Royal Gold Inc (RGLD) 2006 Q2 法說會逐字稿

Good morning. My name is Tia, and I will be the conference operator today. At this time, I would like to welcome everyone to the second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions).

At this time, I would like to turn the conference over to Ms. Gross. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone. Welcome to our second-quarter fiscal 2006 conference call. Our call is being Webcast live today. You will be able to access a replay of it on our Website at www.RoyalGold.com. Also on the Website, you'll find this morning's release.

As always, this discussion falls under the Safe Harbor provision of the Private Securities Litigation Reform Act. A discussion of the Company's current risks and uncertainties is included in the Safe Harbor statement and today's press release and is presented in greater detail in our filings with the SEC.

Participating on the call today are Stanley Dempsey, Chairman and Chief Executive Officer; Tony Jensen, President and Chief Operating Officer; Don Baker, Vice President in Corporate Development; Stefan Wenger, Treasurer and Chief Accounting Officer; and Randy Parcel, Vice President and General Counsel.

First, Stan will talk about our quarterly and year-to-date achievements. Then, Tony will provide a portfolio overview. Concluding remarks will be followed by a Q&A session. Let me also mention that the call will include a discussion of the Company's free cash flow results, which is a non-GAAP financial measure. Therefore, there is a reconciliation for free cash flow in our press release.

Now, I will turn the call over to Stan for our financial update.

Thank you, Karen, and good morning, everyone. We had another great quarter. The gold price continued to hedge higher during our second quarter, resulting in a strong performance from our royalty portfolio. Here are some financial highlights for the quarter.

Royalty revenue was $7.6 million, a 26% increase over the prior year. Net income was $2.9 million or $0.12 per share. Free cash flow was $5.4 million or 71% of revenues. Working capital at the end of December was $85.3 million. We ended the quarter with a cash balance of $79.9 million and no debt. For the 6-month period -- royalty revenue was $14.4 million, net income was $6 million or $0.27 per share and free cash flow was $10.5 million or 73% of revenues.

Other highlights for the quarter include completion of a transaction with High River Gold for its Taparko-Bouroum Project, acquisition of two royalties from Kennecott Minerals, Robinson and Mulatos Mines, completion of our strategic alliance with Taranis Resources, a 10% increase in our shareholder dividend to $0.22 per year and an expansion of our line of credit facility to $30 million.

Now, I will ask Tony Jensen, President and Chief Operating Officer, to provide the specifics about our royalty portfolio.

Thank you, Stan. I'd like to focus on a few of our second-quarter highlights from our existing portfolio and then spend the bulk of my time talking about our new acquisitions.

At the Cortez Joint Venture, production for the quarter-over-quarter period decreased but royalty revenue actually increased by 8%. This was due to a higher gold price environment, which resulted in a two-step increase in our quarter-over-quarter royalty rate from 4.5% to 5%.

At the Betze-Post Mine operated by Barrick Gold, we had a 70% increase in quarter-over-quarter production. Essentially, 100% of the open pit production is now derived from the SJ Claims, which has increased the contained ounces subject to our royalty interests in the processing stockpile. This in turn has resulted in an increased portion of the ores subject to our royalty interest being processed at the site, and this trend will continue for some time.

At Leeville North operated by Newmont, production is continuing to ramp up. We understand that daily production is somewhat below 1,000 tons per day. To put that into perspective, the full production schedule is to be in the range of about 3,500 tons per day.

At the Troy Mine operated by Revett Silver, the operation also is continuing to ramp up and mine production is improving. Revett has been limited by jumbo drill performance, and they have now sourced a second drill which is on site.

The Bald Mountain Mine, operated by Placer Dome, is now delivering fresh ore to the pad. This has resulted in increased royalty revenues for Royal Gold.

Finally, the Martha Mine, operated by Coeur d'Alene Mines, had a solid production year for calendar 2005.

Troy, Bald Mountain and Martha have all had excellent results in their exploration programs during the year. We look forward to these benefits to come.

Next, I would like to discuss the royalty acquisitions Royal Gold closed during this past quarter. It has been a very busy time for us, and these deals will serve to further expand our royalty portfolio and will materially contribute in the near-term. We completed an agreement with Toronto-based High River Gold for construction and development of the Taparko-Bouroum project in Burkina Faso, West Africa. The Taparko-Bouroum deposit totals approximately 9.5 million tons of ore and an average grade of 0.09 ounces per ton, containing about 827,000 ounces of gold.

High River expects the majority of the project construction to be completed during calendar 2006, with start-up shortly after year end. The project has an estimated mine life of 8 years. We're providing $35 million in financing and in exchange for two initial and two subsequent royalties. The first of the initial royalties is equivalent to a 15% gross smelter return royalty. The second initial royalty is a sliding-scale gross smelter return royalty running concurrently with the 15% GSR.

