U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE
13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of December, 2023
Commission File No.: 001-04192
(Translation of Registrant's name into English)
Room 2103 Shanghai Mart Tower, 2299 Yan An Road
West, Changning District, Shanghai China 200336
(Address of office)
Indicate by check mark whether
the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Report for the Six Months Ended June 30, 2023
(December 11, 2023)
All references in this document to "$"
and "dollars" are to Canadian dollars, all references to "US$" are to United States dollars and all references to
"Euro" or "€" are to the European Union Euro, unless otherwise indicated.
Unless the context otherwise indicates, references
herein to "we", "us", "our", the "Company" or "SRL" are to Scully Royalty Ltd. and its
consolidated subsidiaries. Unless otherwise indicated, references herein to numbers of our common shares of US$0.001 par value each are
referred to as the "Common Shares".
The following report and the discussion and analysis
of our financial condition and results of operations for the six months ended June 30, 2023 should be read in conjunction with our unaudited
interim financial statements and notes thereto for the six months ended June 30, 2023 and the annual audited financial statements and
notes thereto of SRL for the year ended December 31, 2022 filed with the United States Securities and Exchange Commission (the "SEC")
and applicable Canadian securities regulators. Our financial statements for such periods have been prepared in accordance with International
Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB").
Non-IFRS Financial Measures
This document includes "non-IFRS financial
measures", that is, financial measures that either exclude or include amounts that are not excluded or included in the most directly
comparable measure calculated and presented in accordance with IFRS. Specifically, we make use of the non-IFRS measure "EBITDA".
EBITDA is defined as earnings before interest
(finance costs), taxes, depreciation and amortization. Our management uses EBITDA as a measure of our operating results and considers
it to be a meaningful supplement to net income as a performance measurement, primarily because we incur significant depreciation and EBITDA
eliminates the non-cash impact.
EBITDA is used by investors and analysts for the
purpose of valuing an issuer. The intent of EBITDA is to provide additional useful information to investors and the measure does not have
any standardized meaning under IFRS. Accordingly, this measure should not be considered in isolation or used in substitute for measures
of performance prepared in accordance with IFRS. For a reconciliation of net income from continuing operations to EBITDA, please see "Results
of Operations".
Disclaimer for Forward-Looking Information
Certain statements in this document are forward-looking
statements or forward-looking information, within the meaning of applicable securities laws, which reflect our expectations regarding
our future growth, results of operations, performance and business prospects and opportunities. Forward-looking statements consist of
statements that are not purely historical, including statements regarding our business plans, the plans and prospects regarding the mine
underlying our royalty interest, future business prospects and any statements regarding beliefs, expectations or intentions regarding
the future. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "plans",
"expects", "is expected", "budget", "scheduled", "estimates", "forecasts",
"intends", "anticipates", "believes", variations or comparable language of such words and phrases or statements
that certain actions, events or results "may", "could", "would", "should", "might" or
"will be taken", "occur" or "be achieved" or the negative connotation thereof.
While these forward-looking statements, and
any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our
business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or
other future performance suggested herein. No assurance can be given that any of the events anticipated by the forward-looking
statements will occur or, if they do occur, what benefits we will obtain from them. These forward-looking statements reflect our
current views and are based on certain assumptions and speak only as of the date hereof. These assumptions, which include our
current expectations, estimates and assumptions about our business and the markets we operate in, the global economic environment,
interest rates, commodities prices, exchange rates and our ability to expand our business. No forward-looking statement is a
guarantee of future results. A number of risks and uncertainties could cause our actual results to differ materially from those
expressed or implied by the forward-looking statements. Additional information about these and other assumptions, risks and
uncertainties is set out in the "Risk Factors" section of this report and in SRL's annual report on Form 20-F for the year
ended December 31, 2022. Such forward-looking statements should therefore be construed in light of
such factors. Although we have attempted to identify important factors that could cause actual results to differ materially from
those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or
intended. Investors are cautioned not to place undue reliance on these forward-looking statements. Other than in accordance with our
legal or regulatory obligations, we are not under any obligation and we expressly disclaim any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
MANAGEMENT'S DISCUSSION
AND ANALYSIS
Nature of Business
We currently have three operating segments:
(i) Royalty, which includes our interest in an iron ore mine; (ii) Industrial, which includes multiple projects in resources and services;
and (iii) Merchant Banking, which comprises regulated merchant banking activities.
Management is committed to a plan to rationalize
its Industrial and Merchant Banking interests over a period of time, and substantial progress has been made on both projects. These
two segments have not produced returns commensurate to that of our royalty interest, and our Board of Directors believes that these actions
provide compelling benefits to our shareholders and to all aspects and business segments of the Company. This plan is expected to simplify
the Company's corporate structure by separating its non-strategic assets and allows the independent business lines to focus on pursuing
and operating their respective businesses. As part of this commitment, in the first half of 2023, we completed the sale of our hydrocarbon
interests. Please see "Recent Developments" for further information.
Royalty
We hold a net revenues royalty interest
in the Scully iron ore mine located in the Province of Newfoundland and Labrador, Canada. The royalty rate under this interest is 7.0%
on iron ore shipped from the mine and 4.2% on iron ore shipped from tailings and other disposed materials. The sub-lease commenced in
1956 and expires in 2055. Pursuant to this sub-lease, we hold a net revenues royalty interest on iron ore shipped from the mine. The current
operator of the mine commenced mining operations in 2019.
Under the terms of the sub-lease, we
are entitled to minimum royalty payments of $3.25 million per year, payable on a quarterly basis, which quarterly payments may be
credited towards earned royalties relating to the same calendar year.
Subsequent to June 30, 2023, the operator of the
Scully iron ore mine commenced proceedings under the Companies' Creditors Arrangement Act ("CCAA"). See "Recent
Developments".
Industrial
Our Industrial segment includes multiple
projects in resources and services around the globe. It seeks opportunities to benefit from long-term industrial and services assets with
a focus on East Asia.
Other production and processing assets
in this segment include a hydro-electric power plant located in Africa. In the first half of 2023, the Industrial segment includes our
former hydrocarbon assets, which we sold in the first half of 2023. See "Recent Developments". The Industrial segment
generated 29% of our revenues in the six months ended June 30, 2023.
We make proprietary investments as part
of our overall activities in the Industrial segment and we seek to realize gains on such investments over time. We seek to participate
in many industries, emphasizing those business opportunities where the perceived intrinsic value is not properly recognized, often as
a result of financial or other distress affecting them. These investments can take many forms and can include acquiring entire businesses
or portions thereof, investing in equity or investing in existing indebtedness (secured and unsecured) of businesses or in new equity
or debt issues. These activities are generally not passive. The structure of each of these opportunities is tailored to each individual
transaction.
Merchant Banking
Our Merchant Banking segment consists
of a subsidiary with its bonds listed on the Malta Stock Exchange and comprises regulated merchant banking in Europe, including the activities
of our licensed European bank (the "Bank").
The Bank does not engage in general
retail or commercial banking, but provides specialty banking services, focused on merchant banking, to our customers, suppliers and group
members. Generally, the Bank earns fees from provisions of a range of financial and consultancy services to the customers and investment
income.
In addition, we hold interests in two
industrial real estate parks in Europe for sale in the ordinary course of business or as investment property.
All Other
Our All Other segment encompasses our
corporate and other investments, as well as the overhead expenses of the parent company. Our All Other segment includes our corporate
and operating segments whose quantitative amounts do not exceed 10% of any of our reported revenue, net income and total assets for the
six months ended June 30, 2023.
Recent Developments
Update on the Scully Iron Ore Mine
The Scully iron ore mine produces a high-grade
ore in excess of 65% iron content that also has other favorable characteristics, such as relatively low contaminant ratios. Globally,
steelmakers value high grade iron ore with low contaminants (such as silica, alumina, and phosphorus) because they improve environmental
and financial performance through more efficient raw material utilization, higher plant yields, and lower emissions. Therefore, it is
common and generally expected for 65% Fe iron ore, including the Scully iron ore mine's product, to sell at a premium to 62% Fe iron ore.
In the first half of 2023, the Platts 65% Fe Index sold at approximately a 12% (US$14) premium to the Platts 62% Fe Index.
The following table sets forth the total iron
ore products (which include pellets, chips and concentrates) shipped from the mine based upon the amounts reported to us by the Scully
iron ore mine for the periods indicated:
| |
|
Six Months Ended
June 30, |
|
| |
|
2023 |
|
|
2022 |
|
| |
|
|
|
|
|
|
| |
|
(tonnes) |
|
| Iron Ore Products Shipped |
|
|
1,665,134 |
|
|
|
1,691,184 |
|
In November
2022, the operator of the mine announced that it had completed a US$15 million preferred share financing, and in January 2023 announced
the closing of an advance payments facility which provided for advance payments of up to US$35 million against future deliveries of concentrate.
Then, in May 2023, Tacora announced that it had completed the sale of US$27 million of senior secured priority notes.
Subsequent to June 30, 2023, the operator of the
Scully iron ore mine commenced proceedings under CCAA, including obtaining a US$75 million debtor-in-possession loan facility which it
disclosed would enable it to continue operating the mine in the ordinary course until a transaction or restructuring is completed. The
Company currently has various outstanding claims against the operator that are the subject of a stay under the proceedings, including
royalties for the second quarter of 2023 of approximately $4.7 million, royalties for the third quarter of 2023 of $8.0 million and a
disputed claim for previously underpaid royalties which was subject to arbitration. The CCAA proceedings are ongoing. An outstanding invoice
of $0.5 million as at June 30, 2023 was paid after the end of the reporting period.
Sparkasse Bank Malta
On March
7, 2022, we announced that our subsidiary, Merkanti Holding plc, entered into a definitive agreement to acquire Sparkasse (Holdings) Malta
Ltd., the Maltese parent company of Sparkasse Bank. Due to timing and the change in global interest rate policy during the period (with
its corresponding effect on asset prices), the parties mutually terminated the agreement subsequent to June 30, 2023.
Sale of Hydrocarbon Assets
In the first half of
2023, we completed the sale of all of our hydrocarbon interests located in Alberta in consideration of $25.0 million, subject to certain
customary adjustments, including adjustment for an economic effective date of April 1, 2022. At closing, we received $18.2 million in
cash consideration (net of GST) after certain customary adjustments and subsequent to June 30, 2023, we received an additional $1.8 million
payment. These hydrocarbon assets were classified as held for sale as of December 31, 2022 and we recognized an impairment reversal of
$1.2 million in the six months ended June 30, 2023.
Discussion of Operations
The following discussion and analysis of our
financial condition and results of operations for the six months ended June 30, 2023 and 2022 should be read in conjunction with our unaudited
condensed consolidated financial statements and related notes.
Business Environment
Our financial performance is, and our consolidated
results in any period can be, materially affected by economic conditions and financial markets generally, including the availability of
capital, the availability of credit and the level of market and commodity price volatility. Our results of operations in our merchant
banking and industrial segments may also be materially affected by competitive factors. Our competitors include firms traditionally engaged
in merchant banking as well as other capital sources such as hedge funds and private equity firms and other companies engaged in similar
activities in Europe, Asia and globally.
We operate internationally and therefore our financial
performance and position are impacted by changes in the Canadian dollar, our reporting currency, against the other functional currencies
of our international subsidiaries and operations, particularly the Euro. As at June 30, 2023, the Canadian dollar was stronger by 0.1%
against the Euro from the end of 2022. We recognized a net $2.3 million currency translation adjustment loss under accumulated other comprehensive
income within equity in the six months ended June 30, 2023, compared to $6.3 million in the comparative period of 2022. In addition, we
recognized a net loss of $83,000 on exchange differences on foreign currency transactions in our consolidated statement of operations
in the six months ended June 30, 2023, compared to a net gain of $3.0 million in the comparative period of 2022.
