BUSINESS REVIEW

 

Background

Ecora had a successful first half of 2023 despite a challenging market backdrop. The Group remained active, acquiring a royalty over the Vizcachitas project in Chile, one of the world's largest copper development projects, for $20 million. This is the Group's fifth copper royalty, and the acquisition is in-line with the Group's strategy to build the leading future facing commodity royalty company, bringing the Group's total acquisitions over the past 24 months to more than $400 million - the leading growth profile in the non-precious royalty sector.

 

Despite short term global macro-economic challenges leading to volatile commodity markets, the medium to long-term outlook for future facing commodities remains positive. The Group remains in a strong position to continue its growth trajectory with over $150m in undrawn borrowings and other liquidity.

 

Results

The first half of the year marked the beginning of a period when mining activities at Kestrel will be increasingly moving out of the Group's private royalty area, as well as the beginning of the ramp-up of underground mining activities at the Voisey's Bay mine.  The Group's portfolio contribution in the first half was impacted by a lower commodity price environment, particularly steel making coal prices which retreated from unsustainable record levels during H1 2022. Current steel making coal prices, however, remain well above historic levels.

 

Cobalt prices have remained subdued, in part due to increased cobalt supply growth from mines in Indonesia along with easing of supply chain disruptions for cobalt produced in the Democratic Republic of Congo. Alloy grade cobalt prices, which represents the majority of the product the Group receives under its Voisey's Bay Stream, averaged $16.5lb during H1 2023, ~55% below the levels achieved in the comparable period.

 

The Group's finance costs increased in the period, in-line with a higher interest rate environment as central banks implement policies to constrain inflationary trends. The Group's cost base remained otherwise unchanged, reinforcing the defensive nature of the royalty business model in periods of high inflation.

 

Adjusted earnings in the period remained resilient at $23.4m (H1 22 $60.1m) generating adjusted earnings per share of 9.06c (H1 22 28.08c).

 

Outlook

The Group is now entering a two to three year transition period during which it will move away from a dependency on revenue from Kestrel to become a diversified royalty company focused on future facing commodities.

 

In the short-term Kestrel revenue will become more volatile on a quarterly basis as operations move in and out of the Group's private royalty area. Production will remain outside of the private royalty area for the majority of H2 2023 with volumes that had been anticipated in Q4 2023 expected to be deferred into H1 2024.

 

The Group has constructed a portfolio of growth assets to replace the income generated by Kestrel. At Voisey's Bay, operations continue to transition to the underground mine and, whilst progress to date has been slower than anticipated, there is expected to be a step up in the number of deliveries in 2024.

 

Looking further ahead, BHP is targeting first production from the West Musgrave nickel-copper project in H2 2025. Piauí has been producing for 12 months and financing discussions are ongoing for the construction of a full capacity production facility. Finally, Capstone Copper is expected to publish a feasibility study in H2 2023 on the fully permitted Santo Domingo project which will hopefully confirm the current 2027 guidance for first production.

 

Demand for commodities such as copper, nickel, lithium and cobalt that will enable the energy transition is expected to grow materially over the coming decade. Macro-economic conditions are limiting the availability of growth capital to mining companies and with over $150m of undrawn borrowings and other liquidity, the Group remains well positioned for further growth.

 

PORTFOLIO REVIEW

 

Voisey's Bay (Cobalt)

Attributable deliveries under the Voisey's Bay cobalt stream totalled 84 tonnes (H1 2022: 168 tonnes) during the period (six 20 tonne deliveries of which 70% is attributable to the Group), realising an average sales price of approximately $16.54/lb (H1 2022: $37.61/lb). 

 

Production from Voisey's Bay continues during the ongoing transition as the Ovoid open pit mine is depleted and progress continues to complete the construction and advance the ramp-up of the Reid Brook and Eastern Deeps underground mines, that form the Voisey's Bay Mine Expansion (VBME) project. During the transition period the cobalt grade of the ore being mined from the open pit and being processed is at lower levels than will be from underground operations, with ore processing tonnage also expected to ramp-up over time to tonnages in line with the installed capacity. Cobalt production volumes during the period were impacted by annual planned maintenance at the Long Harbour refinery. A further four to five deliveries are expected in the second half of the year.

