Good morning and welcome to Altius First Quarter twenty eighteen Financial Results Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded. I would now like to turn the conference over to Flora Wood, Director, Investor Relations.
Please go ahead, Ms. Wood.
Thank you, Bruce. Good morning, everyone, and welcome to our conference call. Our press release and filings were done yesterday after the close. The event is being webcast live, and you'll be able to access the replay along with presentation slides on the webcast and in the Presentation section of our website. Brian Dalton, CEO and Ben Lewis, CFO, will both be speaking on the call.
And for the Q and A, we also have Chad Wells, VP, Business Development Florence Winter, VP, Exploration and Stephanie Hussey, Director of Finance. The order today will be Brian with a general overview of the quarter, which then will follow with a report on the financials. And then we'll go back to you, Bruce. I'll turn it over now to Brian.
Thank you, Flora. Good morning, everyone. Thank you all for joining. We had a quarter that's in line with our guidance range, which we increased to 64,000,000 to $69,000,000 after the recent Potash royalties acquisition. Our royalty revenue of $15,800,000 and adjusted EBITDA of $12,700,000 continue to reflect slow and steady cyclical price rebounds as well as incremental volume increases from a variety of our royalty mine.
At the end of the first quarter, we announced a $65,000,000 acquisition to increase the size of our Saskatchewan potash royalty portfolio. So I'll lead off today by talking about potash. These mines are relatively low operating cost producers, are located within a very stable political jurisdiction, are run by excellent operators and are critical to global food security. Note that our Q1 potash revenue of $2,300,000 or 15% of total revenue included only a few days at the higher ownership level with more contribution expected in the coming quarters, a great many coming quarters in fact. To say this was a long term investment is an understatement.
On the basis of twenty seventeen production levels, Saskatchewan potash mines that we increased our royalty interest in have an average proven plus probable reserve base remaining life of sixty nine years. If measured, indicated and inferred resources are considered, the total average potential mine life increases to more than one thousand years. We consider long resource lives as the best indicator of option value because it tends to point you towards operations that will naturally expand over time. These potash operations can increase production rates by many multiples and still be called ultra long life. Potash mine building is extremely capital intensive and so there is a very significant cost advantage to completing brownfield expansions versus newbuild.
At the royalty level, the benefits are even more extreme as the resulting production volume growth is fully captured at no share of the capital cost. Illustrating this, our royalty mines were recently expanded at a cost of more than $9,000,000,000 and can increase production rates by as much as 71% before current nameplate capacities are consumed. With recent global potash demand growth rates compounding in the 4% to 5% range, this could happen over the next decade or so. We also believe that potash prices reached cyclical bottoms recently and will ultimately have to more than double from current levels before the next wave of eventually required expansion becomes commercially incentivized. Copper is our highest area of exposure at 36% quarterly revenue.
Chapada copper revenues were quite strong at $3,900,000 versus $2,900,000 in the year ago comparable quarter. So that operation is well on track to meet or exceed its annual guidance, particularly since the first quarter is typically a slow one during the Brazilian rainy season. The real news from Chapada, however, is the three phase expansion that Yamana has announced and commenced feasibility studies around. They're considering expanding throughput from the current 23,000,000 tonnes to 32,000,000 tonnes per year to take advantage of some excellent exploration based resource growth. If the expansions are ultimately implemented, Humana expects Chapada production to go from around 120,000,000 pounds of copper per year to as much as 150,000,000 to 160,000,000 pounds.
This was particularly gratifying news for our geologists as the exploration upside potential of the project was something that they were really beating the drum on after our original purchase due diligence and site visit. Royalty revenue from the seven seventy seven minutee was essentially unchanged relative to the year ago quarter at $3,300,000 However, this was on modestly decreased production volumes. The operator, Hudbay Minerals, has been noting that production rates were naturally declining as the mine goes into its late years. Electrical or thermal coal revenue has rebounded from Q4 twenty seventeen levels as the share in this mine sequencing is back on to higher paying royalty land, a trend that we expect will be sustained all year. Overall, this revenue continues to be diluted down as a percentage of our total mix, given that these have no price exposure, while the rest of our portfolio has been benefiting on this basis.
Iron ore related revenue amounted to $1,100,000 or 7% of our total royalty revenue. This is up from the year ago period on an increased ownership level, but down from the prior quarter due to lower dividend paying as the IOC operation is experiencing a labor disruption. On the positive side, both high grade concentrate and pellet premiums remain very strong on environmentally driven structural changes within China's steel industry. Met coal from Teck's Cheviot mine accounted for 5% of revenue, the same as the year ago quarter and better than the last reported quarter. Production levels were back within normal ranges following a shortfall in the prior quarter.