In the first half of 2023, the demand for iron
ore decreased alongside global steel production. According to the World Steel Association, global crude steel production in the first
half of 2023 decreased approximately 1% compared to the first half of 2022. The 65% Fe iron ore price, as reported by Platts, decreased
by 20% to an average US$132 per tonne for the first half of 2023, compared to an average of US$165 in the same period of 2022.
Results of Operations
Six Months Ended June 30, 2023 Compared to Six Months Ended June
30, 2022
The following table sets forth our selected operating
results and other financial information for each of the periods indicated:
| |
|
Six Months Ended
June 30, |
|
| |
|
2023 |
|
|
2022 |
|
| |
|
|
|
|
|
|
| |
|
(In thousands,
except per share amounts) |
|
| Revenue |
|
$ |
26,506 |
|
|
$ |
36,077 |
|
| Costs of sales and services |
|
|
9,477 |
|
|
|
15,835 |
|
| Selling, general and administrative expenses |
|
|
11,552 |
|
|
|
11,124 |
|
| Finance costs |
|
|
941 |
|
|
|
929 |
|
| Impairment loss on property, plant and equipment |
|
|
- |
|
|
|
402 |
|
| Exchange differences on foreign currency transactions, net loss (gain) |
|
|
83 |
|
|
|
(2,999 |
) |
| Net income(1) |
|
|
890 |
|
|
|
3,912 |
|
| Net income(1) per share: |
|
|
|
|
|
|
|
|
| Basic |
|
|
0.06 |
|
|
|
0.26 |
|
| Diluted |
|
|
0.06 |
|
|
|
0.26 |
|
Notes:
| (1) | Attributable to our shareholders. |
The following table provides a breakdown of revenue
for each of the periods indicated:
| | |
Six Months Ended | |
| | |
June 30, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| | |
(In thousands) | |
| Merchant Banking products and services | |
$ | 21,119 | | |
$ | 29,235 | |
| Interest | |
| 1,253 | | |
| 2,884 | |
| Dividend income | |
| 89 | | |
| 198 | |
| Other, including medical and real estate sectors | |
| 4,045 | | |
| 3,760 | |
| Revenue | |
$ | 26,506 | | |
$ | 36,077 | |
During the six months ended June 30, 2023, royalty
revenue (which is included in Merchant Banking products and services) represented 56% of total revenue, compared to 50% in the comparative
period of 2022.
The following is a breakdown of our revenue by
segment for each of the periods indicated:
| | |
Six Months Ended | |
| | |
June 30, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| | |
(In thousands) | |
| Royalty | |
$ | 15,047 | | |
$ | 18,250 | |
| Industrial | |
| 7,664 | | |
| 15,840 | |
| Merchant Banking | |
| 3,795 | | |
| 1,987 | |
| Revenue | |
$ | 26,506 | | |
$ | 36,077 | |
In the first half of 2023, 17% of our revenue
was from Europe, 74% was from the Americas and 9% was from Asia, Africa and other regions.
In the first half of 2023, our proportionate revenue
by product was 75% from iron ore royalties, 17% from hydrocarbons and 8% from other.
Based upon the average exchange rates for the
first half of 2023, the Canadian dollar weakened by approximately 4.6% in value against the Euro compared to the same period of 2022.
Revenue for the first half of 2023 decreased to
$26.5 million from $36.1 million in the same period of 2022, mainly as a result of a decrease in royalty income and Industrial revenues
that primarily resulted from the disposition of our hydrocarbon assets in the first half of 2023.
Revenue for our Royalty segment for the first
half of 2023 decreased to $15.0 million from $18.3 million in the same period of 2022, primarily as a result
of a weaker iron ore pricing environment during the period and, to a lesser extent, lower production at the Scully iron ore mine.
Revenue for our Industrial segment for the first
half of 2023 decreased to $7.7 million from $15.8 million in the same period of 2022, primarily as a result of the disposition of our
hydrocarbon assets in the first half of 2023.
Revenue for our Merchant Banking segment for the
first half of 2023 increased to $3.8 million from $2.0 million in the same period of 2022. The increase primarily resulted from increased
merchant banking activities during the period.
Costs of sales and services decreased to $9.5
million from $15.8 million for the same period in 2022, primarily as a result of the disposition of our hydrocarbon assets and an impairment
reversal of $1.2 million on assets held for sale in the first half of 2023.
The following is a breakdown of our costs of sales
and services for each of the periods indicated:
| | |
Six Months Ended | |
| | |
June 30, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| | |
(In thousands) | |
| Merchant banking products and services | |
$ | 7,839 | | |
$ | 13,121 | |
| Reversal of credit losses | |
| (41 | ) | |
| (1 | ) |
| Fair value loss on a loan payable measured at FVTPL | |
| 238 | | |
| 176 | |
| Other | |
| 1,441 | | |
| 2,539 | |
| Total costs of sales and services | |
$ | 9,477 | | |
$ | 15,835 | |
For the six months ended June 30, 2023 and 2022,
we incurred a fair value loss on a long-term loan payable measured at fair value through profit or loss ("FVTPL") of
$0.2 million.
In the first half of 2023, we recognized other
costs of sales and services of $1.4 million relating to medical supplies and real estate and other, compared to $2.5 million in the same
period of 2022.
Selling, general and administrative expenses increased
to $11.6 million in the first half of 2023 from $11.1 million in the same period of 2022.
In the first half of 2023, we recognized a net
foreign currency transaction loss of $83,000, compared to a net gain of $3.0 million in the same period of 2022, in our consolidated statement
of operations. The foreign currency transaction gain or loss represents exchange differences arising on the settlement of monetary items
or on translating monetary items into our functional currencies at rates different from those at which they were translated on initial
recognition during the period or in previous financial statements.
We recognized an income tax expense (other than
resource revenue taxes) of $0.7 million in the first half of 2023, compared to $3.4 million in the same period of 2022. Our income tax
paid in cash, excluding resource property revenue taxes, during the first half of 2023 was $0.3 million, compared to $0.3 million income
tax refunded in cash in the same period of 2022. We also recognized resource property revenue tax expense of $2.9 million in the first
half of 2023, compared to $3.5 million in the same period of 2022. The decrease was a result of the lower royalty revenue in the current
period.
Overall, we recognized an income tax expense of
$3.6 million (income tax expense of $0.7 million and resource property revenue taxes of $2.9 million) in the first half of 2023, compared
to income tax expense of $6.9 million (income tax expense of $3.4 million and resource property revenue taxes of $3.5 million) in the
same period of 2022.
In the first half of 2023, our net income attributable
to shareholders was $0.9 million or $0.06 per share on a basic and diluted basis, compared to a net income of $3.9 million or $0.26 per
share on a basic and diluted basis, in the same period of 2022.
In the first half of 2023, our EBITDA was $9.1 million, compared to
$17.0 million in the first half of 2022.
The following is a reconciliation of our net income to EBITDA for each
of the periods indicated:
| | |
Six Months Ended | |
| | |
June 30, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| | |
(In thousands) | |
| Net income | |
$ | 838 | | |
$ | 3,881 | |
| Taxes | |
| 3,615 | | |
| 6,905 | |
| Finance costs | |
| 941 | | |
| 929 | |
| Amortization, depreciation & depletion | |
| 3,742 | | |
| 5,307 | |
| EBITDA | |
$ | 9,136 | | |
$ | 17,022 | |
Please see "Non-IFRS Financial Measures"
for additional information.
Liquidity and Capital Resources
General
Liquidity is of importance to our business as
insufficient liquidity often results in underperformance.
Our objectives when managing capital are:
| · | to
safeguard our ability to continue as a going concern; |
| · | to
position ourselves to generate returns for and distribute dividends to our shareholders; |
| · | to
maintain a flexible capital structure that optimizes the cost of capital at acceptable risk. |
We set the amount of capital in proportion to
risk. We manage our capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics
of the underlying assets.
Consistent with others in our industry, we monitor
capital on the basis of our net debt-to-equity ratio and long-term debt-to-equity ratio. The net debt-to-equity ratio is calculated as
net debt divided by shareholders' equity. Net debt is calculated as total debt less cash. The long-term debt-to-equity ratio is calculated
as long-term debt divided by shareholders' equity.
The following table sets forth the calculation
of our net debt-to-equity ratio as at the dates indicated:
| | |
June 30, | | |
December 31, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| | |
(In thousands, except ratio amounts) | |
| Total debt(1) | |
$ | 35,585 | | |
$ | 35,538 | |
| Less: cash | |
| (88,673 | ) | |
| (63,717 | ) |
| Net debt | |
| Not applicable | | |
| Not applicable | |
| Shareholders' equity | |
| 320,600 | | |
| 325,158 | |
| Net debt-to-equity ratio | |
| Not applicable | | |
| Not applicable | |
Note:
| (1) | Long-term debt at June 30, 2023 and December 31, 2022 included bonds payable and did not include: (a)
a non-interest bearing loan payable of $7.5 million as at June 30, 2023 and $7.4 million as at December 31, 2022 which is measured at
FVTPL and does not have a fixed repayment date. See "Financial Position"; and (b) long-term lease liabilities of $0.1
million as at June 30, 2023 and $0.3 million as at December 31, 2022, recognized as a consequence of IFRS 16, Leases. |
There were no amounts in accumulated other comprehensive
income relating to cash flow hedges, nor were there any subordinated debt instruments as at June 30, 2023 and December 31, 2022. Our net
debt-to-equity was not applicable as we had a net cash balance as at June 30, 2023 and December 31, 2022.
The following table sets forth the calculation
of our long-term debt-to-equity ratio as at the dates indicated:
| | |
June 30, | | |
December 31, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| | |
(In thousands, except ratio amounts) | |
| Long-term debt, less current portion(1) | |
$ | 35,585 | | |
$ | 35,538 | |
| Shareholders' equity | |
| 320,600 | | |
| 325,158 | |
| Long-term debt-to-equity ratio | |
| 0.11 | | |
| 0.11 | |
Note:
| (1) | See note in table above. |
During the first half of 2023, our strategy, which
remained unchanged from the same period of 2022, was to maintain our net debt-to-equity ratio and long-term debt-to-equity ratio at manageable
levels. Our long-term debt-to-equity ratio was 0.11 as at June 30, 2023 and December 31, 2022.
Cash
Flows
Our business can be cyclical and our cash flows
can vary accordingly. Our principal operating cash expenditures are for general and administrative expenses.
Working capital levels fluctuate throughout the
year and are affected by the level of operations of the mine underlying our royalty interest, the markets and prices for commodities,
the timing of collection of receivables and the payment of payables and expenses. We currently have a sufficient level of cash on hand
and expected cash flows from operations to meet our working capital and other requirements as well as unexpected cash demands.
