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Subject:  SRL Date:  12/30/2021  1:29 PM
Author:  PhoolishPhilip Number:  25824 of 26021

Investment idea: Scully Royalty Trust Ltd. The company has three segments: a money losing merchant bank in Europe which holds some east Asian venture, an industrial segment which has some natural gas claims in Alberta, and a royalty interest in the Scully iron ore mine in PEI.

The valuable nugget in this mess is the iron ore royalty. SRL receives 7% of revenues from the mining operations, and 4% off the tailings. They receive a minimum annual payment of Canadian $3,250,000 per year. They expect production to ramp up to 6 million tons annually , and they are halfway there with 3 million tons produced in FY 2021. Through the first nine months of 2021 they received royalty revenue of over C$32,000,000. This amounts to over C$2/share. Not all of this revenue has reached the bottom line as they continue to dispose of and rationalize non-core businesses, but in the first half of 2021 they had a net income of C$0.65/sh, or ~$0.50 US.

SRL has promised to initiate a dividend payment in the first quarter of 2022, with the goal of streaming the royalty payments to shareholders. At current run rate of 3 million tons annually, and a projected iron ore price of $100 a ton (more than half of the 2021 highs), SRL is looking at royalty revenue north of $20 million in 2022. If they only pay out half of that, you are looking at $0.65/share. At the current price of $9.00/sh you are looking at a dividend yield of 7.5%.

I think these numbers are conservative, and the payout is more likely to be closer to $1/sh next year, growing to $2/sh as production continues to ramp up. While SRL is by no means a slam dunk, it looks like it might be a cigar butt with some significant puffs left on it. In an environment of rich stock market valuations, I'm finding SRL a worthy addition to my ROTH IRAs.


Fair Warning: There is a lawsuit that could cause material harm to the book value of SRL, including claims on the royalty revenue, should they lose the case.
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