Royal Gold Inc (RGLD) 2006 Q4 法說會逐字稿

Good afternoon. My name is [Arnika] and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fourth-quarter and year-end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

I would now like to turn the call over to Karen Gross, Vice President and Corporate Secretary. Please go ahead, ma'am.

Thank you, operator, and hello, everyone. Welcome to our fourth-quarter and year-end conference call. Our call is being webcast live today, and you will be able to access a replay of it on our Web site at www.RoyalGold.com. Also on the Web site you will 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, in today's press release and is presented in greater detail in our filings with the SEC.

Participating on the call today are Tony Jensen, President and Chief Executive Officer; Stefan Wenger, Chief Financial Officer; Randy Parcel, Vice President and General Counsel; and Stan Dempsey, Executive Chairman. First, Tony will review our fiscal 2006 accomplishments. Then Stefan will give a financial update and Tony will conclude with some property highlights, which 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 that went out this morning.

Now, I will turn the call over to Tony.

Thank you, Karen, and good morning, everyone.

Fiscal 2006 was a very successful year for Royal Gold. Our financial results were solid, and we executed in our plan to grow and diversify the Company.

We'd like to review some of the highlights during the year. Revenue and free cash flow increased 12 and 13% respectively, even after the production decline at the Pipeline Complex. Our margins remained high, as cash flow accounted for 72% of revenues. Earnings were similar to the prior year. Increases in this area were offset by new accounting rules and the addition of stock issuance during the year.

After completing our secondary offering last fall, we added three new royalties to our portfolio, helping to achieve one of our key goals of revenue diversification. Two of these three royalties began generating revenue during our fiscal fourth quarter. Now we have ten paying royalties on eight producing properties in three countries. 92% of our fiscal 2006 revenues still come from the state of Nevada. As of January 1, 2006, revenues subject to our royalties totaled 29.6 million ounces of gold, 13.3 million ounces of silver, and nearly 2.3 billion pounds of copper.

Our fundamentals remain robust as we ended the year with working capital of over $80 million, strong cash flow and no debt.

Now, I'd like to turn the call over to Stefan for a bit more on our quarterly and year financial results.

Thanks, Tony. I will briefly review our fourth-quarter results and then our year-end numbers.

For the fourth quarter, royalty revenue was $8.2 million, which was a record quarter for Royal Gold. Net income was 3.6 million, or $0.15 per share, and free cash flow was $6.5 million. For fiscal 2006, royalty revenue was $28.4 million, which is also a new annual high. Net income was $11.4 million or $0.50 per share. Free cash flow was 20.5 million, and working capital as of June 30 was $81.5 million.

We continued to fund High River Gold's Taparko project in Burkino Faso, bringing our total funding to 18.7 million as of June 30, and as of today, we have funded 29.5 million. Our total funding commitment for Taparko is 35 million, and we expect to have nearly all of that amount invested by calendar year-end.

I'd like to take time and briefly talk about our cost structure at Royal Gold and specifically about the cash cost that we reported for fiscal 2006. During the past calendar year, the producer price index for gold mining increased by 42%. Over our past fiscal year, the costs of operating our royalty business have remained relatively flat.

After taking into consideration the change in accounting principle associated with non-cash compensation expenses, our cost of operations were only up by $77,000. That was due to increased Nevada net proceeds taxes on higher royalty revenue in Nevada. Exploration and business development costs were up by $600,000 due primarily to funding of exploration at the Kettukuusikko project in Finland. Finally, our general and administrative costs were flat with only a $15,000 change over the prior period.

As we look to the future, our business model gives us the flexibility to add additional royalties to our portfolio without increasing our core cost of doing business. We have seen this demonstrated in our fourth-quarter results, as our free cash flow has increased to 79% of revenues, driven by higher revenues during the quarter, while our cost structure remained relatively fixed.

With that, now I will turn the discussion back to Tony to discuss our portfolio highlights.

Thank you, Stefan.

