Athabasca Minerals Inc. (OTCPK:ABCAF) Q2 2022 Earnings Conference Call August 30, 2022 11:30 AM ET
Company Representatives
Dana Archibald – Chief Executive Officer
David Churchill – Chief Financial Officer
Cheryl Grue – Director of Corporate Affairs
Conference Call Participants
Cheryl Grue
Good morning to all of you who have joined us on today’s call. My name is Cheryl Grue and I am the Director of Corporate Affairs for Athabasca Minerals, Inc. Today’s call will be a different format than previous updates, as we will not be presenting any slides, but rather David Churchill, our CFO, will be speaking directly to the 2022, Q2 results that were posted last week.
Also, as per the press release that went out this morning, Dana Archibald has been appointed as the permanent Chief Executive Officer of AMI and he will be speaking to you this morning about the long term vision as our company refocuses, realigns and renews our commitment to corporate growth and shareholder value.
We will have a question-and-answer period after Dana and David has spoken. So please feel free to submit questions during the call or in the Q&A session. All questions can be submitted through the Q&A function on this platform.
Before we start, I’m required to acknowledge that some information provided today may contain forward-looking information regarding AMI’s business. The information presented is subject to risks and market changes and uncertainties that could cause actual results to different materially.
I am now going to invite Dana Archibald to provide an update on the business information.
Dana Archibald
Good morning, everyone, and thank you for joining us on the call today. Before David speaks to our second quarter results, I would like to speak for a few minutes regarding the business and initiatives that we’ve been working on over the last 60 days.
I would also like to address the press release that went out this morning announcing my appointed as Chief Executive Officer of Athabasca Minerals. I’m excited and humbled by the opportunity that lies in front of me and the team here at AMI, and I want to thank the Board for their confident in my ability to lead this group and move this business forward. I would like to reaffirm to our shareholder base that I’m committed to driving a sustainable growth strategy for the corporation, focused on transparency, profitability and action.
Two months ago at our Annual General Meeting, it was made very clear by our shareholders that our business needed to change, and that the status quo would not be acceptable. As such the Board and management set in motion a mandate to rest and refocus the business. When looking at our growth and high yield revenue opportunities, it’s clear that AMI is a sand and gravel company with the main driver of growth being our U.S. sand operations. With this mind, we are realigning our business model around our sand and gravel divisions.
As part of the realignment and the commitment we made to our shareholders at the July 12 Investor Call, our senior management team did a comprehensive review of all our business lines and assets, and our second quarter results are a direct reflection of this review. There are a number of unusual and non-recurring items in the second quarter financials that David’s going to be going through, that had a direct impact on our overall results, and today we will address these items and also identify why we are confident in AMI’s future.
As part of a realignment we also made the difficult decision to wind down operations of TerraShift Engineering. The decision was based on the fact that Engineering is no longer part of AMI’s core business strategy, and this reorganization and refocus also contributes to a reduction in personnel and overhead costs, which will be reflected in our Q3 financial statements. AMI has retained the proprietary TerraMaps application, as well as a couple of the key personnel who will support the aggregates and RockChain divisions and assists with the wind down of external projects.
We also took an extensive look at our assets through our current lenses of optimizing opportunity and maintaining strong financial acumen. It is important to note that although write downs occurred, AMI still owns the pit resources and could potentially monetize them in the future. However, we do not see a strong likelihood for realizing near or mid-term revenues from these assets at this time.
As an organization we will continue to assess and align our SG&A with the vision and goals of our business to ensure that we have a solid structure in place and a strong revenue stream to support continued growth and future opportunities.
Looking briefly at each of our divisions, AMI Aggregates is seeing increased demand at our Coffey Lake Public Pit, Hargwen Pit, Pelican Pit and the Kearl Pit as well. With sales contracts in 2022 exceeding 0.5 million tons, we’re also expecting increased demand in Q4 and Q1, Q4 of 2022 and Q1 of 2023, confirming for us that the aggregates division will be a key contributor to AMI in the quarters and years ahead.
For the corporate pits that were written down, some of the contributing factors were lack of pit, access to the pit, high mining and transportation costs, permitting costs and/or lack of infrastructure near the resource.
In assessing AMI Silica Inc., our Canadian Sand division, we are looking closely at the copper requirements for both the Prosvita Sand Project and Montney Sand Project. Since the Prosvita Project was first announced, we have seen significant changes, both in our company and the economics of executing a large scale project, such as inflation and supply chain challenges. Given the long regulatory process, the high capital requirements and lengthy revenue cycle, it is unlikely that we will see production from this resource for several more years.
