Scully Royalty Ltd

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

Commission file number 001-04192

(Exact name of Registrant as specified in its charter)

Cayman Islands

(Jurisdiction of incorporation or organization)

Room 2103 Shanghai Mart Tower, 2299 Yan An Road West, Changning District, Shanghai China 200336

(Address of office)

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

There were 14,822,251 Common Shares of US$0.001 par value each issued and outstanding as at December 31, 2023.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.☐ YES☒ NO

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.☐ YES☒ NO

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.☒YES ☐ NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).☒ YES ☐ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.☐

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive- based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.◻ Item 17◻ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ YES☒ NO

April 29, 2024

Dear Fellow Shareholders,

We are pleased to present the financial results of Scully Royalty Ltd. for the year ended December 31, 2023 and provide you with an update on recent corporate developments. All dollar amounts are in Canadian dollars, unless otherwise provided.

**I.**2023 FINANCIAL RESULTS

As at December 31, 2023, our cash increased to $78.3 million from $63.7 million as at December 31, 2022.

We had short-term securities of $13.0 million as at December 31, 2023, compared to $30.3 million as at December 31, 2022. These mainly comprised liquid government debt and other securities held by our regulated bank subsidiary in the ordinary course of business, and the decrease primarily related to bond maturities.

Trade receivables and other receivables were $1.9 million and $67.8 million, respectively, as at December 31, 2023, compared to $3.8 million and $43.5 million, respectively, as at December 31, 2022. Included in other receivables at December 31, 2023 were receivables of $20.6 million related to our iron ore royalty interest, compared to $5.8 million as at December 31, 2022.

Assets held for sale were $nil as of December 31, 2023, compared to $34.7 million as of December 31, 2022. The decrease was due to the disposition of our hydrocarbon assets in March 2023.

Account payables and accrued expenses were $16.0 million as at December 31, 2023, compared to $21.1 million as at December 31, 2022, with the decrease attributable primarily to the sale of our hydrocarbon assets in March 2023 and the reduction of payables in the ordinary course of business.

We had deferred income tax liabilities of $58.4 million as at December 31, 2023, compared to $56.6 million as at December 31, 2022.

Bonds payable, consisting of public bonds issued by our subsidiary Merkanti Holding plc and maturing in 2026, were $36.1 million as at December 31, 2023, compared to $35.5 million as at December 31, 2022.

Revenue for 2023 decreased to $54.9 million from $63.7 million in 2022, mainly due to the disposition of our hydrocarbon interests in March 2023, partially offset by increased royalty income. Our Royalty segment represented approximately 64% and 45% of our total revenue for 2023 and 2022, respectively.

Costs of sales and services decreased to $19.1 million in 2023 from $29.9 million in 2022, primarily as a result of the disposition of our hydrocarbon assets in March 2023. Depreciation, depletion and amortization included in costs of sales and services and selling, general and administrative was $7.9 million in 2023 compared to $10.7 million in 2022. In 2023, we recognized a reversal of impairment of assets held for sale of $1.2 million related to a non-cash impairment loss recognized in connection with the reclassification of our former hydrocarbon assets as assets held for sale as at December 31, 2022. The assets were sold in March 2023.

Selling, general, and administrative expenses decreased to $24.2 million in 2023 from $28.5 million in 2022, primarily due to the disposition of our hydrocarbon assets in March 2023 and expense management.

We recognized an income tax expense (other than resource property revenue taxes) of $1.9 million in 2023, compared to an income tax recovery (other than resource property revenue taxes) of $6.2 million in 2022. Excluding resource property revenue taxes, we paid $0.4 million in income tax in cash during 2023 and, in 2022, we paid $0.2 million in income tax in cash. We also recognized a resource property revenue tax expense of $6.9 million in 2023, compared to $5.7 million in 2022.

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Overall, we recognized an income tax expense of $8.8 million (income tax expense of $1.9 million and resource property revenue tax expense of $6.9 million) in 2023, compared to an income tax recovery of $0.5 million (income tax recovery of $6.2 million and resource property revenue tax expense of $5.7 million) in 2022.

In 2023, our net income attributable to shareholders was $1.4 million, or $0.09 per share on a basic and diluted basis, compared to net loss attributable to shareholders of $23.4 million, or $1.58 per share on a basic and diluted basis in 2022. EBITDA* was $19.9 million in 2023 compared to EBITDA loss of $11.4 million in 2022. Our EBITDA loss in 2022 included a non-cash impairment loss of $31.4 million on our hydrocarbon properties reclassified as held for sale.

The following is a reconciliation of our net income (loss) to EBITDA (loss) for each of the years indicated:

(1) Includes net income (loss) attributable to non-controlling interests.

EBITDA is a Non-IFRS financial measure. See “Non-IFRS Financial Measures” for further information and“Item 5: Operating and Financial Review and Prospects – Results of Operations*” for a reconciliation of EBITDA to net loss for the applicable period.

The following is a summary of key financial metrics:

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II**.**UPDATE ON THE SCULLY MINE

Overview

The most valuable asset that the Company owns is its royalty interest in the Scully iron ore mine located in the Province of Newfoundland and Labrador, Canada. The royalty rate under this interest is 7.0% on iron ore shipped from the mine and 4.2% on iron ore shipped from tailings and other disposed materials, with a minimum payment of $3.25 million per annum.

The Scully Mine

In 2017, a new operator acquired the Scully mine and has since achieved a number of milestones, including completinga US$276 million financing and commencing operations at the mine in 2019. The Scully mine has a capacity of six million tonnes per annum and produces what is considered a premium iron ore product, with Fe content in excess of 65%.