The following table presents a summary of cash
flows for each of the periods indicated:
| |
|
Six Months Ended |
|
| |
|
June 30, |
|
| |
|
2023 |
|
|
2022 |
|
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
| Cash flows provided by operating activities |
|
$ |
30,283 |
|
|
$ |
14,584 |
|
| Cash flows provided by investing activities |
|
|
32 |
|
|
|
1,928 |
|
| Cash flows used in financing activities |
|
|
(3,613 |
) |
|
|
(8,353 |
) |
| Exchange rate effect on cash |
|
|
(1,746 |
) |
|
|
(1,860 |
) |
| Increase in cash |
|
$ |
24,956 |
|
|
$ |
6,299 |
|
Cash
Flows from Operating Activities
Operating activities provided cash of $30.3 million
in the six months ended June 30, 2023, compared to $14.6 million in the same period of 2022. A decrease in assets held for sale as a result
of the sale of the hydrocarbon assets provided cash of $18.0 million in the first half of 2023, compared to $nil in the same period of
2022. A decrease in short term securities provided cash of $15.0 million in the first half of 2023, compared to $0.5 million in the same
period of 2022. An increase in income tax liabilities provided cash of $4.4 million in each of the six months ended June 30, 2023 and
2022. An increase in receivables used cash of $6.2 million in the first half of 2023, compared to a decrease in receivables providing
cash of $2.5 million in the same period of 2022.
Cash
Flows from Investing Activities
Investing activities provided cash of $32 thousand
in the six months ended June 30, 2023, compared to $1.9 million in the same period of 2022. Proceeds from the sale of investment property
provided cash of $0.1 million in the first half of 2023, compared to $2.2 million in the same period of 2022. In the first half of 2023,
purchases of property, plant and equipment, net used cash of $0.1 million, compared to $0.3 million in the same period of 2022.
Cash
Flows from Financing Activities
Cash used in financing activities was $3.6 million
in the six months ended June 30, 2023, compared to $8.4 million in the same period of 2022. In the first half of 2023, dividends paid
used cash of $3.4 million, compared to $8.6 million in the same period of 2022, and stock option exercises provided cash of $nil, compared
to $0.4 million in the same period of 2022. In the first half of 2023 and 2022, reductions in lease liabilities used cash of $0.2 million.
Financial
Position
The following table sets out our selected financial
information as at the dates indicated:
| | |
June 30,
2023 | | |
December 31,
2022 | |
| | |
| | |
| |
| | |
(In thousands) | |
| Cash | |
$ | 88,673 | | |
$ | 63,717 | |
| Short-term securities | |
| 14,585 | | |
| 30,293 | |
| Trade receivables | |
| 1,698 | | |
| 3,829 | |
| Tax receivables | |
| 705 | | |
| 631 | |
| Other receivables | |
| 52,480 | | |
| 43,502 | |
| Inventories | |
| 803 | | |
| 840 | |
| Restricted cash | |
| 303 | | |
| 365 | |
| Deposits, prepaid and other | |
| 1,740 | | |
| 1,688 | |
| Assets held for sale | |
| - | | |
| 34,743 | |
| Total current assets | |
| 160,987 | | |
| 179,608 | |
| Working capital | |
| 135,887 | | |
| 136,636 | |
| Total assets | |
| 452,533 | | |
| 475,477 | |
| | |
| | | |
| | |
| Account payables and accrued expenses | |
| 19,232 | | |
| 21,099 | |
| Income tax liabilities | |
| 5,868 | | |
| 1,515 | |
| Liabilities relating to assets held for sale | |
| - | | |
| 20,358 | |
| Total current liabilities | |
| 25,100 | | |
| 42,972 | |
| Bonds payable, long-term | |
| 35,585 | | |
| 35,538 | |
| Loan payable, long-term | |
| 7,495 | | |
| 7,424 | |
| Deferred income tax liabilities | |
| 56,417 | | |
| 56,570 | |
| Total liabilities | |
| 124,849 | | |
| 142,970 | |
| Shareholders' equity | |
| 320,600 | | |
| 325,158 | |
We maintain an adequate level of liquidity, with
a portion of our assets held in cash. This provides us with flexibility in managing our continuing business.
As at June 30, 2023, cash increased to $88.7 million
from $63.7 million as at December 31, 2022. The increase was primarily the result of cash provided from operating activities and the disposition
of securities and assets held for sale.
We had short-term securities of $14.6 million
as at June 30, 2023 and $30.3 million as at December 31, 2022, which comprised of government and other securities.
Trade receivables and other receivables were $1.7
million and $52.5 million, respectively, as at June 30, 2023, compared to $3.8 million and $43.5 million, respectively, as at December
31, 2022. Trade receivables primarily consisted of product sales from our Merchant Banking and Industrial segments. Included in other
receivables were receivables of $4.7 million related to our iron ore royalty interest. Other receivables included a loan of $6.7 million
and aggregate current receivables of $35.6 million as at June 30, 2023 from a related party. See "Transactions with Related Parties"
for further information.
Deposits, prepaid and other assets were $1.7 million
as at each of June 30, 2023 and December 31, 2022.
Inventories were $0.8 million as at each of June
30, 2023 and December 31, 2022.
Current tax receivables, consisting primarily
of value-added taxes and income tax recovery, were $0.7 million as at June 30, 2023 and $0.6 million as at December 31, 2022.
Account payables and accrued expenses were $19.2
million as at June 30, 2023, compared to $21.1 million as at December 31, 2022.
We had current income tax liabilities of $5.9
million as at June 30, 2023, compared to $1.5 million as at December 31, 2022.
We had bonds payable of $35.6 million as at June
30, 2023 and $35.5 million as at December 31, 2022.
We had a non-interest bearing loan payable, which
is measured at FVTPL, of $7.5 million as at June 30, 2023, compared to $7.4 million as at December 31, 2022. The loan does not have a
fixed repayment date and the estimated fair value has been determined using a discount rate for similar instruments.
As at June 30, 2023, we had deferred income
tax liabilities of $56.4 million, compared to $56.6 million as at December 31, 2022. These deferred income tax liabilities primarily
relate to difference in the tax basis and the carrying value of our iron ore royalty.
In the first half of 2023, in connection with
the disposition of our hydrocarbon assets, assets held for sale and liabilities relating to assets held for sale each decreased to $nil
from $34.7 million and $20.4 million as at December 31, 2022.
Future
Liquidity
We expect that there will be acquisitions of businesses
or commitments to projects in the future within our merchant banking and industrial segments. To achieve the long-term goals of expanding
our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the
capital resources that will be required can be substantial. The necessary resources will be generated from cash flows from operations,
cash on hand, borrowings against our assets, sales of proprietary investments or the issuance of securities.
Foreign
Currency
Our consolidated financial results are subject
to foreign currency exchange rate fluctuations.
Our presentation currency is the Canadian dollar.
We translate subsidiaries' assets and liabilities into Canadian dollars at the rate of exchange on the balance sheet date. Revenues and
expenses are translated at exchange rates approximating those at the date of the transactions or, for practical reasons, the average exchange
rates for the applicable periods, when they approximate the exchange rate as at the dates of the transactions. As a substantial amount
of revenue is generated in Euros, the financial position for any given period, when reported in Canadian dollars, can be significantly
affected by the exchange rates for these currencies prevailing during that period. In addition, we also have exposure to the Chinese yuan
and the United States dollar.
In the six months ended June 30, 2023, we reported
a net $2.3 million currency translation adjustment loss under other comprehensive income within equity. This compared to a net loss of
$6.3 million in the same period of 2022. This currency translation adjustment does not affect our profit and loss statement until the
disposal of a foreign operation.
Contractual
Obligations
The following table sets out obligations and commitments,
including contractual obligations, bonds payable and loan payable measured at fair value as at December 31, 2022.
| |
|
Payments Due by Period(1) |
|
| |
|
(In thousands) |
|
| Contractual
Obligations(2) |
|
Less than
1 Year |
|
|
1 – 3 Years |
|
|
3 – 5 Years |
|
|
More than
5 Years |
|
|
Total |
|
| Lease liabilities |
|
$ |
412 |
|
|
$ |
317 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
729 |
|
| Bonds payable |
|
|
1,446 |
|
|
|
2,892 |
|
|
|
36,984 |
|
|
|
- |
|
|
|
41,322 |
|
| Loan payable(3) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,424 |
|
|
|
7,424 |
|
| Total |
|
$ |
1,858 |
|
|
$ |
3,209 |
|
|
$ |
36,984 |
|
|
$ |
7,424 |
|
|
$ |
49,475 |
|
Notes:
| (1) | Includes principal and interest, except for loan payable which is measured at FVTPL. |
| (2) | This table does not include non-financial instrument liabilities and guarantees. |
| (3) | Consists of a U.S. dollar loan payable to a former subsidiary, which is interest free, does not have a
fixed maturity date and is measured at FVTPL. The undiscounted contractual amount due to the former subsidiary out of surplus cash of
the applicable subsidiary note holder is $57.0 million (US$42.1 million). The payment amount disclosed here represents its fair value
as at December 31, 2022. The total amount due on December 31, 2022 or within 12 months thereafter is $nil. The actual repayment may be
materially different from the amount disclosed herein. See "Financial Position" for further information. |
Risk
Management
Risk is an inherent part of our business and operating
activities. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved
in our activities is critical to our financial soundness and profitability. We seek to identify, assess, monitor and manage the following
principal risks involved in our business activities: market, credit, liquidity, operational, legal and compliance, new business, reputational
and other. Risk management is a multi-faceted process that requires communication, judgment and knowledge of financial products and markets.
Our management takes an active role in the risk management process and requires specific administrative and business functions to assist
in the identification, assessment and control of various risks. Our risk management policies, procedures and methodologies are fluid in
nature and are subject to ongoing review and modification.
Inflation
Inflation has had a minimal impact on our costs
of sales and services and selling, general administrative expenses over the last two fiscal years. Our management does not consider inflation
to be a significant risk to direct expenses in the current and foreseeable economic environment.
Application of Critical Accounting Policies
The preparation of financial statements in conformity
with IFRS requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting periods.
Our management routinely makes judgments and estimates
about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution
of the uncertainties increase, these judgments become even more subjective and complex. We have identified certain accounting policies
that are the most important to the portrayal of our current financial condition and results of operations. Please refer to Note 2B to
our audited consolidated financial statements for the year ended December 31, 2022, for a discussion of the significant accounting policies.
In the process of applying our accounting policies,
management makes various judgments and estimates that can significantly affect the amounts it recognizes in the consolidated financial
statements. The following is a description of the critical judgments and estimates that management has made in the process of applying
our accounting policies and that have the most significant effects on the amounts recognized in the consolidated financial statements:
Identification of Cash-generating Units
Our assets are aggregated into cash-generating
units, referred to as "CGUs", for the purpose of assessing and calculating impairment, based on their ability to generate largely
independent cash flows. The determination of CGUs requires judgment in defining the smallest identifiable group of assets that generate
cash inflows that are largely independent of the cash inflows from other assets or groups of assets. CGUs have been determined based on
similar geological structure, shared infrastructure, geographical proximity, product type and similar exposure to market risks. In the
event facts and circumstances surrounding factors used to determine our CGUs change, we will re-determine the groupings of CGUs.
Impairment and Reversals of Impairment on
Non-Financial Assets
The carrying amounts of our non-financial assets,
other than assets held for sale and deferred tax assets, are reviewed at the end of each reporting period to determine whether there is
an indication of impairment or reversal of previously recorded impairment. If such indication exists, the recoverable amount is estimated.
Determining whether there are any indications
of impairment or impairment reversals requires significant judgment of external factors, such as an extended change in prices or margins
for hydrocarbon commodities or refined products, a significant change in an asset's market value, a significant revision of estimated
volumes, revision of future development costs, a change in the entity's market capitalization or significant changes in the technological,
market, economic or legal environment that would have an impact on our CGUs. Given that the calculations for recoverable amounts require
the use of estimates and assumptions, including forecasts of commodity prices, market supply and demand, product margins and in the case
of our interests in an iron ore mine, power plant and hydrocarbon properties, expected production volumes, it is possible that the assumptions
may change, which may impact the estimated life of the CGU and may require a material adjustment to the carrying values of goodwill, if
any, and non-financial assets.