The Montney Project remains of strategic importance to AMI as it is located in northeast BC, northwest Alberta and continues to see significant interest from key operators in the region assessing the sand for future use. I do want to emphasize to our shareholder base that although there are challenges with these projects, we are actively pursuing opportunities to advance them.
AMI Silica LLC, our U.S. based business has quickly become the key contributor to AMIs revenue generation and growth strategy. We’re seeing consistent sales of over 100,000 tons per month with demand continuing to grow. One of our key challenges continues to be logistics, and we are actively pursuing strategic partnerships to expand our rail capacity and network, which would allow us to increase our throughput in both Canada and the U.S.
Since the acquisition in March, we have continued to look for and successfully initiated opportunities to increase revenues and margins outside of the mine gate. With demand in this market growing and supply limited, we are seeing tremendous opportunity in this division.
We’ve also taken a close look at the RockChain Division, which we are realigning their strategy to more closely position them with the refocused business strategy of AMI. Over the last 60 days RockChain has taken steps to reduce their overhead, and from now until the end of 2022 they will be delivering over 5 million worth of aggregate orders.
Although margins continue to be tight in this commodity industry, AMI is committed to creating a unique offering in the aggregates market through the RockChain platform. AMI continues to evaluate all divisions to ensure that maximum performance and profitability are achieved.
Before I pass things over to David, I would like to reiterate that I’m very excited about the future for AMI and I’m proud to be able to lead this team in its new chapter. We are a team that is focused and aligned on growing the corporation, creating value and future opportunities. I want to thank our shareholders for their commitment and support of AMI, and reaffirm that our leadership team is dedicated to creating a focused, sustainable, profitable growth strategy.
And I’ll hand it over to David.
David Churchill
Thank you, Dana. Good morning, everyone and thank you for joining the call today. I’m David Churchill. [Audio Gap]. I’m sorry, everybody, that was a gap by me. Sorry, I had it on mute.
Good morning, everybody, and thank you for joining the call. I’m David Churchill and I’m the Chief Financial Officer for AMI. I’ll be speaking to you about AMI’s second quarter results for the three months ended June 30, 2022, and I’ll be making reference to information contained in the August 26 Press Release, the second quarter financial statements and second quarter MD&A that are posted on SEDAR and the AMI website.
As Dana mentioned earlier, our second quarter had some unusual or one-off items or items that I would characterize as not normal course that I would like to address and help to put into context as we move the business forward under the new strategy.
Firstly, revenue net-of-royalties for the three months ended June 30, 2022 was $7.3 million compared to $3.2 million in the second quarter of 2021. The increase in revenue is due mainly to our 50% interest in the Hixton, Wisconsin Industrial Sand Operations that we own through Silica LLC. A reminder, we didn’t own that business in 2021. We closed this acquisition in March 2022, so this is really the first full quarter of operations we’ve had from this important business segment.
Our gross profit for the second quarter was negative $0.4 million or negative 5.5% compared to $0.5 million or 14.4% in Q1, 2022. In the second quarter there were a number of one-time operating expenses in Silica LLC of about $0.8 million that decreased that net margin. So these expenses included railcar mobilization, increased maintenance costs for ramping up the facility for increased production and other acquisition costs. There was also a depreciation expense of $0.9 million year-over-year increase in quarter-over-quarter as we started to book the depreciation on the Silica LLC assets.
If we adjusted for this $0.8 million one-time operating expense, the adjusted gross profit was positive $0.2 million or 5.5%. Important to note that given the dollar value of those depreciable assets for the Silica LLC business, the depreciation expense will be higher for our business going forward than in previous quarters and the prior year, and will lower our 2022 net income.
Our operating loss for the three months ended June 30, 2022 was negative $5.4 million compared to an operating loss of $0.6 million in 2021. As Dana touched on earlier, there were some significant one-time expenses that contributed to this increased loss. There were severance expenses of $0.64 million for two senior executives who left AMI in May and June, respectively. There was a $3.32 million write-off of certain contract costs and some resource properties.
As Dana mentioned earlier, in the last two months AMI management has commenced a comprehensive review of all of our business assets to determine ways to drive profitability, efficiency and effectiveness. And as a result of this review, some business assets didn’t show immediate or mid-term viability and they were written down. As Dana touched on earlier, the write down consisted of a number of items.
AMI wrote off $1,000,735 of costs incurred to obtain an off-take agreement for the Prosvita Sand Project. Due to the lengthy regulatory approvals and increasing cost estimates for the production facilities, it’s unlikely Silica sand will be produced from the Duvernay site before mid-2026, meaning AMI will not be able to meet the terms of this contract. Therefore, the contract costs were written off at June 30, 2022.
