Update #2 - July 18, 2024
Gold Royalty, Reitman's and Learning Technologies
In this post I will dive into the recent developments, news, outlook and other relevant information of the following companies:
Gold Royalty Corp - GROY 0.00%↑
Learning Technologies Group - $LTG
Reitman’s Canada - $RET
Gold Royalty Corp
You can find the original thesis for Gold Royalty here:
There have been many developments with Gold Royalty in the last few months, Côte Gold entered production just 2 days after my last update, Q1 results were released, a new partnership was announced, a new asset was acquired and the company held the AGM and an investor day. With Côte there is not much else left to say, so let’s dive into the Q1 results.
2024 Q1 Results
The company reported $4.2M in total revenue and land agreements, the equivalent of 2,019 GEOs (Gold Equivalent Ounces), which included the first payments from the Borborema royalty and payments from the royalty generator model of $2.1M, which are expected to be lower for the rest of the year. The Canadian Malarctic (Odyssey Project) royalty has also grown and is expected to contribute to the revenue growth for the rest of the year. Cash operating costs were down 9% YoY, leaving total FCF (including land agreement proceeds) at $1.4M for the quarter.
They also mentioned that they have been ‘marketing’ the company to institutional investors, since most of the shareholder based is comprised of retail investors and they believe that if more institutional investors enter Gold Royalty that could help drive the share price up. They also expect M&A to increase in the royalty sector.
Finally, they were asked about the dividend and when they were planning to reinstate it. They answered that they will decide that once the company enters a ‘sustainable period of FCF’.
Taurus Mining Fund Partnership
Gold Royalty recently announced a strategic exclusive alliance with the Taurus Mining Royalty Fund, which consists of the right but not the obligation to invest between 25% and 50% in “select asset transactions with a value of US$30M or more”, effectively grating Gold Royalty access to bigger deals without having to put up all the cash. The agreement also carries the obligation to inform the other party of any transaction above that $30M threshold.
Vares Acquisition
Gold Royalty acquired the Vares Copper Stream, a stream on a mine operated by Adratic Metals and located in Bosnia with an expected life of 18 years. The first production from this mine is expected to be in Q2 2024 and commercial production is expected to be reached in Q4 2024. A stream is different than a royalty, in a stream the ‘royalty holder’ acquires the right to buy the metals mined at a specific price.
In this case, the stream applies to 100% of the production of the mine, with a stream payment of 30% of the LME spot copper price, with an effective payable copper fixed at 24.5%. So, in order to calculate the revenue earned by the royalty holder we have to apply the following formula:
The tonnes produced and the grade are provided by the operator of the mine, the 0.8 is the recovery rate of the mine, the 0.245 is the effective payable copper percentage and the 0.70 is the benefit that the holder obtains (selling at 100% of the spot price minus the 30% cost). The expected production is:
According to the midpoint of the production guidance, Gold Royalty should receive $2M in net revenue (after payment of the stream) in 2024 and $7M from 2025 onwards, all at a price of $4.5/lb of copper. Were the price of copper to go up, the company would benefir from this without having to deploy any more capital.
The company paid $50M for the Vares Stream, $5M in shares and $45M in cash. For the $45M in cash they raised $35M through a share issuance and amended the credit agreement to expand the limit so they could borrow the extra $10M that they needed. The shares were issued at $1.72/share, leaving the total share count at 170M. Regarding the issuance of shares, David Garofalo, the CEO of the company commented:
“We have constantly said that we would only issue equity if we had a defined use of proceeds and one that was materially accretive to our shareholders. This is just such an acquisition”.
With this acquisition, the company also updated their revenue guidance for 2024. They now expect 6,500 to 7,000 GEOs or $13M to $14M at a price of $2,000/oz of gold, representing 160% revenue growth. At $2,300/oz, the revenue would be $15M to $16M. They also updated the expectation of revenue for the next 5 years:
On a per share basis the effect of this acquisition is not very noticeable in the first two years, however increasing the scale of the company and cash flow helps with the valuation multiple. I now expect Gold Royalty to generate approximately $3M in FCF (including land agreement proceeds) in 2024 and $16M in 2025. That translates into $0.018/share for 2024 and $0.093/share for 2025.
AGM and Investor Day
During the Investor Day presentation, the company reviewed its history, current portfolio, growth strategy and projections for the next few years. I believe it is a good starting point to learn about Gold Royalty. You can what the Investor Day webcast here:
Reitman’s Canada
You can find the original thesis for Reitman’s here:
One of the main catalysts in my thesis of Reitman’s was the company starting to improve communication with investors and strating things like share buybacks, uplisting and such. Reitman’s hired an investor relations firm in May and they started by notifying investors of a conference call for their Q1 results, which includes a presentation.
This is an important step in making the company more well known to investors and the market in general. I expect that they will have answers to all the main questions that investors have (uplisting, share buyback, capital allocation, etc.). I also expect that they will have reached out to analysts so that they attend the conference call and initiate coverage on the company.