Impairment losses recognized in prior years are
assessed at the end of each reporting period for indications that the impairment has decreased or no longer exists. An impairment loss
is reversed only to the extent that the carrying amount of the asset or CGU does not exceed the carrying amount that would have been determined,
net of depletion, depreciation and amortization, if no impairment loss had been recognized.
Valuation of Investment Property
Investment properties are included in the
consolidated statement of financial position at their market value, unless their fair value cannot be reliably determined at that
time. The market value of investment properties is assessed annually by an independent qualified valuer, who is an authorized expert
for the valuation of developed and undeveloped land in Germany, after taking into consideration the net income with inputs on
realized basic rents, operating costs and damages and defects. The assumptions adopted in the property valuations are based on the
market conditions existing at the end of the reporting period, with reference to current market sales prices and the appropriate
capitalization rate. Changes in any of these inputs or incorrect assumptions related to any of these items could materially impact
these valuations.
Assets Held for Sale and Discontinued Operations
We apply judgment to determine whether an asset
(or disposal group) is available for immediate sale in its present condition and that its sale is highly probable and therefore should
be classified as held for sale at the balance sheet date. In order to assess whether it is highly probable that the sale can be completed
within one year, or the extension period in certain circumstances, management reviews the business and economic factors, both macro and
micro, which include the industry trends and capital markets, and the progress towards a sale transaction. It is also open to all forms
of sales, including exchanges of non-current assets for other non-current assets when the exchange will have commercial substance in accordance
with IAS 16, Property, Plant and Equipment.
We measure a disposal group classified as held
for sale at the lower of its carrying amount and fair value less costs to sell. We recognize an impairment loss for any initial or subsequent
write-down of the disposal group to fair value less costs to sell, to the extent that it has not been recognized.
A discontinued operation is a component of an
entity (which comprises operations and cash flows that can be clearly distinguished, operationally and, for financial reporting purposes,
from the rest of the entity) that either has been disposed of or is classified as held for sale. While a component of the entity has distinguished
financial data, judgments must be exercised on the presentation of inter-company transactions between components that are presented as
discontinued operations and those that are presented as continuing operations. Furthermore, the allocation of income tax expense (recovery)
also involves the exercise of judgments as the tax position of continuing operations may have an impact on the tax position of discontinued
operations, or vice versa. Generally, management determines whether a component is a discontinued operation or not based on the contribution
of the component to our net income (loss), net assets, or gross assets. Management does not view revenue as a major factor in determining
whether a component is a discontinued operation or not because the revenue factor does not contribute any real economic benefits to us.
Credit Losses and Impairment of Receivables
We apply credit risk assessment and valuation
methods to our trade and other receivables under IFRS 9, Financial Instruments, which establishes a single forward-looking
expected loss impairment model.
We measure the loss allowance for a financial
instrument at an amount equal to the lifetime expected credit losses if the credit risk on the financial instrument has increased significantly
since initial recognition. The objective of the impairment requirements is to recognize lifetime expected credit losses for all financial
instruments for which there have been significant increases in credit risk since initial recognition – whether assessed on an individual
or collective basis – considering all reasonable and supportable information, including that which is forward-looking.
At each reporting date, our management assesses
whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, management
uses the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount
of expected credit losses. To make that assessment, management compares the risk of a default occurring on the financial instrument as
at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and consider
reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant increases in
credit risk since initial recognition.
Allowance for credit losses is maintained at an
amount considered adequate to absorb the expected credit losses. Such allowance for credit losses reflects our management's best estimate
of changes in the credit risk on our financial instruments and judgments about economic conditions. The assessment of allowance for credit
losses is a complex process, particularly on a forward-looking basis; which involves a significant degree of judgment and a high level
of estimation uncertainty. The input factors include the assessment of the credit risk of our financial instruments, legal rights and
obligations under all the contracts and the expected future cash flows from the financial instruments, which include inventories, mortgages
and other credit enhancement instruments. The major source of estimation uncertainty relates to the likelihood of the various scenarios
under which different amounts are expected to be recovered through the security in place on the financial assets. The expected future
cash flows are projected under different scenarios and weighted by probability, which involves the exercise of significant judgment. Estimates
and judgments could change in the near-term and could result in a significant change to a recognized allowance.
Interests in Resource Properties and Reserve
Estimates
We had interests in resource properties comprised
of an iron ore royalty interest with an aggregate carrying amount of $199.4 million as at June 30, 2023.
Generally, estimation of reported recoverable
quantities of proved and probable reserves of resource properties include judgmental assumptions regarding production profile, prices
of products produced, exchange rates, remediation costs, timing and amount of future development costs and production, transportation
and marketing costs for future cash flows. It also requires interpretation of geological and geophysical models and anticipated recoveries.
The economical, geological and technical factors used to estimate reserves may change from period to period. Changes in reported reserves
can impact the carrying amounts of our interests in resource properties and/or related property, plant and equipment, the recognition
of impairment losses and reversal of impairment losses, the calculation of depletion and depreciation, the provision for decommissioning
obligations and the recognition of deferred income tax assets or liabilities due to changes in expected future cash flows. The recoverable
quantities of reserves and estimated cash flows from our hydrocarbon interests are independently evaluated by reserve engineers at least
annually. In the first half of 2023, we did not recognize any impairment in respect of our interests in resource properties.
Our iron ore reserves are estimates of the amount
of product that can be economically and legally extracted from our mining properties. Reserve and resource estimates are an integral component
in the determination of the commercial viability of our interest in the iron ore mine, amortization calculations and impairment analyses.
In calculating reserves and resources, estimates and assumptions are required about a range of geological, technical and economic factors,
including quantities, grades, production techniques, production decline rates, recovery rates, production costs, commodity demand, commodity
prices and exchange rates. In addition, future changes in regulatory environments, including government levies or changes in our rights
to exploit the resource imposed over the producing life of the reserves and resources may also significantly impact estimates.
Please see Note 12 to our audited consolidated
financial statements for the year ended December 31, 2022 for further information.
Impairment of Other Non-Financial Assets
We had property, plant and equipment aggregating
$27.1 million as at June 30, 2023, consisting mainly of a power plant. Impairment of our non-financial assets is evaluated at the CGU
level. In testing for impairment, the recoverable amounts of the Company's CGUs are determined as the higher of their values in use and
fair values less costs of disposal. In the absence of quoted market prices, the recoverable amount is based on estimates of future production
rates, future product selling prices and costs, discount rates and other relevant assumptions. Increases in future costs and/or decreases
in estimates of future production rates and selling prices may result in a write-down of our property, plant and equipment. Please see
Note 11 to our audited consolidated financial statements for the year ended December 31, 2022 for further information.
Taxation
We are subject to tax in a number of jurisdictions
and judgment is required in determining the worldwide provision for income taxes. Deferred income taxes are recognized for temporary differences
using the liability method, with deferred income tax liabilities generally being provided for in full (except for taxable temporary differences
associated with investments in subsidiaries and branches where we are able to control the timing of the reversal of the temporary differences
and it is probable that the temporary differences will not reverse in the foreseeable future) and deferred income tax assets being recognized
to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized.
Our operations and organization structures are
complex, and related tax interpretations, regulations and legislation are continually changing. The income tax filings of the companies
in our group are subject to audit by taxation authorities in numerous jurisdictions. There are audits in progress and items under review,
some of which may increase our income tax liabilities for previous periods or in the future. In addition, the companies have filed appeals
and have disputed certain issues. While the results of these items cannot be ascertained at this time, we believe that we have an adequate
provision for income taxes based on available information.
We recognized deferred income tax assets of $9.8
million as at June 30, 2023. In assessing the realizability of deferred income tax assets, our management considers whether it is probable
that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is
dependent upon the generation of future taxable income during the periods in which temporary differences become deductible or before tax
loss and tax credit carry-forwards expire. Our management considers the future reversals of existing taxable temporary differences, projected
future taxable income, taxable income in prior years and tax planning strategies in making this assessment. Unrecognized deferred income
tax assets are reassessed at the end of each reporting period.
We provide for future income tax liabilities in
respect of uncertain tax positions where additional income tax may become payable in future periods and such provisions are based on our
management's assessment of exposure. We did not recognize the full deferred tax liability on taxable temporary differences associated
with investments in subsidiaries and branches where we are able to control the timing of the reversal of the temporary differences and
it is probable that the temporary differences will not reverse in the foreseeable future. We may change our investment decision in the
normal course of our business, thus resulting in additional income tax liabilities.
Contingencies
Pursuant to IAS 37, Provisions, Contingent
Liabilities and Contingent Assets, we do not recognize a contingent liability. By their nature, contingencies will only be resolved
when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant
judgment and estimates of the outcome of future events. If it becomes probable that an outflow of future economic benefits will be required
for an item previously accounted for as a contingent liability, an accrual or a provision is recognized in the consolidated financial
statements in the period in which the change in probability occurs. See Note 23 to our audited consolidated financial statements for the
year ended December 31, 2022 and Note 9 to our condensed consolidated financial statements for the six months ended June 30, 2023 for
further information.
Accounting Changes in 2023
The Company adopted the following accounting amendments
effective January 1, 2023:
| · | IFRS
17, Insurance Contracts, a replacement of IFRS 4, Insurance Contracts, that aims to provide consistency in the application
of accounting for insurance contracts; |
| · | Amendments
to IAS 1, Presentation of Financial Statements ("IAS 1"), IFRS Practice Statement 2, Making Materiality Judgements,
and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, requiring the disclosure of material accounting policy
information rather than disclosing significant accounting policies, and clarifying how to distinguish changes in accounting policies
from changes in accounting estimates; and |
| · | Amendments
to IAS 12, Income Taxes - Deferred Tax related to Assets and Liabilities arising from a Single Transaction, narrowing the scope
for exemption when recognizing deferred taxes. |
The adoption of these standards did not have a
material impact on the Company’s interim consolidated financial statements for the six months ended June 30, 2023.
New Standards and Interpretations Not Yet
Adopted
The IASB has issued the following amendments to
existing standards that will become effective in future years:
| · | Amendments to IAS 1 - Classification of Liabilities as Current or Non-current, which were
issued in 2020, clarifying the classification requirements in the standard for liabilities as current or non-current. Amendments
to IAS 1, Non-current Liabilities with Covenants, which were issued in 2022, modifying the 2020 amendments to IAS 1, Classification
of Liabilities as Current or Non-Current, to further clarify the classification, presentation, and disclosure requirements in
the standard for non-current liabilities with covenants and deferring the effective date of the 2020 amendments to IAS 1, Classification
of Liabilities as Current or Non-Current, to annual reporting periods beginning on or after January 1, 2024. Management does not
expect that there will be material effects from these
amendments on the Company’s consolidated financial statements; and |
| · | Amendments
to IFRS 16, Leases - Lease Liability in a Sale and Leaseback, clarifying subsequent measurement requirements for sale and leaseback
transactions for sellers-lessees. The amendments are effective for annual periods beginning on or after 1 January 2024. |
Management is assessing the impacts, if any, the
amendments to existing standards will have on the Company and does not expect that there will be material effects from these amendments
on the Company’s consolidated financial statements.