Teck held an Investor Day in Toronto last month, where they noted that they're studying capital investments to determine the viability and attractiveness of extending the remaining life beyond 2021. Now on to our Project Generation business. In the past two years, we have been about 40 projects and of these 13 were completed during this year's first quarter. So we're off to a great start. Also, our second spin out this cycle, Aethon Minerals began trading in late April.
Demand for exploration projects has been the strongest we've seen in our history as both juniors and majors are recognizing a looming crisis in the industry due to the acute lack of exploration investment in the sector from 2012 onwards. We now expect about 40,000 meters of drilling to occur this year on the exploration projects that we hold royalties on, all funded by partners and all capable of delivering good news on any given morning. On that note, highlights from our portfolio during the quarter included the announcement of a new surface gold discovery by Ebrahim Resources at its Quellay project in Mexico. We're the largest shareholders of Ebrahim at 17% with additional warrants and importantly a 1.5% royalty on the project. So all bases covered from an obvious perspective.
Adventus also announced exciting drilling results from Ecuador during the quarter that included high grade infill drilling results from the El Domo VMS deposit and a potentially new gold rich zone at a target called Sesmo. Lastly, me before turning over to Ben, we disclosed in our MD and A that we are in the process of trying to develop a renewable energy royalties business line. Renewable energy has become very mainstream as a natural resource sector as technological improvements have driven down costs to the point that in many cases, it now represents the lowest cost power on the grid. It is a very fast growing sector globally while also taking the lion's share of incremental power generation growth, largely at the expense of fossil fuel based generation sources, particularly thermal coal. As you may have gathered from the earlier potash discussion, we are very drawn to long resource life assets.
And obviously renewable by definition is about as long life as one can get. We've been studying the sector and how royalty financing might work within it for about eighteen months now in partnership with a team of sector experts at Great Bay Renewables. At a high level, we believe the idea has great mirrors, but as always, the challenge will be in the execution. I am confident that in Great Bay, we have indeed found the necessary technical and sector expertise and have now begun to discuss potential terms with several operators and developers. There's still much to do from a structuring and strategic partnering perspective on this initiative, and we will keep you posted as it evolves.
Also as part of this, we are considering the dedicated contribution of our coal based royalty revenue through which we already find ourselves in the power generation royalty business into the new venture as a multiyear source of capital for deployment financing. These electrical coal royalties are in the process of being phased out over the next twelve years or so as part of recent government policy decisions. With renewables replacing coal in the power generation mix globally, we see some logic in mirrors this strategy as it has the potential to effectively convert medium life coal royalties into very long life renewable royalties. Just before I turn over to Ben, I want to remind everyone who is in St. John's that our AGM starts right after the Q and A here.
And so I'm looking forward to speaking with you at the meeting. Thank you.
Thank you, Brian, and good morning, everyone. I'm restraining myself from providing a long sermon on the quarter, not just because it's the first quarter and in line with guidance, but also because, as Brian mentioned, our AGM starts in a little while. Brian covered the royalty revenue discussion by segment. So I'll mainly focus on the balance sheet and liquidity and a change for the better in accounting treatment that arises with the Potash Royalty acquisition. Starting with the balance sheet.
We ended the quarter with $56,800,000 in cash, 53,500,000.0 drawn on our term debt, which is net of the required payment of $3,250,000 in the quarter and $74,700,000 drawn on our revolver for a total of $128,200,000 in debt. The term debt matures in 2020 and the revolver in 2019. We have a slide in our presentation showing the changes in cash balances and debt and are now back into borrowing mode as we chose to use our revolver for the Potash Royalties acquisition, leaving our cash available for other opportunities we're currently evaluating. Brian has talked about where we are in the cycle and how development stage royalty opportunities are more abundant than cash flowing royalties. And typically, we don't draw on our revolver for this type of acquisition as it's not cash flowing.
Our debt costs remain fairly reasonable as we're paying an average interest rate of roughly 5.2% per annum, which is virtually unchanged from last year despite the move in short term interest rates. And all of our covenants remain in good standing. Given the upcoming maturities in sight for both the term and revolver debt and in light of our overall growth in royalty revenue, we are in the process of refinancing the debt and we'll disclose terms when final, but we expect the size of the total available credit to increase in line with our revenue and asset growth over the past two years. For those of you who pointed out the frustrations of IFRS accounting treatment for joint venture royalty revenue, the Potash royalties acquisition gets us one step closer to financial statement revenue being closer to the overall adjusted revenue we disclose. Now all of our Potash royalty revenue will be included in the income statement revenue, making the joint venture line item smaller as it will only be thermal coal.