Iron ore is primarily used to make steel, which is considered to be a critical commodity for global economic development. As such, the demand and consequently the pricing of iron ore are largely dependent upon the raw material requirements of integrated steel producers. Demand for blast furnace steel is in turn cyclical.

Iron Ore Price & Scully Mine Production

The operator of the mine has disclosed that the Scully iron ore mine produces a high-grade ore in excess of 65% iron content that also has other favorable characteristics, such as relatively low contaminant ratios. Globally, steelmakers value high grade iron ore with low contaminants (such as silica, alumina, and phosphorus) because they improve environmental and financial performance through more efficient raw material utilization, higher plant yields, and lower emissions. Therefore, it is common and generally expected for 65% Fe iron ore, including the Scully iron ore mine's product, to sell at a premium to 62% Fe iron ore. In 2023, the Platts 65% Fe index sold at approximately a 10% (US$12) premium, averaging US$132 per tonne compared to US$120 per tonne for the Platts 62% Fe index.

The following table sets forth total iron ore products shipped by the Scully mine operator in 2023, 2022, and 2021:

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After continuously producing for almost four years, the operator filed for reorganization under the Companies Creditors Arrangement Act (“CCAA”) in October of 2023 to reorganize its affairs. In connection with the CCAA proceedings, the operator announced that it had reached an agreement for a US$75 million loan facility with Cargill, the off-taker of the mine’s iron ore, that would allow it to continue operating in the ordinary course until a transaction or restructuring completed. A sales and solicitation process was initiated pursuant to the CCAA process on October 30, 2023. The Company currently has various outstanding claims against the operator that are the subject of a stay under the proceedings, including royalties for the second quarter of 2023 of approximately $4.7 million, royalties for the third and fourth quarter of 2023 of $7.7 million and a disputed claim for previously underpaid royalties.

We continue to monitor the operational performance of the mine and the financial requirements of the operator within the CCAA closely, especially given the recent decline in iron ore prices. We are encouraged by the amount of capital that the Scully mine has attracted in recent years, and we believe it is indicative of the long-term potential to reach an annual production rate of up to six million tonnes. However, we remain cautious given the recent developments, including the initial successful bidder consortium in the Sale and Solicitation Process in the CCAA informing the Monitor that it will not be proceeding with the proposed transaction.

We remain committed to this project and are prepared to take an active role if no third-party solution is available.

III. DIVIDENDS

In April 2021, the Company announced that it was determined to focus its efforts on enhancing shareholder value and maximizing earnings and dividends to its shareholders based upon its iron ore royalty interest. Aligned with this focus, the Company announced that its board of directors approved a cash dividend policy.

In 2022 and 2023, we declared the following cash dividends:

Given the situation at the Scully mine and the potential for a substantial capital requirement depending on how the CCAA of the operator unfolds, we are currently taking a conservative approach. Upon a resolution of the financial condition of the operator, we intend to resume our quarterly dividend payments in the ordinary course.

The declaration, timing and payment of future dividends will depend on, among other things, royalty payments received, and the Company and the Scully mine operator’s financial condition and operating results.

IV. GROUP STRUCTURE

It has been and remains our goal and initiative to structure the group in a way that substantially eliminates the discount between the market price of our common shares and our stated net book value per share. For example, we believe that the value of our royalty interest in the Scully iron ore mine is not properly reflected in the price of our common shares. We believe that one of the reasons for this discrepancy is our complex group structure and diverse portfolio of assets with different economics, capital requirements, and growth prospects.

In 2021, we announced that in order to support the Company’s core focus, the other two of our operating segments – Industrial & Merchant Banking – would be rationalized over a period of time. These two segments have not produced returns commensurate to that of our royalty interest, and our board believes that these actions provide compelling benefits to our shareholders and to all aspects and business segments of the Company. It simplifies the Company's corporate structure by separating its non-strategic assets and allows the independent business lines to focus on pursuing and operating their respective businesses.

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As part of this plan to rationalize assets in our non-core segments, in March 2023, we completed the sale of all of our hydrocarbon interests located in Alberta in consideration for $25.0 million, subject to certain customary adjustments and adjustment for an economic effective date of April 1, 2023. At closing, we received $18.2 million in cash consideration (net of GST).

We continue to work diligently on this rationalization project and currently expect to make further progress in 2024.

Industrial

Our Industrial segment includes projects in resources and services around the globe. It seeks opportunities to benefit from long-term industrial and services assets with a focus on East Asia. This segment makes proprietary investments as part of its overall activities and we seek to realize gains on such investments over time. These investments can take many forms and can include acquiring entire businesses or portions thereof, investing in equity or investing in existing indebtedness (secured and unsecured) of businesses or in new equity or debt issues. These activities are generally not passive. The structure of each of these opportunities is tailored to each individual transaction.

The book value of our Industrial segment was $44.6 million, or $3.01 per share, as at December 31, 2023.

Merchant Banking

Our Merchant Banking segment comprises regulated European merchant banking business. We own Merkanti Bank Limited, a licensed bank in Europe, which does not engage in general retail, commercial banking or any universal banking operations, but provides specialty banking services, focused on merchant banking, to our customers, suppliers and group members. In addition, we hold an interest in two industrial real estate parks in Europe.

The book value of our Merchant Banking segment was $78.0 million, or $5.26 per share, as at December 31, 2023.

V. STAKEHOLDER COMMUNICATIONS

We welcome any questions you may have and looks forward to discussing our operations, results and plans with stakeholders. Further:

Respectfully Submitted,

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Form 20-F