Transactions with Related Parties
In the normal course of operations, we enter into
transactions with related parties, which include affiliates in which we have a significant equity interest (10% or more) or have the ability
to influence their operating and financing policies through significant shareholding, representation on the board of directors, corporate
charter and/or bylaws. The related parties also include, among other things, the Company's directors, Chairman, President, Chief Executive
Officer and Chief Financial Officer. This section does not include disclosure, if any, respecting open market transactions, whereby a
related party acts as an investor of the Company's publicly traded securities or the bonds of a subsidiary.
| | |
Six Months Ended | |
| | |
June 30, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| | |
(In thousands) | |
| Dividends income | |
$ | 89 | | |
$ | 198 | |
| Fee Income | |
| 422 | | |
| - | |
| Interest income | |
| 47 | | |
| - | |
| Royalty expenses | |
| (366 | ) | |
| (372 | ) |
| Fee expenses | |
| (20 | ) | |
| (59 | ) |
| Recovery (reimbursements) of expenses, primarily including
employee benefits and lease and office expenses | |
| 411 | | |
| (774 | ) |
From time to time we have entered into arrangements
with a company controlled by our Chairman to assist us to comply with various local regulations and requirements, including the newly
introduced economic substance legislation for offshore jurisdictions, as well as fiscal efficiency. These arrangements are utilized to
aid in the divestment of financially or otherwise distressed or insolvent assets or businesses that are determined to be unsuitable for
our ongoing operations. These arrangements are implemented at cost and no economic benefit is received by, or accrued, by our Chairman
or the company controlled by him. Pursuant to these arrangements, as at June 30, 2023, we held: (i) an indemnification asset of $6.7 million
relating to a secured indemnity provided by such company to our subsidiary to comply with local regulations and requirements, in an amount
equal to the amount advanced to it, for certain short-term intercompany balances involving certain of our subsidiaries and another subsidiary
that was put into dissolution by us in 2019; (ii) a non-interest-bearing loan to such company of $0.9 million, which was made in the year
ended December 31, 2019 in order to facilitate the acquisition of securities for our benefit; and (iii) current account receivables of
$34.7 million. We also had current account payables of $1.6 million due to the aforesaid affiliate as at June 30, 2023.
In addition, pursuant to these arrangements, during
the six months ended June 30, 2023 and 2022, respectively, we recovered and reimbursed such company $0.4 million and $0.8 million (as
set forth in the table above), respectively, at cost for expenses, primarily consisting of employee benefits and lease and office expenses.
As set forth in the table above, we had royalty
expenses of $0.4 million during each of the six months ended June 30, 2023 and 2022 that were paid to a company in which we hold a minority
interest and that is a subsidiary of the operator of the underlying mine. During the period, we received $0.1 million of dividends from
this interest.
Financial and Other Instruments
We are exposed to various market risks from changes
in interest rates, foreign currency exchange rates and equity prices that may affect our results of operations and financial condition
and, consequently, our fair value. Generally, our management believes that our current financial assets and financial liabilities, due
to their short-term nature, do not pose significant financial risks. We use various financial instruments to manage our exposure to various
financial risks. The policies for controlling the risks associated with financial instruments include, but are not limited to, standardized
company procedures and policies on matters such as hedging of risk exposures, avoidance of undue concentration of risk and requirements
for collateral (including letters of credit) to mitigate credit risk. We have risk managers to perform audits and checking functions to
ensure that company procedures and policies are complied with.
We use derivative instruments to manage certain
exposures to commodity price and currency exchange rate risks. The use of derivative instruments depends on our management's perception
of future economic events and developments. These types of derivatives are often very volatile, as they are highly leveraged, given that
margin requirements are relatively low in proportion to their notional amounts.
Many of our strategies, including the use of derivative
instruments and the types of derivative instruments selected by us, are based on historical trading patterns and correlations and our
management's expectations of future events. However, these strategies may not be fully effective in all market environments or against
all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments
could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize are not effective,
we may incur losses.
Please refer to Note 26 of our audited consolidated
financial statements for the year ended December 31, 2022, for a qualitative and quantitative discussion of our exposure to market risks
and the sensitivity analysis of interest rate, currency and other price risks at December 31, 2022.
Outstanding Share Data
Our share capital consists of US$450,000 divided
into 300,000,000 Common Shares and 150,000,000 preference shares divided into US$0.001 par value each. Our Common Shares are listed on
the New York Stock Exchange under the ticker symbol "SRL". As of June 30, 2023, we had 14,822,251 Common Shares and 1,839,977
stock options issued and outstanding.
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures
designed to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified
in provincial securities legislation. We evaluated our disclosure controls and procedures as defined under National Instrument 52-109
– Certification of Disclosure in Issuers, referred to as "NI 52-109", as at June 30, 2023. This evaluation
was performed by our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
We maintain internal controls over financial reporting
that have been designed to provide reasonable assurance of the reliability of external financial reporting in accordance with IFRS.
Management, including our then Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as
of December 31, 2022. In conducting this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).
There were no changes in our internal control
over financial reporting that occurred during the six months ended June 30, 2023 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has
inherent limitations and is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis
by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Legal Proceedings
We are subject to routine litigation incidental
to our business and are named from time to time as a defendant in various legal actions arising in connection with our activities, certain
of which may include large claims for punitive damages. Further, due to the size, complexity and nature of our operations, various legal
and tax matters are outstanding from time to time, including audits and reassessments and litigation related thereto.
The Company and certain subsidiaries have
been named as defendants in a legal action relating to a guarantee of the former parent of the Group. Management believes that such
claim is without merit and intends to vigorously defend such claim. Currently, based upon the information available to management,
management does not believe that there will be a material adverse effect on the Group's financial position or results of operations
as a result of this action. However, due to the inherent uncertainty of litigation, the Company cannot provide certainty as to
the outcome. The claim amounted to approximately $116.7 million (€80.8 million), plus interest and costs, as at June 30, 2023,
compared to $116.8 million (€80.8 million), plus interest and costs, as at December 31, 2022.
Currently, based upon information available to
us, we do not believe any such matters would have a material adverse effect upon our financial condition or results of operations as at
June 30, 2023. However, due to the inherent uncertainty of litigation, we cannot provide certainty as to their outcome. If our current
evaluations are materially incorrect or if we are unable to resolve any of these matters favourably, there may be a material adverse impact
on our financial performance, cash flows or results of operations. Please see Note 23 to our audited consolidated financial statements
for the year ended December 31, 2022 and Note 9 to our condensed consolidated financial statements for the six months ended June 30, 2023
for further information.
Risk Factors
Statements in this report that are not reported
financial results or other historical information are "forward-looking statements" within the meaning of applicable securities
legislation including the Private Securities Litigation Reform Act of 1995, as amended. These statements appear in a number of
different places in this report and can be identified by words such as "anticipate", "could", "project",
"should", "expect", "seek", "may", "intend", "likely", "will", "plan",
"estimate", "believe" and similar expressions suggesting future outcomes or statements regarding an outlook or their
negative or other comparable words. Also discussions of strategy that involve risks and uncertainties share this "forward-looking"
character.
There are a number of important factors, many
of which are beyond our control, that could harm our business, operating or financial condition or that could cause actual conditions,
events or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited
to, the following:
| · | our
financial results may fluctuate substantially from period to period; |
| · | a
weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and
have a material adverse effect on our liquidity and capital resources; |
| · | we
are subject to global economic, market and business risks with respect to the current COVID-19 pandemic; |
| · | our
business is highly competitive; |
| · | if
we are unable to compete effectively with our competitors, our business and results of operations will be adversely affected; |
| · | our
earnings and, therefore, our profitability may be affected by price volatility in our various products; |
| · | we
may face a lack of suitable acquisition, merger or other proprietary investment candidates, which may limit our growth; |
| · | the
operation of the iron ore mine underlying our royalty interest is generally determined by a third-party operator and we currently have
no decision-making power as to how the property is operated. In addition, we have no or very limited access to technical or geological
data respecting the mine, including as to mineralization or reserves. The operator's failure to perform or other operating decisions
could have a material adverse effect on our revenue, results of operations and financial condition; |
| · | our
activities are subject to counterparty risks associated with the performance of obligations by our counterparties; |
| · | we
are subject to transaction risks that may have a material adverse effect on our business, results of operations, financial condition
and cash flow; |
| · | our
risk management strategies may leave us exposed to unidentified or unanticipated risks that could impact our risk management strategies
in the future and could negatively affect our results of operations and financial condition; |
| · | if
the fair values of our long-lived assets or their recoverable amounts fall below our carrying values, we would be required to record
non-cash impairment losses that could have a material impact on our results of operations; |
| · | derivative
transactions may expose us to unexpected risk and potential losses; |
| · | the
operations of our banking subsidiary are subject to regulation, which could adversely affect our business and operations; |
| · | any
failure to remain in compliance with sanctions, anti-money laundering laws or other applicable regulations in the jurisdictions in which
we operate could harm our reputation and/or cause us to become subject to fines, sanctions or legal enforcement, which could have an
adverse effect on our business, financial condition and results of operations; |
| · | fluctuations
in interest rates and foreign currency exchange rates may affect our results of operations and financial condition; |
| · | some
of our operations are subject to environmental laws and regulations that may increase the costs of doing business and may restrict such
operations; |
| · | limitations
on our access to capital could impair our liquidity and our ability to conduct our business; |
| · | we
may substantially increase our debt in the future; |
| · | as
a result of our global operations, we are exposed to political, economic, legal, operational and other risks that could adversely affect
our business, results of operations, financial condition and cash flow; |
| · | we
are exposed to litigation risks in our business that are often difficult to assess or quantify and we could incur significant legal expenses
every year in defending against litigation; |
| · | we
rely significantly on the skills and experience of our executives and the loss of any of these individuals may harm our business; |
| · | we
conduct business in countries with a history of corruption and transactions with foreign governments and doing so increases the risks associated
with our international activities; |
| · | future
environmental and reclamation obligations respecting our resource properties and interests may be material; |
| · | strategic
investments or acquisitions and joint ventures, or our entry into new business areas, may result in additional risks and uncertainties
in our business; |
| · | tax
audits or disputes, or changes in the tax laws applicable to us, could materially increase our tax payments; |
| · | restrictions
on the remittance of Renminbi into and out of China and governmental control of currency conversion may limit our ability to pay dividends
and other obligations, and affect the value of your investment; |
| · | failures
or security breaches of our information technology systems could disrupt our operations and negatively impact our business; |
| · | investors'
interests may be diluted and investors may suffer dilution in their net book value per share if we issue additional shares or raise funds
through the sale of equity securities; |
| · | certain
factors may inhibit, delay or prevent a takeover of our company, which may adversely affect the price of our common shares; and |
| · | investors
may face difficulties in protecting their interests, and their ability to protect their rights through United States courts may
be limited, because we are incorporated under Cayman Islands law. |
Additional Information
We file annual and other reports, proxy statements
and other information with certain Canadian securities regulatory authorities and with the SEC in the United States. The documents filed
with the SEC are available to the public from the SEC's website at http://www.sec.gov. The documents filed with the Canadian securities
regulatory authorities are available at http://www.sedarplus.ca.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2023
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Scully Royalty Ltd.'s auditors have not reviewed
the unaudited financial statements for the period ended June 30, 2023.
NOTICE TO READER OF THE INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The preparation of the accompanying interim condensed
consolidated statements of financial position of Scully Royalty Ltd. as at June 30, 2023 and the related condensed consolidated statements
of operations, comprehensive income, changes in equity and cash flows for the six months ended June 30, 2023 is the responsibility of
management. These condensed consolidated financial statements have not been reviewed on behalf of the shareholders by the independent
external auditors of Scully Royalty Ltd.