Q1 Results and Conference Call
Reitman’s announced the intention to initiate a NCIB to purchase up to 10% of the Class A (non-voting shares). Revenues were flat despite having 14 stores less but gross margin improved 310 bps. The CEO emphasized that Q1 is their weakest quarter. They also announced modernization initiatives for 2025 with a total investment of $14M including 3D design capabilities, a new POS system and streamlined handling equipment for their distribution facility.
SG&A costs were up because of lease renewals, although rent expenses will stabilize as they have signed long-term lease agreements, and other business-related expenses. Cash was down mainly because of the purchase of equipment in Q1. They expect $32M in capex for 2025. All in all, FCF and p/e are mostly the same, since depreciation and amortization and interest on lease liabilities are equal to capital expenditures and lease payments.
In the call they mentioned that they have reported their best first quarter in 10 years. They also uploaded a presentation. They are working on a growth plan and long-term strategy, which they will release in the next quarters.
Some analyst asked about the uplisting to which they answered that they are evaluating the uplisting and they will have “more to share shortly”. The full sentence was: “As a Board, we’re continuing to evaluate the up-listing. We’ll have more to share shortly. We don’t have an update on today’s call”.
Learning Technologies Group
You can find the original thesis for LTG here:
2023 Results
LTG renewed all contracts over $10M and revenues were down 2% (like-for-like), reflecting the recurring nature of the business. Margins improved to 17.5% with an EBIT of £98.5M and record operating cash flow of £86.3M, which helped the company to deleverage to x0.7 Net Debt/EBITDA.
For GP Strategies, the adjusted EBIT margin was 13.5% due to the problems in the integration of LEO Learning and PDT Global into GP. However, the exit margin for Q4 was 17%, so the margin should improve significantly for 2024. They have stated that they believe that GP’s margins can’t reach 20% or more sustainably, but they can do so at a ‘high teens’ level. For the Software and Platforms segment, revenue was down 4% but margins improved from 25.9% to 29.2%.
For 2024, they expect lease payments to keep going down as they reduce their office space. Net interest payments should also go down significantly since net debt was significantly reduced from £119.8M to £61.7M (£78.6M reported minus the £16.9M from the sale of the non-core asset, and a positive FX impact of £6M). As a reminder, they pay quarterly principal installments of £9.6M. Additionally, earnout payments will no longer be significant for 2024 as the earnout agreements ended in 2023. They also mentioned that they implemented a restructuring plan in late 2023 with a cost of £2.5M and expected benefits of £9.5M.
They also explained their capital allocation priorities for the year, which are, in order of relevance:
Regarding M&A, they commented: “Strategic M&A is at the heart of LTG’s philosophy, and we’ve had a temporary pause in 2022, which continued into 2023. The strength of our balance sheet gives the board confidence to return to value accretive acquisitions in 2024. Taking into consideration the ending net debt in addition to the receipt of the cash following the dispose of Lorien, a leverage ratio of x1.5 would provide approximately £110M for acquisitions that align with our strategic objectives”. They also hired a new head of corporate development, Assad Ali, a career M&A banker.
When it comes to returning capital to shareholders, they increased the dividend to 1.66 pence per share and passed a resolution in the AGM to authorize the board to repurchase up to 10% of the company if they deem it appropriate. Jonathan Satchell said: “We are fortunate enough to have some very high-quality businesses in the group. We frankly have a slightly different opinion to the market about the collective value of those businesses, and perhaps some outsiders do as well”.
Sale of VectorVMS - June 26th
In line with their active portfolio management strategy, LTG decided to sell VectorVMS. They initially acquired it through the purchase of PeopleFluent, for which they paid $150M. VectorVMS generated revenue of $11.4M and an adjusted EBIT of $7.1M in 2023. LTG has sold Vector for $50M. The Board has not decided the use of the proceeds yet, but they have stated that they will provide an update to the market ‘in due course’.
The reported net debt at the end of 2023 was £78.6M. The sale of Lorien Engineering Solutions provided LTG with a further £16.9M. Using the same exchange ratio of $1.25 per £1, the sale of Vector provided another £40M, so the net debt of LTG is now at £21.7M. Assuming that they generate the same amount of free cash flow as they did last year (cash from operations – capex – leases), LTG will have another £30M in cash and paid £10M in dividends, so they will end the second quarter with another £20M. This leaves net debt at zero and provides LTG with a lot of muscle for acquisitions. LTG management has stated that they can leverage up to x1.5 (Net Debt/EBITDA), so considering that they have made £145M in EBITDA in 2023, they have about £215M available for acquisitions, or $270M. Historically, they have purchased businesses at around x1 revenue, so this could add £215M in sales, an inorganic growth of 40%.
Furthermore, assuming that VectorVMS contributes half of the revenues and EBIT to LTG in 2024, the new updated expectations are £528M in sales, EBIT without margin expansion of £103.6M, and with margin expansion £114M.
Disclaimer
This article is not a financial advice. I am not a financial analyst. If you are going to invest do it under your own risk and after doing the appropriate due diligence.