The sliding-scale royalty is a bit confusing to explain verbally, but I will give it a try here. The sliding-scale royalty pays a 4.3% rate when the average monthly gold price falls between $385 and $430 per ounce. Outside of this price range, the sliding-scale royalty rate is derived by dividing the average monthly gold price by 100 for gold prices above $430 per ounce. And for gold prices below $385 per ounce, the average gold price is divided by 90. Both initial royalties continue until approximately 800,000 ounces of gold has been produced or payments totaling $35 million have been received from the 15% GSR royalty.

The two subsequent royalties consist of a 2% GSR royalty, which is applicable to gold production within an area of interest and a 0.5% milling royalty. The milling royalty applies to ore mined outside of the area of interest that is processed through the Taparko facilities. The milling royalty is capped at a production level of 1.1 million tons per year. At the current gold price at an estimated annual production of 100,000 ounces, we would receive about $12 million annually in royalty revenue from the Taparko-Bouroum Project.

In late December, we announced the acquisition of two royalties, the Mulatos and Robinson royalties, from Kennecott Minerals for approximately $25 million. The Mulatos Mine is owned and operated by Toronto-based Alamos Gold. It is an open pit, heap leach gold mine located in Sonora, Mexico.

We have a sliding-scale net smelter return royalty ranging from 0.3% to 1.5%. We are currently at the 1.5% rate, which is payable at gold prices higher than $400 per ounce. Construction is essentially complete, and the project is ramping up to design capacity. Alamos estimates its yearly gold production will average about 150,000 ounces.

The Robinson Mine is operated by Vancouver-based Quadra Mining. We have a 3% net smelter return royalty on this project. Robinson is an open pit copper mine with significant gold and molybdenum credits. The operator estimates that calendar 2006 production will be in the range of 55,000 to 65,000 ounces of gold, 145 to 150 million pounds of copper and 1 million to 1.6 million pounds of molybdenum. At current metal prices, this royalty will produce about $10 million in royalty revenue annually. Royal Gold will begin receiving revenue after the royalty funds $20 million for a reclamation trust account. This is expected to happen in the second half of calendar 2006.

Finally, in November, we entered into a strategic alliance with Denver-based Taranis Resources. We invested $320,000 for a private placement, the right to a 2% net smelter return royalty and future earning rights on properties Taranis obtains from its exploration program in Finland.

We also entered into an exploration and earning agreement with Taranis on its Kettukuusikko Project, also located in Finland. This allows us to obtain a 2% NSR royalty for funding $500,000 for exploration work.

We have a further option to fund an additional $600,000 in exchange for a 51% joint venture interest in the Kettukuusikko Project. By funding 100% of the project costs through a completion of a feasibility study, we can earn an additional 24% joint venture interest, which would add up to a 75% joint venture interest in total. Drilling is currently underway on the project, and Taranis has obtained some interesting results.

In summary, we are satisfied with our performance during the quarter. And we're particularly pleased with our acquisition efforts and look forward to the contribution these will make down the road. As always, we remain active in evaluating and pursuing new high potential deals.

Before I turn the call back to Stan, I would just like to also mention that we are in the process of receiving and compiling new production and reserve figures from each of the operators. Once this information is available, we will publish our annual reserve release most likely in late March or early April. Stan?

It's pretty clear from what you've heard from Tony that we're having a great year. The portfolio is growing, and our model is working. We are generating good returns. We are pleased to have been able to do what we said we would do. We're looking forward to the rest of fiscal 2006. We will now take questions.

(Operator Instructions). Victor Flores, HSBC.

I have a couple questions. Could you give us a sense if you have an update for us on what the status is of the reclamation trust account for Robinson? I mean you have been quoting information, the dates to October. And I'm just wondering if Quadra maybe has given you a bit of an update since then?

Victor, that trust -- first of all, let me say that we completed the due diligence process. The last time we audited that account was the end of October I believe, and it was at 14.7 million then. But, you can imagine at these copper prices and the numbers I had quoted of potentially $10 million in royalty revenue annually at these copper prices, that is going to pay out in a pretty quick hurry. So, we have a couple months in calendar 2005; you add November/December that will go into that account. We will receive a confirmation of that after the -- I think 30 days or so after the quarter ends. So we should be getting something very soon.

But nonetheless, we do expect that we will be in a royalty-paying mode in the second half of 2006. Not a specific answer Victor, but I think that gets you pretty close.

