currency exchange rate risks, but not for speculative purposes[457] ITEM 15: CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2024 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[464] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2024, based on the COSO framework[467] ITEM 16: Corporate Governance and Accountability Key governance events include a change of auditor, adoption of a cybersecurity program, and confirmation of an audit committee financial expert - Effective December 5, 2024, the company's auditor resigned and was replaced by AOGB CPA Limited[485] Principal Accountant Fees for FY 2024 (in thousands) | Fee Type | AOGB CPA Limited (US$) | Smythe LLP (C$) | | :--- | :--- | :--- | | Audit Fees | $680.0 | - | | Audit-Related Fees | $0 | $435.0 | | Tax Fees | $0 | $60.1 | | All Other Fees | $0 | $8.6 | - The company has implemented a cybersecurity risk management program, which is overseen by the Board's Audit Committee and managed at the executive level by the CFO[491][493][494] ITEM 18: FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Auditors issued an unqualified opinion on the financial statements, highlighting the valuation of the mine interest and properties as Critical Audit Matters - The auditor, AOGB CPA Limited, issued an unqualified opinion on the 2024 consolidated financial statements[501] - Critical Audit Matters for the 2024 audit included the assessment of the recoverable amount of the interest in the Scully iron ore mine and the fair value of investment properties, due to the high degree of judgment and subjectivity in the assumptions used[506][509] Consolidated Financial Statements The statements show a net loss of $20.6 million and negative operating cash flow of $31.5 million for 2024 Consolidated Statements of Financial Position (in C$'000s) | | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total current assets | $175,319 | $164,545 | | Total non-current assets | $262,776 | $287,922 | | Total assets | $438,095 | $452,467 | | Total current liabilities | $38,488 | $20,573 | | Total non-current liabilities | $89,282 | $102,224 | | Total liabilities | $127,770 | $122,797 | | Shareholders' equity | $302,277 | $322,459 | Consolidated Statements of Operations (in C$'000s) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Gross revenues | $35,302 | $54,944 | $63,689 | | (Loss) income before income taxes | ($19,023) | $10,197 | ($23,956) | | Net (loss) income attributable to owners | ($20,588) | $1,391 | ($23,398) | Consolidated Statements of Cash Flows (in C$'000s) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Cash flows from operating activities | ($31,543) | $26,181 | $30,637 | | Cash flows from investing activities | $2,760 | ($6,307) | ($4,677) | | Cash flows from financing activities | ($1,157) | ($3,815) | ($17,192) | | (Decrease) increase in cash | ($26,496) | $14,535 | $8,844 | Notes to Consolidated Financial Statements Key notes detail an $18.6 million impairment loss from assets held for sale, segment performance, and significant related party transactions - As of Dec 31, 2024, assets of $88.5 million and liabilities of $18.1 million were classified as held for sale, resulting in an impairment loss of $18.6 million for the year[737] Segment Income (Loss) Before Income Taxes (in C$'000s) | Segment | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Royalty | ($3,469) | $11,120 | $1,012 | | Merchant Banking | $1,797 | ($55) | $2,900 | | All Other | ($17,351) | ($868) | ($27,868) | | Total | ($19,023) | $10,197 | ($23,956) | - The carrying value of the iron ore royalty interest was $192.1 million as of December 31, 2024, down from $196.6 million at year-end 2023 due to depletion[778] - In 2024, the maturity of the subsidiary's €25.0 million bonds was extended to 2033, and the interest rate was increased to 5.70% per annum[794] - As of Dec 31, 2024, the company had a receivable of $22.4 million from an affiliate controlled by the Executive Chairman[764][834]