There was a write-down on the Kearl Pit as management reassessed the recovery of the pit development costs compared to the saleable product on hand and determined there was a shortfall of about $542,000 and that was written down.
For the House River Pit, the results were a reassessment of the recovery of pit development costs compared to the saleable product and additional costs required for production, and determined there was a shortfall and wrote off cost of $175,267.
Management – The Logan pit was also reassessed by management. The recovery of pit development costs compared to saleable product and determined there was a shortfall and wrote down costs of $370,000.
The Richardson Quarry project was reassessed by management, again for the recovery of pit development costs compared to saleable product, and the significant additional cost required for production, and the viability of market for the products in that area. Based on this, management wrote down costs of over $1.23 million.
Working capital: We recognize that our consolidated working capital of about $406,000 at June 30, 2022 is tight. There’s two distinct operations within AMI being the Canadian gravel and sand operation through AMI Silica Inc., our aggregates business in RockChain, and then we have the 50% interest in the Silica LLC business based in Hixton, Wisconsin.
Our Canadian operations continue to run with little working capital required given the nature of their business. Our U.S. operations have been able to operate within their operating cash flow and we expect to be able to continue to grow that business with cash flow and possibly low amounts of debts that are tied specifically to AMI Silica LLC. As Dana mentioned, we will continue to work on aligning our SG&A and operating expenses for our businesses, and ensure we have the right structure in place and a revenue stream that will support them.
I wanted to conclude with some comments in our forecast from our July 2022 investor update. We are looking to provide another update for you later in mid-fall. At this time we are still confident in our revenue forecast for 2022 of $34 million. We expect the Silica LLC sales volumes to be strong for the second half of 2022 with improving margins. Again, a reminder that our first half results for 2022 for Silica LLC have about four months of revenue as we acquired that business in March, so our second half will have the six month revenue for LLC.
RockChain has secured some large projects with several customers that have started in the last half of 2022, and they total over $5 million. While these projects continue to be at lower margins, these are awards that are positive as they give RockChain some momentum in the last half of 2022 and into 2023.
Our aggregate business remains on track for the year end forecast. Net income will be lower by approximately $5 million due to the write downs for – due to the write downs we mentioned earlier and increased depreciation.
Thank you again for attending our call this morning, and I’ll now pass it back over to Dana Archibald to close out discussions.
Dana Archibald
Thanks David, and I just wanted to thank everyone for attending this morning. In the last 60 days that David and I have been leading this team, we’ve had to make some significant changes to AMI and we are confident for the direction that the company is moving in. I appreciate the support of the shareholders and look forward to continued communication as we update you on the progress we are making.
I’d like to leave you with a quote that seems to fit well for us these days: “In life, change is inevitable. In business, it’s vital.”
And with that I’ll pass it back to Cheryl to lead the Q&A session for our call. Thanks.
Question-and-Answer Session
Q – Cheryl Grue
Thank you, David and Dana, I appreciate that. So we’re going to head into the question-and-answer period. If you have any questions that you would like to send to the team, please feel free to use the Q&A portal in the zoom link. We do have a couple of questions that were sent to us earlier, so I’m just going to throw those out and wait for any other ones to come in through our participants.
So David, I’m going to send this one over your way. One of the questions is, in your Q2 financial statements, what is included in your cost of goods sold?
A – David Churchill
Thanks Cheryl. So cost of goods sold, included in there would be all of the operating costs associated with the various divisions. Anything, so that would be wages, maintenance costs or recurring maintenance costs, operating materials, your standards run-of-the-mill costs for operating the, say the aggregates business, the sand business. To the extent there’s any – if there’s any costs related to pit development or moving things forward to the extent that we can capitalize those, those are capitalized, so operating costs would strictly be what we consider directly related to the revenue stream for the particular division.
Cheryl Grue
Thank you, David. Dana, I’ve got one here for you. For Silica LLC, have you signed or are you planning to sign long term sand contracts?
A – Dana Archibald
A very good question. So right now we have not contracted any of our volume, which has provided us a lot of optionality. I think that as we’re looking towards Q4 and Q1, we will start looking out, walking in or contracting out some of our volumes.
Cheryl Grue
Thank you, Dana. There’s one here, I’m not sure whether Dana or David wants to take it, but the question is, will RockChain launch in the United States?
A – Dana Archibald
I can take that one on. I guess not to get too far ahead of our skies here, but yes, I think that RockChain we have always looked at the U.S. as a great opportunity for expansion, and you know we have been working with key individuals down in the U.S. to look at opportunities for that. So I would say that that is a stay tuned question and it’s – yeah, it’s definitely something that we are looking to pursue.