 

In 2021 Vale achieved first ore production from the Reid Brook deposit, the first of the two underground mines, which are covered by Ecora's stream agreement. As Reid Brook continues its underground development and ramp-up over time, so it will be joined by Eastern Deeps, the second underground mine of the VBME project. Vale Base Metals is expected to continue the production ramp-up over the remainder of 2023 and beyond, with volumes continuing to ramp up during 2024.

 

Kestrel (Steelmaking coal)

Production from Kestrel started to move outside of the Group's private royalty area during Q2 2023. Going forward this will lead to increased volatility in the Kestrel royalty revenue as production moves in and out of the private royalty area. Mining is currently in longwall panel LW412 and is anticipated to move to the LW500 panel at the end of 2023.

 

Saleable volumes during the period from the Group's private royalty area totalled 1.3Mt (H1 2022: 2.9Mt). Minimal volumes are expected in H2 2023 as the operations will predominantly be outside the private royalty area before moving back inside the Group's land at the end of 2023 and into Q1 2024.

 

Mantos Blancos (Copper)

Mantos Blancos sold 24.9kt of payable copper during the first half, 14% higher than the same period in 2022 (H1 2022: 21.9kt), reflecting improved production following the completion of the Mantos Blancos debottlenecking project in H2 2022. The mine production is expected to increase in H2 2023 with the operator, Capstone Copper, guiding FY 2023 copper production of 52kt - 57kt.

 

Capstone Copper is currently evaluating the Mantos Blancos Phase II expansion project, which includes the potential to increase throughput of the Mantos Blancos sulphide concentrator plant from 7.3 million tonnes per annum to 10.0 million tonnes. As part of Mantos Blancos Phase II Capstone is evaluating the potential to extend the life of copper cathode production. The Mantos Blancos Phase II feasibility study is expected to be released in 2024.

 

Maracás Menchen (Vanadium)

V₂O₅ production during the first half was impacted by adverse weather resulting in H1 2023 sales totalling 4,544 tonnes (H1 2022: 4,413 tonnes). Vanadium pricing during the period was $9.97/lb compared to $11.61/lb in H1 2022.  As a consequence of lower than expected H1 production Largo has reduced guidance for the full year from 11,000-12,000 tonnes to 9,000-11,000 tonnes.

 

Construction of the ilmenite concentration plant was completed in June; the commissioning phase is expected to be completed in Q3 2023 with a gradual ramp up of ilmenite production expected to commence in Q4 2023.

 

LIORC (Iron ore pellets)

Results were negatively impacted in H1 due to lower iron ore prices, wildfires causing a cessation of production and a change in product sales mix with lower sales of the higher value pellets. Pellet sales of 4.25Mt represented 52.8% of total sales in H1 2023 compared to H1 2022 pellet sales of 4.94Mt which represented 63.3% of total sales.

 

FY 2023 guidance for IOC's saleable production has been lowered to 17.0 million to 18.7 million tonnes (previously 17.9 million to 19.6 million tonnes) as a result of lost production in June due to wildfires in Northern Quebec, together with a slightly extended annual maintenance shutdown. This revised guidance compares to 17.6 million tonnes of saleable production in 2022.

 

The lower iron price is a direct result of lower global steel production and continuing concerns surrounding China's property sector. According to the World Steel Association, global steel crude production decreased 2.6% in Q2 2023 compared to Q2 2022. The 65% Fe pellet premium averaged $47 per tonne in Q2 2023, down from an average of $81 per tonne in Q2 2022 as low steel production margins in China caused steel mills to prefer medium-grade fines over high-grade fines.