The interim condensed consolidated financial statements
have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to
prepare these financial statements in accordance with IFRS.
SCULLY ROYALTY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL
POSITION
(Unaudited)
(Canadian Dollars in Thousands)
| | |
June 30,
2023 | | |
December 31, 2022 | |
| ASSETS | |
| | |
| |
| Current Assets | |
| | | |
| | |
| Cash | |
$ | 88,673 | | |
$ | 63,717 | |
| Securities | |
| 14,585 | | |
| 30,293 | |
| Trade receivables | |
| 1,698 | | |
| 3,829 | |
| Tax receivables | |
| 705 | | |
| 631 | |
| Other receivables | |
| 52,480 | | |
| 43,502 | |
| Inventories | |
| 803 | | |
| 840 | |
| Restricted cash | |
| 303 | | |
| 365 | |
| Deposits, prepaid and other | |
| 1,740 | | |
| 1,688 | |
| Assets held for sale | |
| - | | |
| 34,743 | |
| Total current assets | |
| 160,987 | | |
| 179,608 | |
| Non-current Assets | |
| | | |
| | |
| Securities | |
| 2,283 | | |
| 2,435 | |
| Real estate for sale | |
| 12,908 | | |
| 12,920 | |
| Investment property | |
| 31,751 | | |
| 31,850 | |
| Property, plant and equipment | |
| 27,052 | | |
| 28,871 | |
| Interests in resource properties | |
| 199,395 | | |
| 201,802 | |
| Deferred income tax assets | |
| 9,812 | | |
| 9,677 | |
| Other | |
| 8,345 | | |
| 8,314 | |
| Total non-current assets | |
| 291,546 | | |
| 295,869 | |
| | |
$ | 452,533 | | |
$ | 475,477 | |
| LIABILITIES AND EQUITY | |
| | | |
| | |
| Current Liabilities | |
| | | |
| | |
| Account payables and accrued expenses | |
$ | 19,232 | | |
$ | 21,099 | |
| Income tax liabilities | |
| 5,868 | | |
| 1,515 | |
| Liabilities relating to assets held for sale | |
| - | | |
| 20,358 | |
| Total current liabilities | |
| 25,100 | | |
| 42,972 | |
| Long-term Liabilities | |
| | | |
| | |
| Bonds payable | |
| 35,585 | | |
| 35,538 | |
| Loan payable | |
| 7,495 | | |
| 7,424 | |
| Deferred income tax liabilities | |
| 56,417 | | |
| 56,570 | |
| Other | |
| 252 | | |
| 466 | |
| Total long-term liabilities | |
| 99,749 | | |
| 99,998 | |
| Total liabilities | |
| 124,849 | | |
| 142,970 | |
| Equity | |
| | | |
| | |
| Capital stock, fully paid | |
| 19 | | |
| 19 | |
| Additional paid-in capital | |
| 313,070 | | |
| 313,070 | |
| Treasury stock | |
| (2,643 | ) | |
| (2,643 | ) |
| Contributed surplus | |
| 18,558 | | |
| 18,687 | |
| Deficit | |
| (33,901 | ) | |
| (31,499 | ) |
| Accumulated other comprehensive income | |
| 25,497 | | |
| 27,524 | |
| Shareholders' equity | |
| 320,600 | | |
| 325,158 | |
| Non-controlling interests | |
| 7,084 | | |
| 7,349 | |
| Total equity | |
| 327,684 | | |
| 332,507 | |
| | |
$ | 452,533 | | |
$ | 475,477 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SCULLY ROYALTY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
(Canadian Dollars in Thousands, Except Per Share
Amounts)
| |
|
2023 |
|
|
2022 |
|
| Gross Revenues |
|
$ |
26,506 |
|
|
$ |
36,077 |
|
| |
|
|
|
|
|
|
|
|
| Costs and expenses: |
|
|
|
|
|
|
|
|
| Costs of sales and services |
|
|
9,477 |
|
|
|
15,835 |
|
| Selling, general and administrative |
|
|
11,552 |
|
|
|
11,124 |
|
| Finance costs |
|
|
941 |
|
|
|
929 |
|
| Impairment loss on property, plant and equipment |
|
|
- |
|
|
|
402 |
|
| Exchange differences on foreign currency transactions, net loss (gain) |
|
|
83 |
|
|
|
(2,999 |
) |
| |
|
|
22,053 |
|
|
|
25,291 |
|
| |
|
|
|
|
|
|
|
|
| Income before income taxes |
|
|
4,453 |
|
|
|
10,786 |
|
| Income tax expense |
|
|
|
|
|
|
|
|
| Income taxes |
|
|
(697 |
) |
|
|
(3,369 |
) |
| Resource property revenue taxes |
|
|
(2,918 |
) |
|
|
(3,536 |
) |
| |
|
|
(3,615 |
) |
|
|
(6,905 |
) |
| Net income for the period |
|
|
838 |
|
|
|
3,881 |
|
| |
|
|
|
|
|
|
|
|
| Net loss attributable to non-controlling interests |
|
|
52 |
|
|
|
31 |
|
| Net income attributable to owners of the parent company |
|
$ |
890 |
|
|
$ |
3,912 |
|
| |
|
|
|
|
|
|
|
|
| Earnings per share |
|
|
|
|
|
|
|
|
| Basic |
|
$ |
0.06 |
|
|
$ |
0.26 |
|
| Diluted |
|
$ |
0.06 |
|
|
$ |
0.26 |
|
| |
|
|
|
|
|
|
|
|
| Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
| — basic |
|
|
14,822,251 |
|
|
|
14,799,801 |
|
| — diluted |
|
|
14,822,272 |
|
|
|
14,882,705 |
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SCULLY ROYALTY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
(Canadian Dollars in Thousands)
| | |
2023 | | |
2022 | |
| Net income for the period | |
$ | 838 | | |
$ | 3,881 | |
| Other comprehensive loss, net of income taxes: | |
| | | |
| | |
| Items that will be reclassified subsequently to profit or loss | |
| | | |
| | |
| Exchange differences arising from translating financial statements of foreign operations | |
| (2,328 | ) | |
| (6,346 | ) |
| Net exchange difference | |
| (2,328 | ) | |
| (6,346 | ) |
| Fair value gain (loss) on securities at fair value through other comprehensive income | |
| 85 | | |
| (291 | ) |
| Reclassification (reversal) of impairment charge to statements of operations | |
| 3 | | |
| (1 | ) |
| Net fair value gain (loss) on securities at fair value through other comprehensive income | |
| | | |
| | |
| | |
| 88 | | |
| (292 | ) |
| | |
| (2,240 | ) | |
| (6,638 | ) |
| Total comprehensive loss for the period | |
| (1,402 | ) | |
| (2,757 | ) |
| Comprehensive loss (income) attributable to non-controlling interests | |
| 265 | | |
| (139 | ) |
| Comprehensive loss attributable to owners of the parent company | |
$ | (1,137 | ) | |
$ | (2,896 | ) |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SCULLY ROYALTY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN EQUITY
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
(Canadian Dollars in Thousands)
| | |
| Capital
Stock | | |
| Treasury
Stock | | |
| Contributed
Surplus | | |
| | | |
| Accumulated
Other
Comprehensive
Income (Loss) | | |
| | | |
| | | |
| | |
| | |
| Number
of Shares | | |
| Amount | | |
| Number
of
Shares | | |
| Amount | | |
| Share-based
Compensation | | |
| (Deficit)
Retained
Earnings | | |
| Securities
at Fair
Value Through
Other
Comprehensive
Income | | |
| Currency
Translation
Adjustment | | |
| Shareholders'
Equity | | |
| Non-controlling
Interests | | |
| Total
Equity | |
| Balance at January 1, 2023 | |
| 14,899,530 | | |
$ | 313,089 | | |
| (77,279 | ) | |
$ | (2,643 | ) | |
$ | 18,687 | | |
$ | (31,499 | ) | |
$ | (850 | ) | |
$ | 28,374 | | |
$ | 325,158 | | |
$ | 7,349 | | |
$ | 332,507 | |
| Net income (loss) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 890 | | |
| - | | |
| - | | |
| 890 | | |
| (52 | ) | |
| 838 | |
| Forfeiture of stock options | |
| - | | |
| - | | |
| - | | |
| - | | |
| (129 | ) | |
| 129 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Cash dividends paid | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (3,421 | ) | |
| - | | |
| - | | |
| (3,421 | ) | |
| - | | |
| (3,421 | ) |
| Net fair value gain | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 88 | | |
| - | | |
| 88 | | |
| - | | |
| 88 | |
| Net exchange differences | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,115 | ) | |
| (2,115 | ) | |
| (213 | ) | |
| (2,328 | ) |
| Balance at June 30, 2023 | |
| 14,899,530 | | |
$ | 313,089 | | |
| (77,279 | ) | |
$ | (2,643 | ) | |
$ | 18,558 | | |
$ | (33,901 | ) | |
$ | (762 | ) | |
$ | 26,259 | | |
$ | 320,600 | | |
$ | 7,084 | | |
$ | 327,684 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at January 1, 2022 | |
| 14,856,581 | | |
$ | 312,487 | | |
| (77,279 | ) | |
$ | (2,643 | ) | |
$ | 18,988 | | |
$ | 9,078 | | |
$ | 70 | | |
$ | 27,620 | | |
$ | 365,600 | | |
$ | 6,934 | | |
$ | 372,534 | |
| Net income (loss) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,912 | | |
| - | | |
| - | | |
| 3,912 | | |
| (31 | ) | |
| 3,881 | |
| Collection of share subscription receivables from non-controlling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 21 | | |
| 21 | |
| Exercises of stock options | |
| 42,949 | | |
| 602 | | |
| - | | |
| - | | |
| (196 | ) | |
| - | | |
| - | | |
| - | | |
| 406 | | |
| - | | |
| 406 | |
| Cash dividends paid | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (8,607 | ) | |
| - | | |
| - | | |
| (8,607 | ) | |
| - | | |
| (8,607 | ) |
| Net fair value loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (292 | ) | |
| - | | |
| (292 | ) | |
| - | | |
| (292 | ) |
| Net exchange differences | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (6,516 | ) | |
| (6,516 | ) | |
| 170 | | |
| (6,346 | ) |
| Balance at June 30, 2022 | |
| 14,899,530 | | |
$ | 313,089 | | |
| (77,279 | ) | |
$ | (2,643 | ) | |
$ | 18,792 | | |
$ | 4,383 | | |
$ | (222 | ) | |
$ | 21,104 | | |
$ | 354,503 | | |
$ | 7,094 | | |
$ | 361,597 | |
| Total comprehensive (loss) income for the six months ended
June 30: |
|
Owners
of
the Parent Company |
|
|
Non-controlling
Interests |
|
|
Total |
|
| 2023 |
|
$ |
(1,137 |
) |
|
$ |
(265 |
) |
|
$ |
(1,402 |
) |
| 2022 |
|
$ |
(2,896 |
) |
|
$ |
139 |
|
|
$ |
(2,757 |
) |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SCULLY ROYALTY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
(Canadian Dollars in Thousands)
| | |
2023 | | |
2022 | |
| Cash flows from operating activities: | |
| | | |
| | |
| Net income for the period | |
$ | 838 | | |
$ | 3,881 | |
| Adjustments for: | |
| | | |
| | |
| Amortization, depreciation and depletion | |
| 3,742 | | |
| 5,307 | |
| Exchange differences on foreign currency transactions | |
| 83 | | |
| (2,999 | ) |
| Loss on securities | |
| 958 | | |
| 502 | |
| Deferred income taxes | |
| (3,899 | ) | |
| (972 | ) |
| Interest accretion | |
| 193 | | |
| 210 | |
| Change in fair value of a loan payable measured at FVTPL | |
| 238 | | |
| 176 | |
| Reversal of credit losses | |
| (41 | ) | |
| (1 | ) |
| Impairment loss on property, plant and equipment | |
| - | | |
| 402 | |
| Write-offs of payables | |
| (317 | ) | |
| - | |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| Short term securities | |
| 15,038 | | |
| 476 | |
| Receivables | |
| (6,161 | ) | |
| 2,455 | |
| Restricted cash | |
| 62 | | |
| (104 | ) |
| Inventories | |
| 36 | | |
| 112 | |
| Deposits, prepaid and other | |
| (58 | ) | |
| (623 | ) |
| Assets held for sale, net of related liabilities | |
| 18,019 | | |
| - | |
| Account payables and accrued expenses | |
| (1,452 | ) | |
| 1,609 | |
| Income tax liabilities | |
| 4,351 | | |
| 4,414 | |
| Other | |
| (1,347 | ) | |
| (261 | ) |
| Cash flows provided by operating activities | |
| 30,283 | | |
| 14,584 | |
| Cash flows from investing activities: | |
| | | |
| | |
| Purchases of property, plant and equipment, net | |
| (70 | ) | |
| (310 | ) |
| Proceeds from sale of investment property | |
| 102 | | |
| 2,238 | |
| Cash flows provided by investing activities: | |
| 32 | | |
| 1,928 | |
| Cash flows from financing activities: | |
| | | |
| | |
| Reductions in lease liabilities | |
| (192 | ) | |
| (173 | ) |
| Dividends paid | |
| (3,421 | ) | |
| (8,607 | ) |
| Shares issued for exercises of stock options | |
| - | | |
| 406 | |
| Collection of share subscription receivables from non-controlling interests | |
| - | | |
| 21 | |
| Cash flows used in financing activities | |
| (3,613 | ) | |
| (8,353 | ) |
| Exchange rate effect on cash | |
| (1,746 | ) | |
| (1,860 | ) |
| Increase in cash | |
| 24,956 | | |
| 6,299 | |
| Cash, beginning of period | |
| 63,717 | | |
| 54,873 | |
| Cash, end of period | |
$ | 88,673 | | |
$ | 61,172 | |
| | |
| | | |
| | |
| Represented by: | |
| | | |
| | |
| Cash | |
| 88,673 | | |
| 60,172 | |
| Cash-in-transit | |
| - | | |
| 1,000 | |
| | |
$ | 88,673 | | |
$ | 61,172 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SCULLY ROYALTY LTD.