We have consolidated the net assets of the potash partnership as well and recognize a non controlling interest further strengthening our balance sheet. Brian's covered the revenue and EBITDA this quarter. While the quarter is in line with revenue guidance, the net earnings of $06 per share are lower than the analysts' expectations of $0.10 So I'll provide some explanation there. The main factor will be the $2,200,000 loss on derivative financial instruments, which arises from changes in fair value on our convertible debentures, the Champion and share purchase warrants. Higher taxes are consistent with the higher pretax earnings, but are also higher than statutory rates this quarter due to timing of earnings from our limited partnerships and other non deductible items such as amortization.
Looking forward, the G and A expense this quarter of $1,900,000 reflects higher professional and consulting fees, mainly relating to the Potash acquisition and should return to normal in the coming quarters. And that wraps up our formal remarks, and we'll turn it back to the operator for Q and A.
And our first question comes from the line of Orest Wowkodaw from Scotiabank. Your line is now open.
Hi, good morning. I was wondering if you could give us an update on what's happening with discussions, if any, with the Alberta government regarding the cancellation of the thermal power plants.
Sure. Thanks, Orest. There are no meaningful discussions underway with the Alberta government. And from our perspective, what's happening is that we are working now with council and preparing to launch action in the province to recover what we consider to be an effective expropriation of the tail end of the lives of those assets. So that's a sooner rather than later event.
Okay. So we'll have to stay tuned on that?
Yes.
Okay. And then in terms of just a financing question, it did surprise me actually that you decided to use your revolver for the potash royalty. Is that just a timing issue? Are we are you expecting just to pay that down now in the second quarter? Or are you just going to run with the higher cash balance in the current environment?
The decision at the time was driven much as Ben said in his remarks there that the way our revolver works is that we can only use it for cash flowing assets. So these were these obviously fit the bill and it made so it made sense to use that there and to hold on to our cash for anything else. But the other probably more important element is that we were also in the process of restructuring our overall financing and or debt financing. And so we do expect to match that up with a much longer term package given the overall mine lives and resource lives we're dealing with there. So it basically was effectively a bridge to that broader, more appropriate financing that we expect to put in place for that acquisition.
Okay. And then just finally for me, Brian, I'm curious sort of where you see the mix going in terms of your commodity exposure moving forward. I like the fact that you added the potash or increased the potash exposure. Where do you want to take it next with regards to commodity exposure? Are you happy with the current mix?
The current mix is not bad. We recently went through the exercise of comparing all of the major base metal and bulk commodities out there and weighting them based on their global traded value. And our royalty revenue actually matched up remarkably well. There's a few notable exceptions, things like manganese, aluminum, those aren't easy nuts to crack at the royalty level. I guess overall, it's probably there's probably less of a focus within the group now to try to get that to shuffle the diversity mix around as there is to just make sure we stay focused on really good quality assets within the current mix.
The decline from $7.77 that's coming in a few years was a big issue for us, but that's kind of naturally taken care of itself with growth from Chapada and as we expect a couple of other new mines to come on. So that issue has been largely dealt with. And hopefully over the next little bit, you'll also see the thermal coal revenue show up as matched up with some renewable energy royalty revenue.
Great. Thank you very much.
And our next question comes from the line of Brian MacArthur from Raymond James. Your line is now open.
Good morning. My question is an accounting one. I just want to going forward, now that you're consolidating the potash royalties, when you give your production and your revenue as attributable, going forward, is that still going to be attributable? Are you going to give us a subsector? I'm just looking for modeling purposes how you're actually going to present this going forward.
Okay. So this is Dan, by the way. Hi, Brian. We will consolidate the Potash partnership. We technically own 91% of it, but we'll consolidate.
And so we'll show 100% of the revenue on the face of our income statement. And we'll also have a deduction for the owner of the other 9% that will show up as a deduction in non controlling interest. So if you want to get to if you're doing net asset values that type of thing, you know, with the 91% beneficial interest. But it will be in two places on our income statement. A little bit of math.
Right. But then you've also always had this chart where you give summary of attributable production and average prices. And so in that, is that going to be moved up out of I mean that was always at whatever percentage in this quarter it's tough to call because it's I mean it's obviously didn't have it very long. Is that summary chart going to be changed that way too? So that the thermal coal will come in at the whatever 40 odd percent and the potash will not come in at 100% like you do with seven seventy seven?
Yes, that will change and it'll show it'll match up with our reported revenue. So that revenue will go up as well.
Perfect. Thanks. And the second question, with all this restructuring, is there any impact on your tax structure going forward as far as deferred taxes or overall rates or any guidance you can give us there?
