CAA.V - Callinan Royalties

[Williams406]

Callinan Royalties is a company possessing two royalty interests in the 777 mine in Manitoba, operated by Hudbay Minerals. Callinan has a new look--in July 2011 it spun off its portfolio of exploration properties plus a bit of cash as Callinex. To the best of my knowledge, Callinan Royalties does not retain any interest in, or obligation to Callinex. Callinan Royalties is debt free, has roughly $26 million in cash, and pays an $0.08 annual dividend, approximately a 3% yield at the current share price. The market cap is about $130 million, enterprise value is around $105 million. The Chairman of Callinan Royalties is Mike Muzylowski, who also serves as CEO of Callinex (so a call from one entity will likely get answered at the other). Roland Butler is newly installed as CEO of Callinan Royalties and was a co-founder of Altius.

 

Additional considerations include:

• The 777 mine produces zinc and copper along with much smaller amounts of gold and silver.

• Callinan owns War Baby claim—adjacent to 777 mine. As 777 mine operator Hudbay Minerals calls this mine it’s “flagship mine,” they would be a natural buyer of this claim at some point in the future as a way to extend the life of this mine. Callinan also owns an option to purchase a 1.25% net smelter return royalty for $1.25 million should War Baby ever get developed.

• Hudbay is currently developing the 777 North mine, on which Callinan also holds royalty interests.

• Callinan filed a lawsuit against Hudbay in March of 2007 to “verify correct calculation of royalty interests” related to the 777 mine. The wheels of justice seem to be turning slowly here, but Callinan is conducting an audit of the 777 mine and reviewing auditor Deloitte and Touche’s working papers, per court judgment. I believe Callinan has thus far won every major court judgment, either directly or on appeal.

• The spinoff occurred in July 2011 and the company’s fiscal year end is June 30, so we have yet to see financials for just Callinan Royalties. As Callinan’s sole sources of revenue are its royalty interests in the 777 mine (less de minimis interest income), all revenue stays with Callinan Royalties while some expenses go with Callinex. Callinan offers a remarkably detailed income statement with itemized expenses right down to telephone costs, so an intrepid investor could come up with an educated guess as to Callinan’s new cost structure. Also, legal expenses—elevated today with the Hudbay lawsuit—probably decline significantly at some point in the future.

• Market cap is around $130 million with net cash of $26 million for an enterprise value of around $105 million.

• Fiscal year 2009 royalty revenue was $12.8 million, fiscal year 2010 royalty revenue was $16.5 million. Year to date royalty revenue is $23.5 million, but that includes a special $6.3 million payment from Hudbay owing to an underpayment by Hudbay dating back to 1997, then 2005 onward. 

 

This name is not going to be interesting to those who buy Chanos’ China collapse theory as it a full-bore commodity play. Also, its revenue comes from a single mine at present, and Voisey’s Bay serves as an object lesson to that kind of concentration. For those Altius, Alderon, or Cliffs holders who are looking to diversify their iron ore exposure with some zinc and copper, however, Callinan could be worth a look. It will be interesting to see how the company executes its new strategy of focusing on “royalty creation and generation, while seeking royalty acquisitions.”

 

I have no idea what War Baby is worth, or how the court case turns out. I view both of them as inexpensive or free call options.

 

There is a very good write-up of Callinan on VIC dating from early 2010, I believe, that provides good background on the court case. Highly recommended reading for those with access.

 

406