SELECTED EXPLANATORY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
Note 1. Nature of Business
Scully Royalty Ltd. ("Scully" or the
"Company") is incorporated under the laws of the Cayman Islands. Scully and the entities it controls are collectively known
as the "Group" in these consolidated financial statements. The Groups's core asset is a 7% net revenue royalty interest in the
Scully iron ore mine in Newfoundland & Labrador, Canada. Scully is listed on the New York Stock Exchange under the symbol SRL. The
Company's primary business office is Room 2103 Shanghai Mart Tower, 2299 Yan An Road West, Changning District, Shanghai China 200336.
Note 2. Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation
These condensed consolidated financial statements
include the accounts of Scully and entities it controls. The presentation currency of these condensed consolidated financial statements
is the Canadian dollar ($), as rounded to the nearest thousand (except per share amounts). References to "US$" herein are to
United States dollars.
This interim financial report has been prepared
by Scully in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting
Standards Board (the "IASB"). The Group's interim financial statements for the six months ended June 30, 2023 are in compliance
with IAS 34, Interim Financial Reporting ("IAS 34"). Except those accounting changes in 2023 as indicated in Note 3,
the same accounting policies and methods of computation are followed in these interim consolidated financial statements as compared with
the most recent annual consolidated financial statements. In accordance with IAS 34, certain information and footnote disclosure normally
included in annual consolidated financial statements have been omitted or condensed.
The measurement procedures to be followed in an
interim financial report are designed to ensure that the resulting information is reliable and that all material financial information
that is relevant to an understanding of the financial position or performance of the Group is appropriately disclosed. While measurements
in both annual and interim financial reports are often based on reasonable estimates, the preparation of the interim financial report
generally requires a greater use of estimation methods than the annual financial report.
In the opinion of Scully, its unaudited interim
condensed consolidated financial statements contain all normal recurring adjustments necessary in order to present a fair statement of
the results of the interim periods presented. These interim consolidated financial statements should be read together with the audited
consolidated financial statements and the accompanying notes included in Scully 's latest annual report on Form 20-F. The results for
the periods presented herein are not indicative of the results for the entire year. The revenues from the Group's iron ore royalty activities
involve seasonality and cyclicality.
Note 3. Accounting Policy Developments
Accounting Changes in 2023
The Group adopted the following accounting amendments
effective January 1, 2023:
· IFRS 17, Insurance Contracts, a
replacement of IFRS 4, Insurance Contracts, that aims to provide consistency in the application of accounting for insurance
contracts;
· Amendments to IAS 1, Presentation
of Financial Statements ("IAS 1"), IFRS Practice Statement 2, Making Materiality Judgements, and IAS 8, Accounting
Policies, Changes in Accounting Estimates and Errors, requiring the disclosure of material accounting policy information rather than
disclosing significant accounting policies, and clarifying how to distinguish changes in accounting policies from changes in accounting
estimates; and
· Amendments to IAS 12, Income Taxes
- Deferred Tax related to Assets and Liabilities arising from a Single Transaction, narrowing the scope for exemption when recognizing
deferred taxes.
SCULLY ROYALTY LTD.
SELECTED EXPLANATORY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
Note 3. Accounting Policy Developments (Continued)
The adoption of these standards did not have a
material impact on the Group's interim consolidated financial statements for the six months ended June 30, 2023.
Future Accounting Changes
The IASB has issued the following amendments to
existing standards that will become effective in future years:
· Amendments to IAS 1 - Classification
of Liabilities as Current or Non-current, which were issued in 2020, clarifying the classification requirements in the standard for
liabilities as current or non-current. Amendments to IAS 1, Non-current Liabilities with Covenants, which were issued in
2022, modifying the 2020 amendments to IAS 1, Classification of Liabilities as Current or Non-Current, to further clarify the classification,
presentation, and disclosure requirements in the standard for non-current liabilities with covenants and deferring the effective date
of the 2020 amendments to IAS 1, Classification of Liabilities as Current or Non-Current, to annual reporting periods beginning
on or after January 1, 2024. Management does not expect that there will be material effects from these amendments on the Group’s
consolidated financial statements; and
· Amendments to IFRS 16, Leases -Lease
Liability in a Sale and Leaseback, clarifying subsequent measurement requirements for sale and leaseback transactions for sellers-lessees.
The amendments are effective for annual periods beginning on or after 1 January 2024.
Management is assessing the impacts, if any, the
amendments to existing standards will have on the Group and does not expect that there will be material effects from these amendments
on the Group’s consolidated financial statements.
Note 4. Business
Segment Information
The Group's assets include its iron ore royalty,
financial services and other proprietary investments. In addition, the Group owns other merchant banking assets and seeks to invest in
businesses or assets whose intrinsic value is not properly reflected. The Group's investing activities are generally not passive. The
Group actively seeks investments where its financial expertise and management can add or unlock value.
The Group currently has three separate and independently
managed operating subgroups underneath its corporate umbrella. In reporting to management, the Group's operating results are currently
categorized into the following operating segments: Royalty, Industrial, Merchant Banking and All Other segments which include corporate
activities.
Basis of Presentation
In reporting segments, certain of the Group's
business lines have been aggregated where they have similar economic characteristics and are similar in each of the following areas: (a) the
nature of the products and services; (b) the methods of distribution; and (c) the types or classes of customers/clients for
the products and services.
The Group's Royalty segment includes an interest
in the Scully iron ore mine in the Province of Newfoundland and Labrador, Canada. The Group’s Industrial segment includes projects
in resources and services around the globe. It seeks opportunities to benefit from long-term industrial and services assets, with a focus
on East Asia. The Group's Industrial segment's hydrocarbon assets, which were classified as held for sale as at December 31, 2022, were
sold during the six months ended June 30, 2023. The Group recognized an impairment reversal of $1,247 on its assets held for sale. The
Group's Merchant Banking segment has a subsidiary with its bonds listed on the Malta Stock Exchange and comprises regulated merchant banking
businesses with a focus on Europe. In addition, the Merchant Banking segment holds two industrial real estate parks in Europe.
SCULLY ROYALTY LTD.
SELECTED EXPLANATORY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
Note 4. Business
Segment Information (Continued)
The All Other segment includes the Group’s
corporate and small entities whose quantitative amounts do not exceed 10% of any of the Group's: (a) reported revenue; (b) net income;
or (c) total assets.
The accounting policies of the operating segments
are the same as those described in the summary of significant accounting policies in Note 2B to the Company's audited consolidated financial
statements for the year ended December 31, 2022. The chief operating decision maker evaluates performance on the basis of income or loss
from operations before income taxes and does not consider acquisition accounting adjustments in assessing the performance of the Group’s
reporting segments. The segment information presented below is prepared according to the following methodologies: (a) revenue and expenses
directly associated with each segment are included in determining pre-tax earnings; (b) intersegment sales and transfers are accounted
for as if the sales or transfers were to third parties at current market prices; (c) certain selling, general and administrative
expenses paid by corporate, particularly incentive compensation and share-based compensation, are not allocated to reporting segments;
(d) all intercompany investments, receivables and payables are eliminated in the determination of each segment’s assets and
liabilities; (e) deferred income tax assets and liabilities are not allocated; and (f) gains or losses on dispositions of subsidiaries
which include reclassification of realized cumulative translation adjustments from equity to profit or loss on disposals of subsidiaries,
write-offs of intercompany accounts, changes in intercompany account balances and cash used (received) in acquisition (disposition) of
a subsidiary are allocated to corporate and included within the Group’s All Other segment.
Segment Operating Results
| |
|
Six Months ended June 30, 2023 |
|
| |
|
Royalty |
|
|
Industrial |
|
|
Merchant
Banking |
|
|
All Other |
|
|
Total |
|
| Revenue from external customers |
|
$ |
15,047 |
|
|
$ |
7,664 |
|
|
$ |
3,795 |
|
|
$ |
- |
|
|
$ |
26,506 |
|
| Intersegment sale |
|
|
- |
|
|
|
465 |
|
|
|
2,338 |
|
|
|
- |
|
|
|
2,803 |
|
| Interest expense |
|
|
4 |
|
|
|
122 |
|
|
|
815 |
|
|
|
- |
|
|
|
941 |
|
| Income (loss) before income taxes |
|
|
8,784 |
|
|
|
1,181 |
|
|
|
898 |
|
|
|
(6,410 |
) |
|
|
4,453 |
|
| | |
Six Months ended June 30, 2022 | |
| | |
Royalty | | |
Industrial | | |
Merchant
Banking | | |
All Other | | |
Total | |
| Revenue from external customers | |
$ | 18,250 | | |
$ | 15,840 | | |
$ | 1,987 | | |
$ | - | | |
$ | 36,077 | |
| Intersegment sale | |
| - | | |
| 377 | | |
| 3,082 | | |
| - | | |
| 3,459 | |
| Interest expense | |
| - | | |
| 138 | | |
| 791 | | |
| - | | |
| 929 | |
| Income (loss) before income taxes | |
| 13,150 | | |
| 1,524 | | |
| 1,144 | | |
| (5,032 | ) | |
| 10,786 | |
Note 5. Consolidated Statements
of Operations
Revenue
The Group's revenue comprised:
| Six months ended June 30: | |
2023 | | |
2022 | |
| Merchant banking products and services | |
$ | 21,119 | | |
$ | 29,235 | |
| Interest | |
| 1,253 | | |
| 2,884 | |
| Dividend | |
| 89 | | |
| 198 | |
| Other, including medical and real estate sectors | |
| 4,045 | | |
| 3,760 | |
| Revenue | |
$ | 26,506 | | |
$ | 36,077 | |
During the six months ended June 30, 2023, royalty
revenue (which is included in the merchant banking products and services) from an iron mine operator represented approximately 56% of
total revenue (2022: 50%).