 

EVBC (Gold)

During the second half of 2022, the Group commenced discussions with the operator of EVBC in light of the sustained margin pressures and operational constraints at the mine.  Negotiations are ongoing, and until a commercial or legal resolution is reached, management have assessed the recoverability of the Q1 and Q2 2023 royalties to be inherently uncertain and have fully provided for the $1.2m receivable at 30 June 2023.

 

McClean Lake Mill (Uranium)

Throughput at the McClean Lake Mill decreased by 11% in H1 2023 as a result of lower output from the Cigar Lake mine while development and commissioning activities were completed to achieve first production from a new mining area in the west of the ore body. All mining historically has taken place in the eastern portion of the mine body. Cameco announced on 3 September 2023 that due to lower mining rates it has lowered full year production guidance from 18Mlbs to 16.3Mlbs.

 

Four Mile (Uranium)

On 13 April 2022, the Supreme Court of Western Australia handed down a favourable judgment in relation to the Group's legal dispute with Quasar Resources Pty Ltd ('Quasar'), the owner of the Four Mile uranium mine over which the Group has a 1% net smelter return royalty. Quasar were ordered to pay A$2.7m in additional royalties and interest in the amount of A$0.3m for the original claim which runs from Q4 2015 to Q4 2018. The funds for the judgement amount were received in May 2022.

 

Prior to paying the original judgement amount, Quasar lodged an appeal. As a result, the judgement amount received has been and will remain classified as deferred income until the appeal is decided and the Group's entitlement to the monies becomes irrevocable. The appeal was heard in August 2023 and at the date of this report the judgement has not yet been received.

 

On 15 August 2022, the parties entered into a settlement agreement, which required Quasar to pay A$3.1m plus interest in respect of the underpaid royalties during the period Q1 2019 to Q4 2021, which was not covered by the original claim. The settlement agreement calculates the royalties in line with the judgement in relation to the original claim. Under the terms of the settlement agreement, should Quasar's appeal be successful, the settlement amounts will be repaid with interest. The settlement payment has been, and will remain, classified as deferred income similar to the judgement amount, until the appeal is decided and the Group's entitlement to the monies becomes irrevocable.

 

Key development projects

Ecora has a portfolio of royalties over development projects that will potentially transform our future income profile and provide investors with an increased exposure to future facing commodities, especially copper and nickel. The key projects that will drive this growth are:

 

West Musgrave (Nickel-copper)

BHP assumed operatorship of the West Musgrave project in May when its acquisition of OZ Minerals completed. Construction remains ongoing with first production targeted for H2 2025. Production over the first five years is expected to be approximately 35kt of nickel and 41kt of copper with a mine life of over 24 years. Ecora holds a 2% NSR royalty over West Musgrave.

 

Santo Domingo (Copper)

Capstone Copper expects to release an updated feasibility study for the fully permitted Santo Domingo project in Q4 2023. The current project plan envisages that construction commences in 2025 with production expected to start in 2027.  Ecora owns a 2% NSR royalty over part of the Santo Domingo project that covers the highest copper grade portion of the mine plan. In the initial six to seven years of production in the Group's royalty area, annual production is expected to be 118ktpa of copper and 5.1 Mtpa of by products (including gold and iron). 

 

Piauí (Nickel)

Brazilian Nickel continued in H1 to optimise production from the PNP1000 plant which at the end of Q2 completed 12 months of production. It raised $30 million in H1 to fund the continued development of the Piauí nickel project and continues to progress work on the construction financing solution for the full scale project. The full-scale project would have an expected production capacity of 24ktpa of nickel and 1ktpa of cobalt. Assuming Ecora exercises its option to commit a further $70 million to the project then it will own a 4.25% GRR (currently 1.25% GRR).

 

Post balance sheet events

In July the Group announced the acquisition of a 0.25% NSR over the Vizcachitas copper project in Chile, operated by Los Andes Copper, for a cash consideration of $20 million. This is a large scale, low cost, and long-life project in an established mining jurisdiction and fits Ecora's core investment criteria, contributing alongside West Musgrave and Santo Domingo, to the Group's copper growth portfolio. Vizcachitas estimates average annual copper production of 183kt in the first 8 years and an average of 153kt over the life of mine at first quartile costs over a 26 year reserve based mine life with extension potential.