I'd like to take a little bit different approach today than what we've done in our recent conference calls. Rather than reviewing each royalty in our growing portfolio in detail, I'd like to just take a bit of time and describe some of the assets that I think you'd like to hear a little bit more about, including pipeline, Bald Mountain, the SJ Claims at Goldstrike, and one of our newest royalty properties, Robinson.

First, starting at pipeline, reserves at the pipeline mining complex stood at 4.4 million ounces at the start of this calendar year, including 1.4 million ounces at the crossroads and gap deposits, which should be subject to a 9% royalty rate if those reserves were being mined today. As you can see, Pipeline will remain a cornerstone of our royalty portfolio, but revenues will be less concentrated on this asset going forward. For example, in fiscal 2005, Pipeline contributed 85% of our revenue and in fiscal 2006, Pipeline contributed 59%.

Production for the operation is on pace for the 385,000-ounce budget, but we are encouraged to learn that Barrick expects the North American gold production to increase slightly in the second half of calendar 2006 due to contributions at Pipeline and Bald Mountain. We are also encouraged by the fact that the operations mined at an average grade lower than the reserve grade for the first half of calendar 2006, which indicates to me that there are better grades to come.

Moving onto Bald Mountain, last year, this property had a dramatic expansion in reserves and has since ramped up production as well. As of January 1, 2006, Bald Mountain had approximately 3.4 million ounces in reserve of which about 1.8 million ounces are subject to our royalty interests. This represents a 300% increase in reserves over the previous year. Stronger revenue is beginning to flow from the operation as well. In the fourth quarter of fiscal 2006, we received royalty revenue of over $800,000, which was four times the amount we received in all of fiscal 2005. Barrick has estimated production of 248,000 ounces of gold from Bald Mountain in calendar 2006, and that figure is expected to remain high for the next few years as mining is focused on the west side of the property.

The SJ Claims at the Goldstrike mine is another property where we have large increases in quarter-over-quarter and year-over-year production levels. This was due to greater -- due to a greater portion of the total mine production being derived from property that is subject to our royalty interest. You see, when we bought this property, the majority of the mine production was coming from an area to the southeast of our royalty boundaries. Now, we are reaping the benefits of the mine production that has moved on to our royalty ground. For fiscal 2006, royalty revenue increased 140% from this operation to $4.8 million.

Now, I'd like to wrap up the property section of the call by profiling one of our newest royalty interest, the Robinson mine. The Robinson mine is an open-pit copper mine with significant gold and molybdenum credits located in eastern Nevada. Robinson is about five miles west of the town of Ealing. Kennecott consolidated this mining district in early 1900s and operated the mine into the 1970s. Through a series of transactions, BHP Billiton acquired the mine and invested about $480 million to modernize the operation in the mid-1990s. Quadra mining purchased the mine in 2004 and has been operating since. We purchased our 3% net smelter return royalty at Robinson in December of last year. This investment is already producing excellent returns. Since our acquisition, we received 2.2 million in royalty revenue in just the months of May and June alone. Reserves were increased by 27% over the previous year, and the estimated mine life increased from eight to ten years.

Reserves at the start of this calendar year stood at 1.2 million ounces of gold and 2.2 billion pounds of copper. Quadra estimates that calendar 2006 production will be approximately 54,000 ounces of gold and 125 to 130 million pounds of copper attributable to Royal Gold's royalty position. We expect Robinson to be an important revenue source well into the future.

Now, let me conclude by saying that we're very happy with our financial results and the growth that has come into our company. We have significantly changed the profile of our royalty portfolio over the past year, and we are pleased with these additions as well as our growing revenue diversification. We expect 2007 to be another strong year for us as we enjoy the benefit of the full-year production from the Robinson and Mulatos royalties and higher output from Bald Mountain. We also look forward to increased production at Leeville and Troy as they make progress towards full production capacity. Finally, High River's Taparko project is scheduled to begin production in the April quarter of 2007. As you can understand, we're very excited about the upcoming year and believe that we've put the pieces in place to drive revenue and free cash flow going forward.