SCULLY ROYALTY LTD.
SELECTED EXPLANATORY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
Note 5. Consolidated Statements of Operations
(Continued)
Expenses
The Group's costs of sales and services comprised:
| Six months ended June 30: | |
2023 | | |
2022 | |
| Merchant banking products and services | |
$ | 7,839 | | |
$ | 13,121 | |
| Reversal of credit losses | |
| (41 | ) | |
| (1 | ) |
| Fair value loss on a loan payable measured at FVTPL | |
| 238 | | |
| 176 | |
| Other | |
| 1,441 | | |
| 2,539 | |
| Total costs of sales and services | |
$ | 9,477 | | |
$ | 15,835 | |
Note 6. Dividends Paid
A dividend of $0.23 (US$0.17) per common share was paid in US dollars
on May 19, 2023 to shareholders of record on May 9, 2023.
Note 7. Earnings Per Share
Earnings per share data for the six months ended
June 30, 2023 and 2022 are summarized as follows:
| | |
2023 | | |
2022 | |
| Basic income attributable to holders of common shares | |
$ | 890 | | |
$ | 3,912 | |
| Effect of dilutive securities: | |
| - | | |
| - | |
| Diluted income | |
$ | 890 | | |
$ | 3,912 | |
| | |
| | |
| |
| | |
2023 | | |
2022 | |
| Weighted average number of common shares outstanding — basic | |
| 14,822,251 | | |
| 14,799,801 | |
| Effect of dilutive securities: | |
| | | |
| | |
| Options | |
| 21 | | |
| 82,904 | |
| Weighted average number of common shares outstanding — diluted | |
| 14,822,272 | | |
| 14,882,705 | |
Note 8. Related Party Transactions
In the normal course of operations, the Group
enters into transactions with related parties, which include affiliates in which the Group has a significant equity interest (10% or more)
or has the ability to influence their operating and financing policies through significant shareholding, representation on the board of
directors, corporate charter and/or bylaws. The related parties also include, among other things, the Company's directors, Chairman, President,
Chief Executive Officer and Chief Financial Officer. This section does not include disclosure, if any, respecting open market transactions,
whereby a related party acts as an investor of the Company's securities or the bonds of Merkanti Holding plc.
SCULLY ROYALTY LTD.
SELECTED EXPLANATORY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
Note 8. Related Party Transactions (Continued)
The Group had the following transactions with
its related parties:
| Six months ended June 30: |
|
2023 |
|
|
2022
|
|
| Dividends income |
|
$ |
89 |
|
|
$ |
198 |
|
| Fee income |
|
|
422 |
|
|
|
- |
|
| Interest income |
|
|
47 |
|
|
|
- |
|
| Royalty expenses |
|
|
(366 |
) |
|
|
(372 |
) |
| Fee expenses |
|
|
(20 |
) |
|
|
(59 |
) |
| Recovery (reimbursements) of expenses,
primarily including employee benefits and lease and office expenses |
|
|
411 |
|
|
|
(774 |
) |
From time to time the Group has entered into arrangements
with a company controlled by the Group's Chairman to assist the Group to comply with various local regulations and requirements, including
the newly introduced economic substance legislation for offshore jurisdictions, as well as fiscal efficiency. These arrangements are utilized
to aid in the divestment of financially or otherwise distressed or insolvent assets or businesses that are determined to be unsuitable
for the Group's ongoing operations. These arrangements are implemented at cost and no economic benefit is received by, or accrued, by
the Group's Chairman or the company controlled by him. Pursuant to these arrangements, as at June 30, 2023, the Group held: (i) an indemnification
asset of $6,717 relating to a secured indemnity provided by such company to a subsidiary of the Group to comply with local regulations
and requirements, in an amount equal to the amount advanced to it, for certain short-term intercompany balances involving certain of the
Group's subsidiaries and another subsidiary that was put into dissolution by the Group in 2019; (ii) a non-interest bearing loan to such
company of $875 which was made in the year ended December 31, 2019 in order to facilitate the acquisition of securities for the Group's
benefit; and (iii) current account receivables of $34,733. The Group also had current account payables and liabilities of $1,598 due to
the aforesaid affiliate as at June 30, 2023.
In addition, pursuant to these arrangements, during
the six months ended June 30, 2023 and 2022, respectively, the Group recovered from such company $411 and reimbursed $774, respectively,
at cost for expenses, primarily consisting of employee benefits and lease and office expenses.
As set forth in the table above, the Group had
royalty expenses of $366 and $372, respectively, during the six months ended June 30, 2023 and 2022 that were paid to a company in which
it holds a minority interest and that is a subsidiary of the operator of the underlying mine.
SCULLY ROYALTY LTD.
SELECTED EXPLANATORY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
Note 9. Changes in Contingent
Liabilities or Contingent Assets Since the End of the Last Annual Reporting Period
Litigation
The Group is subject to routine litigation incidental
to its business and is named from time to time as a defendant and is a plaintiff from time to time in various legal actions arising in
connection with its activities, certain of which may include large claims for punitive damages. Further, due to the size, complexity and
nature of the Group's operations, various legal and tax matters are outstanding from time to time, including periodic audit by various
tax authorities.
The Company and certain subsidiaries have been
named as defendants in a legal action relating to a guarantee of the former parent of the Group. Management believes that such claim is
without merit and intends to vigorously defend such claim. Currently, based upon the information available to management, management does
not believe that there will be a material adverse effect on the Group's financial position or results of operations as a result of this
action. However, due to the inherent uncertainty of litigation, the Company cannot provide certainty as to the outcome. The claim
amounted to approximately $116,677 (€80,773), plus interest and costs, as at June 30, 2023, compared to $116,782 (€80,773),
plus interest and costs, as at December 31, 2022.
If management's current assessments are incorrect
or if management is unable to resolve any of these matters favourably, there may be a material adverse impact on the Group's financial
performance, cash flows or results of operations.
Note 10. Subsequent Events
Business Combination
In March 2022, the Company announced that its subsidiary, Merkanti Holding, the parent of Merkanti Bank Ltd. (“Merkanti Bank”),
had signed a definitive agreement to acquire Sparkasse (Holdings) Malta Ltd., a company registered in Malta ("Sparkasse Holdings")
and the parent of Sparkasse Bank Malta plc ("Sparkasse Bank").
On July 24, 2023, Merkanti Bank, jointly with
Anteilsverwaltungssparkasse Schwaz, the parent of Sparkasse Holdings, entered into an agreement to mutually terminate the SPA. Consequently,
the transaction did not close. The reason for the termination is not related to any aspect of the regulatory approval process but is related
to timing and the change in global interest rate policy during this period.
The termination did not materially impact the
financial results of the Group. However, as a result of the termination, the Group impaired minor capitalized costs associated with the
transaction in 2023.
Royalty Segment
The Group derives revenue from a mining sub-lease of the lands upon which the Scully iron ore mine is situated in the Province of Newfoundland
and Labrador, Canada. The sub-lease commenced in 1956 and expires in 2055. The iron ore deposit is currently sub-leased to a third-party
entity under certain lease agreements which will also expire in 2055. Pursuant and subject to the terms of the lease agreements, the Group
collects royalty payments directly from a third-party operator (the "Operator") based on a pre-determined formula.
On October 10, 2023, the Operator announced that
it has obtained an order (the "Initial Order") from the Ontario Superior Court of Justice (Commercial List) (the "Court")
commencing proceedings (the "CCAA Proceedings") under the Companies' Creditors Arrangement Act (the "CCAA"). The Initial
Order includes, among other things: (a) a stay of proceedings in favor of the Operator; (b) approval of the DIP Facility (as described
below); and (c) appointment of a monitor of the Operator (in such capacity, the "Monitor").
SCULLY ROYALTY LTD.
SELECTED EXPLANATORY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
Note 10. Subsequent Events
(Continued)
In connection with the CCAA Proceedings, the Operator
has reached agreement for a $75 million debtor-in-possession facility (the "DIP Facility") with a business group which is an
existing stakeholder of the Operator and a party to various existing operational agreements with the Operator. The CCAA Proceedings and
DIP Facility will enable the Operator to continue operating in the ordinary course and complete a strategic sales and investment solicitation
process to pursue alternatives and develop a transaction that will allow the Operator to emerge as a strong and sustainable operation
and continue its efforts to ramp up production at the Scully iron ore mine.
During the CCAA Proceedings, operations of the
Operator will continue in the normal course. The board of directors of the Operator remains in place and management remains responsible
for the day-to-day operations.
As at June 30, 2023, the Group had receivables
aggregating $5,179 due from the Operator, which was included in other receivables on the Group's consolidated statement of financial position.
After the assessments of all relevant information to the date of the approval of these interim consolidated financial statements, including
the payment of an outstanding invoice of approximately $500 subsequent to the period end, management of the Group estimated an expected
loss allowance of $nil.
The Group has outstanding claims in the CCAA totaling
at least $12.7 million that are currently stayed, including $4.7 million of royalties for the second quarter of 2023, royalties of $8.0
million for the third quarter of 2023, and a disputed claim for previously underpaid royalties which was subject to arbitration.
Note 11. Approval of Consolidated Financial
Statements
This interim financial report was approved by
the Board of Directors and authorized for issue on December 9, 2023.
NEWS RELEASE
Scully Royalty
Ltd.
1 (844) 331 3343
info@scullyroyalty.com
SCULLY ROYALTY LTD. PUBLISHES RESULTS FOR THE
SIX MONTHS ENDED JUNE 30, 2023
SHANGHAI (December 11, 2023) . . . Scully Royalty Ltd. (the "Company")
(NYSE: SRL) announces it has published its half-year report, including its results for the six months ended June 30, 2023, and other
updates, a copy of which has been furnished on Form 6-K to the United States Securities and Exchange Commission (the "Half-Year
Report").
Stakeholders are encouraged to read the Company's entire Half-Year
Report for a greater understanding of the Company's business and operations.
A copy of the Half-Year Report is available through
the Company's website at www.scullyroyalty.com and is available under the Company's profile on EDGAR at www.sec.gov. Shareholders
may request a hard copy of the Half-Year Report free of charge, by contacting our investor relations firm at info@scullyroyalty.com.
All stakeholders who have questions regarding the information in the
Half-Year Report may book a conference call with the Company's senior management by emailing the Company at info@scullyroyalty.com.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCULLY ROYALTY LTD.
| By: |
/s/
Samuel Morrow |
|
| |
Samuel Morrow |
|
| |
Chief Executive Officer and Chief Financial Officer |
|
| |
|
| Date: |
December 11, 2023 |
|
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