Second question goes to the purchase price of the two royalties. The total is 25 million. Have you assigned a breakdown of that 25 to each of the 2 assets you've acquired?

Victor, this is Stefan Wenger. We have done that allocation, and that will be more thoroughly laid out in our 10-Q. But I can tell you the allocation is roughly 17.5 million to the Robinson property with the remainder going to Mulatos.

Then just one final question on Taparko. If memory serves and correct me if I'm wrong, MDM was the contractor for that project. They are -- bankrupt might not be the term but certainly financially distressed and I know there has been a call basically for the -- what's the term I'm looking for -- the liquidation of the company. Are you aware of that? Am I correct? And if so, will that have an impact on the construction schedule?

Victor, this is Don Baker. We've certainly been aware and watch that as High River has. MDM was enlisted on a soft start contract at Taparko to complete certain earth works and so forth. That program was completed successfully. High River is in the midst -- and we anticipate an imminent signing of a construction contractor to carry that project forward. So, we're still looking at the original schedule that High River had laid out.

Okay, so basically the MDM situation has not affected them.

Correct.

Brian Christie, National Bank Financial.

Tony, I guess have you got any sense here on that new resource number from Placer Dome at Bald Mountain? How much of that is kind of going to be impacted by the royalty?

Brian, we don't have anymore information than what you have right now. It was about 2.8 million ounces that came out in November of resource, and that's up from about I think a reserve of 900,000 ounces. So it is a material increase -- potential increase. And as I mentioned, we are still in the process of gathering all the information from the operators with regard to year-end reserves. But nonetheless, we expect some very good news there.

Ross DeMont, Midwood Capital.

Just a real quick question. I wanted to know -- and I know you are still collecting data from the producers -- but I wanted to get a sense for what you feel like there will be a material drop-off in production under the GSR1 royalty stream. Because I know we've got sort of an estimated production length, but that's kind of be -- kind of nonlinear. Is it 4 years out? Is that a decent number to use?

This is Tony. You know, we get this question just about every time, and we're pretty bullish on exploration opportunities out there. Having operated the mine for some 4 years myself, I know how prolific that area is. We are going to experience a production decline there; that is a maturing asset. I think using something past 2010 is wise when you take a look at the reserves and schedule them out on a declining basis that would go out past 2010.

Go out past 2010. And that wasn't -- again, I wasn't speaking of the entire complex. I was being sort of specific to GSR1, which is I think -- the majority of the income that comes off that complex right now is in that stream.

You've got it.

Mike Jalonen, Merrill Lynch.

I just had a couple of questions. I guess following up, Tony, on Crossroads, I'm just wondering the gold price where it is. Certainly, Crossroads must look very attractive now for your new partner there or operator, Barrick -- or if you have anything there to add.

I would've been disappointed if you hadn't asked me the question. Yes, we continue to be very bullish on Crossroads. And as I had mentioned to Brian, we don't have those reserve numbers yet from Placer Dome/Barrick. We are hopeful that those resources there I think were at about 2.8, 3 million ounces of resource at Crossroads. And how much of that might be converted at these gold prices, I'm not certain of, if any. But, you're absolutely right.

Well, at these gold prices, if you were to use a net for long-term planning, obviously you would have a fantastic reserve there. But I don't know what price they are going to use for sure on a long-term basis and whether that will convert. But we sure see value in Crossroads.

Also, second question going to Troy, which I guess -- Troy Mine looks like it's being a bit of a disappointment so far -- very low start-up. I guess (technical difficulty) production forecast 3 million ounces of silver a year -- annualizing right now, 1 million ounces. How much will the second jumbo add to production?

You know it has been a slow start-up; there's no doubt about that. We had planned for a much quicker -- as Revett Silver did -- a much quicker ramp-up into full production. They are now averaging over 3,000 tons a day. They are having some days that are getting even up over 4 and close to 5. And the production schedule there was designed at 6,500 tons a day.

But, I guess it's a bit more than just the drill jumbo itself. It's also a training issue and labor issue, and they are addressing that as well. But you know there is every reason engineering-wise to believe that one jumbo would come close to getting 6,500 tons a day. But, it's great to have a back-up now. There's no reason to believe that two jumbos won't get the production.

Maybe another way of answering it -- well, thank you for that by the way -- but was Rivette just too aggressive with the production plan? Maybe -- I've never been in the mine. I'm just speculating.

You know actually, we addressed this and so did Rivette when they started up. The old operation that ASARCO was running there was running up over 8,000 tons a day -- 8,000 8,500 tons a day. And that was really pushing the underground facilities at that time. The mill, as I understand it, was keeping up. And so Rivette purposely brought the production rate down from the historical rate, thinking they were somewhat conservative.