 

FINANCE REVIEW

 

As expected, the Group has entered a transitionary period while Voisey's Bay ramps up, the construction of West Musgrave continues and production from Kestrel moves outside of the Group's private royalty lands. Combined with softer prices for steelmaking coal and cobalt during the six months ended 30 June 2023 than those realised during the same period in 2022, the Group's portfolio contribution reduced from a record $92.8m in H1 2022 to $44.5m in H1 2023.

 

Production at Kestrel is expected to remain largely outside of the Group's private royalty lands for the rest of the year. As a result, portfolio contribution in the second half of the year is forecast to be materially lower than H1 2023, before production is expected to return to the Group's private royalty lands in Q1 2024. While earnings will remain volatile during the transitionary period over the next 24 months, the Group maintains a strong balance sheet and continues to grow the portfolio as demonstrated by the acquisition of a 0.25% NSR over the Vizcachitas copper project for $20m that was completed on 3 August 2023.

 

 

Results

The Group's portfolio contribution reduced by 52% to $44.5m for the six months ended 30 June 2023 (H1 2022: $92.8m). The reduction in portfolio contribution combined with the $43.8m fair value loss on the revaluation of the Kestrel royalty, which reflects depletion in the first half of the year and slightly lower forward looking pricing inputs, resulted in an H1 2023 loss after tax of $7.5m (H1 2022: profit of $94.3m). This generated a basic loss per share of 2.90c for the first half of 2023 (H1 2022:  earnings per share 44.08c). Adjusting for the royalties from EVBC, valuation movements, non-cash items and the tax effect of these adjustments, resulted in H1 2023 adjusted earnings of $23.4m (H1 2022: $60.1m) and adjusted earnings per share of 9.06c (H1 2022: 28.08c).

 

The key driver for the reduction in the Group's portfolio contribution during H1 2023 was the expected decrease in volumes produced by Kestrel from the Group's private royalty lands.  Slightly offsetting the lower volumes at Kestrel, was the higher royalty rates that applied from 1 July 2022 resulting in an average royalty rate for H1 2023 of 20.45% and total royalties of $31.8m (H1 2022:  13.20% and $70.9m).

 

Production at Voisey's Bay was impacted by the ongoing transition from the open pit mine and ramp-up to full production of the underground mine.  As a result, cobalt deliveries reduced by 50% to six in H1 2023 (H1 2022: 12).  In addition to the reduction in cobalt deliveries, the cobalt price continued to weaken throughout H1 2023 with the Group realising an average sales price of $16.54/lbs (H1 2022: $37.61/lbs).  The combination of both lower volumes and lower cobalt prices resulted in the contribution from the Group's Voisey's Bay stream, net of metal stream cost of sales, decreasing to $2.4m (H1 2022: $10.8m).

 

Elsewhere, the contributions from Mantos Blancos and Maracás Menchen were in line with our expectations, while the LIORC dividend was lower as a result of lower iron ore prices and a change in product sales mix with lower sales of the higher value pellets.

 

Whilst not included in portfolio contribution, the Group has continued to benefit from the price linked contingent consideration in conjunction with the Narrabri disposal. The Group is entitled to a $/t payment should the thermal coal price exceed $90/t. The price over the last twelve months has ranged from $127/t - $465/t and is currently at $158/t. The Group received $0.7m in price linked payments for H1 23, with total price linked payments of $2.0m received to date. This is in addition to the $12.8m fixed payments received since 31 December 2021, with a further $2m to be received in January 2024 and January 2025, before final payments of $2m and $2.8m to be received in January 2026 and December 2026 respectively. Should the southern permit be granted, a further $5m is receivable in equal annual $1m instalments.

 

The table below outlines the key drivers of portfolio contribution increases in the period.