There was this acquisition had no impact taxes. We basically took a larger stake in the existing structure that was there.
Right. So there's nothing corporately that you can shelter or do anything there differently. Okay. No, thank Thank you. You very
Yes, you're welcome.
And our next question comes from the line of Craig Hutchison from TD Securities. Your line is now open.
Hi guys. In terms of your renewable energy royalty opportunities, are there certain jurisdictions you guys are targeting where you think this will work better than others?
The initial work that's underway is within North America. This is a new type of financing for the sector broadly. And we think that this is the place or North America is the place to really develop the structures and the legal structures and the financing structures. Beyond that, once there's adoption in North America, once this becomes something that is recognized within the sector as another tool in their capital toolbox, I would like to believe that we'll be able to export the model and the idea and the initiative But first out of the gate, it will be North American focus.
And your partner, Great Bay, they already have a small one, think. Is that based in The U. S?
It is. That's a U. S.-based group. And their focus has been in The U. S.
And Canada as well. So they've got a pretty broad range of experience across the whole renewables spectrum. And they recently sold a combined hydro solar facility in Vermont and retained a royalty as part of that sale. So that was a lot of our work in fact over the last number of months was just in how to develop that legal structure and to create a royalty because again, it's not something that's ever been done before.
Okay. And you guys eventually see this sort of as a spin out or just something you hold as a subsidiary?
Initially, the idea is to keep it within just putting it as another business line, no different than evaluating copper iron ore opportunities. But if we're successful in developing critical mass, there's that going to have to be a good conversation with our shareholders and just get some better views in the market generally as to whether or not this belongs within a diversified mining royalty company. If it does, that's fine. It works well there. And if not, once there's a critical mass of revenue built up, we also don't have any problem with seeing it go out as a standalone public or otherwise.
As long as current Altius shareholder is the ultimate beneficiary, that's really all that matters and we'll take advice from our shareholders in the market beyond that.
Okay. Thanks guys.
Thank you.
And our next question comes from the line of Joseph Valentino from Jalisman. Your line is now open.
Thank you very much. I'm testing my memory here, but was there a discussion at some point way in the past of moving the listing of your ATUSF in New York to a different venue?
We don't actually do anything with that listing. I don't even know who put it up there, quite frankly. I mean, amazes me when I look at it every now and then and see that we trade as much or more there as we do in Canada often. But yes, that's not something that we really have any say or control or management over. We have certainly looked at listing the shares of the company on other exchanges over time.
And it's pretty burdensome. Know I guess it's something that eventually would make more sense, but the percentage growth or gain or the extra G and A cost that we would have to go for a full board listing in The U. S. Will be pretty dramatic, lots of percentage points as well as being very burdensome. We find that we're not running into much complaint from investors either.
It's not it doesn't seem
to be that big of a prohibitive factor for a lot of investors where main board listed on the TSX and most investors can avail of that exchange. It's obviously a very credible global exchange. And beyond that, that pink sheet or whatever it is kind of listing to serve its role. But we've looked at it a bunch of times and always concluded that it's not the time and I'd have to say the same thing about right now.
Thank you for that. Just one more question. Your additional exposure to Alderon, does that motivate you to speak in more in detail of what your expectations are for Alderon?
We've been pretty busy obviously investing in and around the Labrador Trough over the last couple of years. The investment in Labrador Iron Ore Royalty Corporation effectively an investment in Iron Ore Company of Canada has obviously worked out pretty well for us as the kinds of products that come out of the Labrador Trough, those high grade products really start to go into big market demand. Bloom Lake, I think is probably a more important proxy though for what happens with Alderon. If Champion is successful with the commissioning and ramp up of Bloom Lake, that's when I think investor and strategic attention would turn more towards the possibilities of developing the CAMI project. I mean it's a high grade fully permitted mine project sitting on top of existing infrastructure.
I don't I can't tell you that there's a master grand master plan or strategy right now here. We're working we're getting up to speed on what's been happening at the company level. We're talking to the other strategic partners that are already in the mix. And as the year goes on, we'll certainly be doing everything we can to help get the CAMI project across the line. There's probably nothing that could happen that would have more impact on Altius in the near term other than a production decision for the Kami mine.
That 3% royalty, if that mine we're producing today and that royalty we're paying, it would amount to as much as would increase our royalty revenue probably by 25% or more. So it's obviously something we're going to put a lot of effort into.
Right, right. Thank you for that. And thank you for taking my questions.
Thank you.
And at this time, I'm showing no further questions. And at this time, I'm showing no further questions.
Okay. Thanks, Bruce, and thanks, everyone, for joining us on the call, and we hope to see some of you at the AGM today.
Thanks everyone.
Bye bye.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.