I know you are just as I am; you are a bit inpatient here. But we believe that they are going to get to the 6,500 ton a day rate in time.

I guess just one other question on that. They are at half the rate right now. It should be producing 1.5 million ounces of silver annually instead of 1 million ounces? Is there a problem with the grade, dilution?

Sorry, Mike. You're ahead of me on the numbers. I just can't pull those numbers out and --

There's no grade problem.

No. In fact, the grade problem is doing quite well, and recovery is doing very good. So I don't see any problem with the reserve.

If they get the tons, they will get the ounces.

In fact, Troy came out -- I should say Revett came out and announced new reserves at Troy in January of this year, and they increased reserves by 39%. So there are some very good pieces of news there. You know, when we went into this business opportunity, we went in with the anticipation that they were going to extend that 4-year mine life beyond that. Now, they are up over 5 years from where they are today. So, there are a few pieces of good news there, and we are in for the long term on that project.

I was just going to mention the reserve increase is good news.

Yes.

I guess just -- well you mentioned your plan there. Also, one last question on the performance-based compensation plan. But this was quite novel what you've done here, quite interesting and very progressive and neat. But I was noticing that you're using reserve expansion and cash flow growth as drivers, and for this plan -- with reserve expansion, I guess you could just go by -- I'm not saying you're doing this -- but you can buy anything really. Is there a quality aspect to these reserves that is factored into this compensation plan?

There is a per-share approach to it. So that's -- pull out shares, it wouldn't work.

And the other aspect there is if those assets that we buy to try to get them into reserves, if they don't generate the cash flow and that would indicate the low quality nature of it. If they have low quality cash flows, then on a per-share basis, you're not going to do it. So it's really been structured to steward the shares and the resources of the Company.

I'm not trying to criticize it. I just find it very interesting. Other companies may be emulating this in the future.

I would guess so. Yes, we are very happy with the performance so far. I think we are getting what shareholders are paying for. We're getting the growth in reserve and cash flows that we hoped we would get by incenting management enough with direction.

[John Levins], [Levins Capital].

It's a follow-up on that question on the decline through 2010. What is the shape of -- even though the resource will continue to be productive, what is the shape of the decline in that period? secondly, will Crossroads if it became -- what is the priority, at what time might that come on and how rapidly might that buildup because it's an offset of some kind potentially?

Boy, John, you are asking some pretty tough questions because that operation is very dynamic, and I think they are probably going through replanning efforts right now. We anticipate that -- well our position, it's better to bring Crossroads on earlier rather than later. It is probable that much of Crossroads can be heap leached, so it doesn't take mill capacity. There are some higher grade components of Crossroads that would -- you would want to put through the mill.

But, the other element is that they have a dewatering cost there of over $6 million a year, producing somewhere around 30,000 gallons a minute just to keep that pit dry. And if they don't do that as an extension to the Pipeline South Pipeline Complex, it will be very hard to shut those pumps off and start them up again and drain down the pit.

So there is a reason to bring on Crossroads in a natural sequence.

We really believe so.

But then coming back to the first question, what's the shape of the decline into 2010?

You know, I don't have that information in front of me and (multiple speakers)

It will be half, say in '08 or '09 or something?

Again, I would just go out to 2010, 2012 and use a declining production rate, something like that. I just don't have that here.

[Robert Birch], [Delltech].

I was wondering, when you have to buy these new royalties, what kind of internal rate of return are you looking for? When you look at it, the future cash flow stream, what kind of discount rate are you applying to it? And then, related to that, what price of gold, silver, and copper are you using in those calculations?

Do you want me to take that, Don, or do you want to?

Yes, this is Don Baker. We don't have a magic answer on forecasting prices, but we certainly are reasonably conservative there. We tend for instance in a gold pricing model to employ higher prices earlier in our model with the expectation that gold prices are going to moderate over time potentially or at least comparison historically.

Hurdle rates are all over the board. Bottom line is using proven and probable reserves on any of these opportunities; we expect our acquisition to be cash flow positive at modest metal prices. And then we enjoy some upside in price production, profile and bringing on converting resources to reserves.

Okay, so cash flow positive means sort of at a zero discount rate? You're looking for just a nominal cash flow positive thing over time, and then the upside comes from a higher minerals price?

You know, in most of the financing activities, we need to be cost competitive with debt alternatives. However, we do take on additional risks that a normal lender would not. So, we expect to be compensated appropriately for that as well.

There are no further questions at this time. Would anyone like to have any closing remarks?

Yes. Thank you for taking the time to join us today. We look forward to talking to you next quarter.

Thank you for participating in today's second-quarter earnings conference call. You may disconnect at this time.