Operator, that concludes our prepared remarks. We would be happy to take any questions at this time.

Thank you. (OPERATOR INSTRUCTIONS). Andrew Schopick.

Thank you. Nutmeg Securities in Connecticut. I'd like to ask you to just repeat the reserves at the fiscal year-end, and if you can give us the comparable numbers at fiscal year and '05 for gold, silver and copper.

Andrew, I'd be happy to repeat the numbers. I'd don't have the comparable numbers at my fingertips, but the numbers that we had as of January 1, 2006 were 29.6 million ounces of gold, 13.3 million ounces of silver, and 2.3 billion pounds of copper.

Most of the copper has been acquired or associated with the Robinson mine. Is that correct?

That is correct. I think the reserves there are 2.3 billion at the end of the year last year. Then we also have some copper at the Troy operation.

Based on your current royalty structure on the Robinson mine, is that also tied to a sliding scale on the price of copper?

(indiscernible) saying at the Robinson mine?

Yes.

That's a fixed 3% royalty there, Andrew.

It is fixed?

Yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS). At this time. there are no further questions. Excuse me, you have a question from Jerome (indiscernible).

Yes, I am just a little behind here but I'm trying to review this press release. In the Pipeline Complex for the quarter, it says 75,000-some ounces of gold compared to 288,000 a year ago, and then for the year, it's 598 compared to 973, so it's $5 million less in revenue (indiscernible) 21, so that's one thing. But on a quarterly basis going forward, if I multiply times four, it's another drop of 50 -- it's a drop of 50% for the next four quarters. So, how -- maybe you're making up that first chunk but how are you going to make up 50%?

I'm not sure that I follow all of your numbers through, but --

Well, I'm just reading your press release. It says "Pipeline produced 598,000 ounces of gold for 16.8 million of revenue." Oh, I guess that's for the fiscal '06, but for the quarter, fourth quarter, it produced 75,574 ounces for 2.7 million compared to 288,600 providing 6.4 million of revenue. What I'm saying is even though, for the '06 year compared to '05, your drop is significant but it's one number, but for the quarter, the drop seems to be so substantial that going forward comparing '07 to '06, it would be a much bigger drop for the year.

Let me just answer that -- (multiple speakers).

Maybe I'm missing something but that is a lot of makeup.

Yes, that is a lot of makeup and in fact that's what we addressed in our last conference call, because we were made aware, in February, of a reduction of production at Cortez from about 930,000 ounces last year to 385,000 ounces this year. We have been living with that reduction for the first six months of this calendar year, which are part of the financial results that you see now. So we're pleased that we've not only been able to make up that revenue from the other sources of our royalties but we've actually been able to surpass that on a revenue basis. I think we had about $3 million more this year than we did the previous fiscal year.

Well that may be but -- (multiple speakers).

Going forward, I also want to call your attention that we have substantial revenue coming through at Robinson now to the tune of about $1 million of a month that wasn't there last year, plus Mulatos is coming in. Then we are coming in with growth at Bald Mountain and expansion and Troy and Leeville as those productions ramp up. So, we're very comfortable with where we are going.

(multiple speakers).

Well, at a time when earnings on these different gold mining companies are coming in with increases like from -12 million to plus 28 million, this, that and the other thing, I mean, a huge (indiscernible) Royal Gold is making up and gradually getting ahead by 9% a year. I've been waiting a long time, 20 years or so as you know, so I'm having trouble seeing this because each year, we're told there's more things that are going to come in and make up for the last, but the percentage increases are not really that substantial compared to the gold price increase. You're still sitting with 80 million in cash, you know, and announcing that deals will be made, deals will be made. (technical difficulty) -- progress in the Company. So I'm questioning how much progress you're making in percentage increases each year. I don't understand whether this option expense is going to recur ever year also. That's a side point.

