Executive Summary / Key Takeaways

• Strategic Transformation: Scully Royalty Ltd. (KHDHF), formerly MFC Industrial Ltd., has undergone a profound strategic pivot, divesting non-core resource assets to focus on its high-grade iron ore royalty and a specialized European merchant banking segment. This transformation aims to enhance profitability and reduce the significant market discount to its book value.
• Premium Iron Ore Foundation: The company's core asset, a 7% net revenue royalty in the Scully iron ore mine, benefits from premium-grade ore (over 65% Fe content) that commands a significant price premium (approximately 13% or US$14 per tonne over 62% Fe ore in 2024) due to its superior quality and role in green steel production. The mine's operator, Tacora Resources, recently emerged from CCAA with substantial new backing and a ramp-up plan.
• Merchant Banking as a Growth Engine: The European merchant banking segment, including a regulated bank subsidiary, is positioned to drive margin expansion by offering specialized trade and structured finance solutions (e.g., factoring, inventory financing) to an established customer base, a service currently underserved by traditional institutions.
• Transitional Financials with Future Focus: While 2024 saw a net loss of C$20.6 million and an EBITDA loss of C$9.3 million, primarily due to non-cash impairment on rationalized assets and lower royalty income, the company maintains a strong liquidity position (C$19.1 million cash, C$23.5 million short-term securities) and is targeting a 15% return on equity.
• Shareholder Value Initiatives: Management is actively working to reduce the market discount to book value (C$20.39 per share in 2024) through strategic focus, operational efficiency, and a recently resumed cash dividend policy (C$0.37 per share declared in December 2024).

The Genesis of Scully Royalty: A Strategic Pivot

Scully Royalty Ltd., trading as KHDHF, represents the culmination of a significant strategic metamorphosis from its origins as MFC Industrial Ltd. The company embarked on a journey of diversification in the early 2010s, expanding into a global supply chain business encompassing natural gas, minerals, metals, and wood products, achieving substantial revenue growth to $1.4 billion by 2014. However, this expansive strategy encountered headwinds, particularly in volatile commodity markets, leading to significant non-cash impairment losses on natural gas and iron ore interests in 2015.

This period marked a pivotal shift, as management initiated a rigorous rationalization of non-core resource assets, aiming to streamline operations and reallocate capital. The company formally incorporated as Scully Royalty Ltd. in June 2017, solidifying its focus on a core royalty interest and developing a specialized merchant banking segment. This strategic pivot is fundamentally driven by a clear objective: to substantially reduce the discount between the market price of its common shares and its stated net book value per share.

The Crown Jewel: Scully Iron Ore Royalty

At the heart of Scully Royalty's investment thesis lies its 7% net revenues royalty interest in the Scully iron ore mine in Newfoundland and Labrador, Canada. This asset is not merely a passive income stream; it is underpinned by a premium-grade product. The Scully mine produces ore with over 65% iron content and favorable characteristics, including low levels of contaminants such as silica, alumina, and phosphorous. This high-quality concentrate is highly valued by steelmakers globally, as it enhances both environmental and financial performance through more efficient raw material utilization, higher plant yields, and lower emissions.

The superior quality of Scully's ore translates directly into a market premium. In 2024, the Platts 65% Fe index traded at an approximate 13% premium (US$14) over the Platts 62% Fe index, with an average price of US$123 per tonne compared to US$109 per tonne. This technological differentiation of the ore itself provides a tangible, quantifiable benefit, contributing to stronger revenue potential for the royalty holder. The royalty structure also includes a 4.20% rate on shipments from tailings and other disposed materials, with minimum annual payments of C$3.25 million, providing a floor to royalty income.

A significant development for this core asset was the emergence of Tacora Resources, the Scully Mine operator, from Companies' Creditors Arrangement Act (CCAA) proceedings in September 2024. Tacora's restructuring included a US$250 million equity injection from a consortium of well-capitalized investors (Cargill, Millstreet Capital Management, and O'Brien Staley Partners), a significantly strengthened balance sheet, and a multi-year capital investment plan to restore the mine to its historic nameplate production capacity of six million tonnes per annum. This renewed backing and operational commitment are critical for the long-term stability and growth of Scully Royalty's primary income stream.

The Merchant Banking Engine: Fueling Growth and Margins

Complementing its iron ore royalty, Scully Royalty operates a Merchant Banking segment, primarily focused on regulated activities in Europe through its bank subsidiary. This segment is not engaged in general retail or commercial banking but provides specialty banking services, including financial and consultancy services, to the company's established network of customers, suppliers, and group members.

The strategic intent behind this segment, rooted in the company's historical experience with banking operations, is to leverage its global supply chain platform to offer alternative trade and structured finance solutions. These include factoring, inventory financing, forfaiting, and various risk management and financing solutions. Management views this as a crucial avenue to improve profit margins, targeting an increase in gross margin to a minimum of 10% and a corporate return on equity (ROE) of 15%. The company believes this specialized financial expertise and service offering provides a competitive advantage in markets where many customers and suppliers lack adequate financing alternatives.