David Churchill
And sorry, and Cheryl maybe I’ll just jump in on that too, just to the RockChain discussion. The numbers that we did mention of the $5 million of orders we have right now, those are Canadian at this time. So anything that we forecasted to the end of 2022 is our current – is based on our current business in Canada.
Cheryl Grue
Thank you, gentlemen. Got another question here. I’m pretty sure it’s going to go to Dana, but when you purchased the U.S. sand business, it was stated that the capacity was 2 million tons per year. Is that still accurate? And also, you also mention challenges on ramping up capacity. Can you elaborate?
Dana Archibald
Yeah, no, good question. So with – I’ll talk to the first one. With regards to throughput capacity of 2.4 million, yes that’s – our plant is still very much capable of 2.4 million tons of production. When we’re talking about the logistics and that side of things there, really what we’re talking about is railcars and also our receiving transloads and so that’s really what we’re looking at doing right now, is sort of increasing our rail throughput capacity, and it’s something that we’ve got opportunities to bring on more railcars, but it’s – yeah, something that we have to do very methodically, because you know with railcars it’s all about utilization and then it goes to how many parking spots we have available if we all of a sudden need to park our fleet.
And so we are going to be increasing, you know increasing our fleet, but we are sort of doing that carefully and cautiously here so that we don’t get ourselves into trouble.
Cheryl Grue
Thanks Dana.
Dana Archibald
And actually maybe just one other items there too. So our capacity is very much 2.4 million in in the plant and then sort of going back again to the rail and the transloads there is that you know like our capacity right now is probably sitting in that 100,000 to 150,000 tons a month of rail capacity and that depends on our railcar turns and everything else there.
Cheryl Grue
Thank you, Dana. Another one that’s probably for you Dana, how are the frac sand sales or acceptance in northwest Alberta preceding?
A – Dana Archibald
Yeah, so we’re seeing extremely strong demand in northwest Alberta and northeast BC. You know really the positive that we’re seeing from our stand sales is that we’re not really displacing any of our competitors, is we’re actually just filling a void right now in demand and we’re seeing you know from our customers and you know what we’re hearing in the market there is that demand, it really sounds like it’s going to continue to increase here in the near and mid-term future here at least.
Cheryl Grue
Thank you, Dana. David, this one is probably more in your direction. Why did you choose now to write down your assets?
David Churchill
Well, I think the – I think as a business, every quarter you go through and you look at your assets. I think the key driver on that is what Dana touched on earlier; is there was a very, very clear mandate from the shareholders that this business needed to reset and refocus. So as part of that we looked at everything across the business and you know for a number of items we touched on earlier.
One was the decision to wind down the TerraShift businesses, it wasn’t strategic. The other was to look at in taking on new information and as we pivoted, I think what was a big game changer for this business was the opening of Hixton and what that’s meant to the business for sales of the sand in the U.S. and in Canada, and so from – and then that takes to looking at the Prosvita business where we look at it, and given the regulatory environment we’re in and the challenges that we have with a high inflation environment and supply chain issues is just whether that production facility, is it likely to be in production here within the term of that contract, so that drove that decision.
The other one was again just looking at the various assets and deciding in the near or mid-term, what is the viability of those assets going forward. I think it’s important to remember that the write down notwithstanding, it’s an accounting write down, and those assets, we still own them. There’s still – it still gives us some optionality. Things can change, but as we look at the business going forward today, we made those decisions and you see those results reflected in the Q2 statements, and you’ll see the impact of the TerraShift wind down in the Q3 financials.
Cheryl Grue
Thank you, David. Probably just kind of adding on to the back of that, there’s a question here and I’ll let you just continue on. Regarding the write downs, do you expect more of these types of expenses in the second half of 2022?
David Churchill
I think we’ve taken the assessment again, you know things change. Obviously we’ve all seen that. I mean the market in general is – there’s a lot of things and moving parts going on out there. At this time I don’t foresee that we have – we’ve done a thorough review. I don’t foresee any more changes in the back half of the year for that. But you never – again, it’s a quarterly assessment. At this time I don’t foresee anything and in our forecasting, we’re not forecasting any more write downs to the back half of 2022.
Cheryl Grue
Thank you, David. Just looking to see if there’s any other questions popping up here. I will remind people again. If you have a question after the presentation, please feel free to reach out to myself or any of the leadership team here and we’ll try and answer your questions as best we can.
Cheryl Grue
So it looks like that may be all for this morning. So again, just to reiterate what David and Dana said, I appreciate everybody taking the time to join us this morning so that we would have an opportunity to speak to you. We look forward to continued communications with our shareholders in the days to come, and we look forward to the future of Athabasca Minerals. So thank you again for joining us, and we will talk to you in the future.
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