Well, again, all I can say is that we had a fantastic year last year. We brought in three new royalties -- (technical difficulty) -- going to be contributing very, very handsomely. We are very, very pleased with the kind of revenue and the kind of earnings that we're looking forward to into 2007, and I feel very comfortable about where we are at as a company.

Well, I'm glad you do but I think you should feel less comfortable and even go faster, somehow. Because -- (multiple speakers) -- (technical difficulty) -- we're not getting enough results.

Okay, well, we thank you very much for your comment.

Andrew Schopick.

I'm surprised there aren't more people in this queue. I do want to ask a couple of questions about Taparko and just management's philosophy about investing outside of the United States and in geographies where there are certain inherent risks. When do you believe we will get some sense of the production from the operator in Taparko, when that will begin and when you will get a sense of the projected production coming out of that mine? How much hands-on involvement does management have when investing in properties like this outside of the country?

Let me try to split those up and Karen, I'll ask you to help me remember the second question. But as far as Taparko production, we do have estimates on that in twofold. The first is that they still anticipate production near the end of the first calendar quarter of next year, so we're looking for our revenues to start flowing in the April quarter. They are still on schedule for that.

I believe the production is in the range of 140 to -- 100 to 140,000 ounces of gold a year. Of course, next year will be a year that's less than a full year, so you should take a proportion of that. So that guidance is still with High River Gold is giving and so that's what we pass along to you.

How frequently does High River update their production forecast?

Well, that one I wouldn't anticipate they would update that very frequently because nothing has changed as far as the mineralogy or the assets. As far as I know, there hasn't been any new drilling that would cause them to change that, and they fixed the design of the mine and the mill and they are currently constructing that and doing a good job. So I think those are probably going to stay fixed. I wouldn't look for any kind of new guidance there for quite some time, at least a year or so.

Now, your second question is related to how much control management -- as you're referring to Royal Gold management, I assume, on assets that are outside the United States.

Yes because historically, you know, most of your involvement has been in Nevada, and at least close to home where you clearly could watch things.

We will continue to look for opportunities outside the United States, and we will be growing our portfolio internationally, but we apply the same principles internationally as we do here in the United States. We continue to visit the properties. Most of the operators are North Americans, are folks that we know quite well, and so we get good dataflow; we make sure that we have that in our contract. So for us, there really isn't any kind of difference in managing an asset inside the country or outside the country other than the specific risk of that country and the time travel it takes to go and visit these operations.

Well, it just seems to me that there are more than the normal kind of risks. I mean, I've been around long enough to remember [Briax], for example, and what can happen in some of these foreign geographies that can be very unnerving and disturbing. I don't know how mines get salted or how people do these kind of things, but those kinds of questions immediately come to my mind when I see Royal Gold beginning to invest and move into these kinds of geographies.

There's a couple of other things that we should just add to responding to your question. First of all, we're very comfortable with our due diligence process that we completed on all of our acquisitions; it was a very thorough process. Most of those are required to now abide by the 43 101 reserve and resource statement in Canada. We also employ our own people to not only check that but go into the raw data and make sure that those reserves are reasonable and kind of respond specifically to your [Briax] issue.

But there are a couple of other things that we do to manage risks. At the present time, we have a construction engineer that we send over to Taparko during the construction phase, and he's over there perhaps every other month. He will probably be more frequent now as we get closer to completion. He comes back and reports to us on the progress and we have a very good relationship with High River Gold and on the progress as well.

Then one other thing that we always are looking at when we go internationally is political risk and we have political risk as part of this agreement for Burkino Faso. We will continue to seek political risk when we think it's necessary. Not in all jurisdictions would we seek political risks that are foreign to the U.S., but in things that are a little bit further from home we will continue to do that.

Okay, thank you.

At this time, there are no further questions.

Well, thank you very much for attending the conference call and your interest in Royal Gold. We appreciate your support. Operator, that concludes our call.

This concludes today's conference call. You may now disconnect.