Financial Performance: A Transitional Year

Scully Royalty's financial performance in 2024 reflects a period of strategic transition and asset rationalization. Revenue for the year decreased to C$35.30 million from C$54.90 million in 2023. This decline was primarily attributed to the disposition of energy interests in March 2023 and decreased royalty income in 2024. The Royalty segment's revenue specifically fell to C$20.10 million in 2024 from C$35.30 million in 2023, impacted by lower production at the Scully mine and volatility in iron ore prices. The Merchant Banking segment also saw a revenue decrease to C$6.20 million in 2024 from C$7.40 million in 2023, due to reduced merchant banking activities.

The company reported a net loss attributable to shareholders of C$20.60 million in 2024, a significant shift from the net income of C$1.40 million in 2023. This loss was heavily influenced by a non-cash impairment loss of C$18.60 million recognized on assets held for sale as part of the ongoing rationalization strategy.

Consequently, EBITDA for 2024 was a loss of C$9.30 million, compared to a gain of C$19.90 million in 2023.

Despite these transitional financial results, Scully Royalty maintains a solid liquidity position. As of December 31, 2024, cash stood at C$19.10 million, with short-term securities of C$23.50 million, primarily comprising government debt securities and term deposits. The company's overall liquidity profile remained stable, supported by access to various liquidity facilities through its bank subsidiary.

Competitive Landscape: Niche Focus in a Broad Market

Scully Royalty operates in a highly competitive environment across its segments. In merchant banking, it faces competition from international banks, private equity firms, hedge funds, and other financial advisory firms, many of which possess substantially greater capital and resources. However, Scully Royalty differentiates itself by focusing on niche markets and providing tailored, rapid solutions to small and mid-sized enterprises, fostering a "partnership approach" that larger competitors may not offer. The company's competitive advantage in this sector stems from its ability to offer specialized trade finance solutions that many customers and suppliers are not receiving elsewhere.

For its iron ore royalty interest, the competition is indirect, primarily related to the global iron ore market and the performance of the Scully Mine operator. The mine's premium-grade ore provides a competitive edge in a market increasingly demanding high-quality, low-impurity inputs for green steel production. The Labrador Trough, where the Scully Mine is located, is a resource-rich region benefiting from well-developed infrastructure and recent investment activity, validating the strategic importance of high-grade iron ore assets in geopolitically stable regions.

Strategic Outlook and Shareholder Value

Scully Royalty's management is committed to a clear strategic path aimed at enhancing shareholder value. The ongoing rationalization of non-core assets, which represented approximately 20% of consolidated total assets (C$88.50 million) at December 31, 2024, is expected to be completed in 2025. This initiative is designed to simplify the corporate structure, reduce operating complexity, and concentrate capital and management attention on the core royalty and merchant banking segments.

A key financial target is to achieve a 15% return on equity, a benchmark management believes is essential for long-term value creation. The company has also demonstrated its commitment to shareholder returns by resuming its cash dividend policy, declaring a dividend of C$0.37 (US$0.26) per common share in December 2024, paid in February 2025. This move reinforces its focus on delivering consistent returns, with future dividends dependent on royalty payments and the operator's performance.

Key Risks and Considerations

Investing in Scully Royalty involves several inherent risks. The company's financial results are highly sensitive to fluctuations in iron ore prices and the production levels at the Scully mine, over which it has no direct operational control. Dependence on a single primary asset for a significant portion of revenue (57% in 2024) means adverse developments at the Scully mine could have a material impact.

The merchant banking segment is exposed to intense competition, counterparty risks, and stringent regulatory oversight in Europe. Global economic conditions, geopolitical instability, and foreign currency exchange rate fluctuations (particularly involving the Euro and U.S. dollar against the Canadian dollar) can also materially affect financial performance. Furthermore, the company faces litigation risks and relies significantly on the skills of its executive team. Dilution from future equity issuances and the complexities of being incorporated under Cayman Islands law also present considerations for investors.

Conclusion

Scully Royalty Ltd. is in the midst of a transformative journey, shedding its diversified industrial past to emerge as a focused entity anchored by a high-quality iron ore royalty and a specialized merchant banking operation. The premium nature of the Scully mine's iron ore, coupled with the renewed operational vigor of its operator, provides a strong foundational asset. Simultaneously, the strategic expansion of its merchant banking capabilities aims to unlock new revenue streams and improve profitability through tailored financial solutions.

While 2024's financial results reflect the transitional costs and non-cash impairments associated with this strategic pivot, the company's robust liquidity, clear strategic objectives, and commitment to shareholder returns through dividends signal a forward-looking approach. The success of this strategy hinges on the effective execution of its merchant banking initiatives and the sustained performance of the Scully mine. For discerning investors, Scully Royalty presents a compelling narrative of strategic refinement, leveraging niche strengths and technological advantages in its core assets to drive long-term value creation, despite the inherent risks of commodity markets and financial services.