Royal Gold Inc (RGLD) 2008 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal 2008 first quarter earnings 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 your leader, Miss Karen Gross. Please go ahead, ma'am.

Thank you, operator, and hello, everyone. Welcome to our first quarter fiscal 2008 conference call that is being webcast live today. You will be able to access a replay of the call on our website at www.royalgold.com. Also on the website you'll find our release detailing our financial results.

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; Stanley Dempsey, Executive Chairman; Stefan Wenger, Chief Financial Officer and Treasurer; Bill Heissenbuttel, Vice President Corporate Development; and Bruce Kirchhoff, Vice President and General Counsel. A Q&A will follow our comments.

Let me also mention that the call will include a discussion of the Company's free cash flow which is a non-GAAP financial measure. For your reference there is a free cash flow reconciliation in this morning's press release. Now I will turn the call over to Tony.

Thank you, Karen, and good morning, everyone. We are pleased to report solid first quarter results for fiscal 2008. Our core producing properties continue to provide a strong revenue stream for the Company. We also began receiving revenue from our Taparko royalty in Burkina Faso and as evidence by closing the Battle Mountain acquisition last week we are focused on expanding and diversifying our royalty portfolio.

Financial highlights for the the first quarter include strong revenue of $12.8 million, an increase of approximately 29% over the comparable quarter, net income of $5.8 million or $0.20 per share compared with $5 million or $0.21 per share for the comparable quarter, free cash flow of $10.1 million or 79% of revenues compared to $8 million or 81% of revenues for the previous period. Working capital as of September 30, was approximately $94 million, and we ended the quarter with a cash balance of about $91 million. These increases in revenue, net income, and cash flow reflect improved production at several of our core properties as well as a 10% higher average gold price for the period. From our existing portfolio Cortez's production at the pipeline mining complex is marginally higher, but our first quarter revenues were $5.7 million, an increase of 21% over the comparable period.

The SJ claims that a gold strike recorded a production increase of 25% over the comparable quarter and revenues increased 40% to $1.2 million. From our expanding portfolio new and additional revenue is beginning to flow. The Leeville production ramp up continues at Newmont's operation in Nevada. Production on our royalty interest increased over 200% when compared to the prior period while royalty revenue increased threefold to about $800,000. The mine still has not reached full capacity, so we're expecting further revenue growth in this fiscal year. We understand that Newmont continues to anticipate reaching full capacity by the end of this calendar year.

At the Robinson mine in Nevada we're pleased to report robust production for the quarter with revenues totaling $3.6 million. The Robinson royalty which began generating revenue for us about 14 months ago has returned over 70% of our original investment in just a little over a year. In July Quadra revised its 2007 production guidance for gold from 68,000 ounces to 90,000 ounces due to a higher than planned grade in recovery. As of September 30, they had already achieved 90% of the revised forecast. Needless to say, we're very happy with this operation and look forward to its strong continued performance.

The Taparko mine at Burkina Faso achieved first gold poor in July of this year. I had the opportunity to visit the mine for an inauguration ceremony just several weeks ago. This is my second visit that I made to the property. The mine is still working through production start-up issues and will likely take a few more months before they reach the steady state production level. However, we're pleased to see that the flow of money is reversing on the project. Royal Gold has now invested -- now completed its investment obligations, and we have received our first royalty revenue of over $400,000 during the quarter on production of 2,900-ounces. Just like to call out that that's 400,000 on 2900-ounces of production, and that gives you some sense of leverage that we have when the mine reaches its full production rate of 100,000 ounces. We should see a tremendous amount of revenue flowing from this project at full ramp-up.

These new sources of production more than offset lower revenue from Bald Mountain, Mulatos, and Revett during the quarter. Mulatos continues to focus on processing issues, and Revett was set back with a very unfortunate accident that closed a portion of the mine for a period of time during the quarter.

As you know, Royal Gold has been very active in new business transactions during the past twelve months. We have increased our outstanding share capital over that time by 5.1 million shares to finance this growth. I would like to note that this equity financing is included in our financial per share calculations this quarter but the revenue from those transactions is still to come. Now I would like Bill Heissenbuttel our Vice President of Corporate Development to speak about some of those additions to our portfolio and their potential impact.

Thank you, Tony. Just last week we closed on the acquisition of Battle Mountain gold exploration. We paid approximately $3.4 million in cash and issued 1.14 million shares of common stock to the Battle Mountain shareholders in order to acquire the shares of Battle Mountain that we did not already own. This transaction resulted in the addition of four producing properties to Royal Gold's royalty portfolio. The Williams mine in Ontario, the Don Mario mine in Bolivia, the El Limone mine in Nicaragua, and the Joman mine in Quebec.

Including both producing and development stage royalties these newly acquired properties contain approximately 4.5 million-ounces of gold reserves and 136 million-ounces of silver reserves. Battle Mountain received approximately $800,000 last quarter from existing operations, and we look forward to immediate revenue contributions from these new producing royalties. Battle Mountain's principle asset includes a 3.25% royalty on gold production and a 2% net smelter return royalty on silver production from the Dolores project in Mexico which is under development by Mine Finders Corporation. The Delores project is an open pit gold and silver operation located in the state of Chihuahua in Northern Mexico.

In November 2006 Mine Finders began construction of a heap leach operation with an 18,000 ton per day processing rate and recent reports indicate the construction is going well. The mine camp is fully operational, the plant construction is still in progress, and the power plant is scheduled for completion this month. They have made good progress on laying liners for the initial Leach pad and they are now conducting waste stripping activities. Commercial production is targeted for the second quarter of calendar 2008.

According to Mine Finders February 2006 feasibility study, the mine is estimated to produce 120,000 ounces of gold and 4.3 million-ounces of silver per year with a projected mine life of twelve years. The mine life was extended by two years to 14 years as of their December 2006 reserve update. At full production and current metal prices this would add approximately $4 million per year to our annual revenue stream. There is some exciting upside potential as the project has additional resources at the North and South ends of the proposed pit which are being evaluated for inclusion in the mine operation. In addition, there are high grade mineralized areas below the pit and running parallel to the existing deposit that have good opportunity for underground development. An additional flotation mill is being considered that could be in operation as soon as the third year of open pit production and would increase recoveries of gold and silver from the high-grade portion of the deposit.

Turning to Penasquito, construction is under way at Goldcorp's property, another one of our development stage royalties. The Penasquito project is an open pit polymetallic mine being developed by Goldcorp in the State of Zacatecas, Mexico. When completed Penasquito will be Mexico's largest mine with throughput estimated to be 100,000 tons per day and a projected mine life of 17 years.

Construction support infrastructure and mine access is now in place. Current activities are focused on construction of the Meryl Crow plan, the Leach pad, equipment assembly, line feed power, the primary crusher foundation as well as camp and warehouse facilities. A phase start-up is designed at Penasquito. The heap leach operation is envisioned by Goldcorp to commence in 2008 followed by the first line of sulfide concentrates in 2009 and finally the second sulfide concentrate line in 2011. Full production of 100,000 metric tons per day is expected to be achieved in late 2011. A feasibility study on the project was completed by Glamis in July 2006 and it is estimated that the average annual metal production will be 388,000 ounces of gold, 23 million-ounces of silver, 303 million pounds of zinc and 156 million pounds of lead. With these production levels and at current metal prices this 2% NSR royalty could generate over $20 million annually at full production.

In addition, Goldcorp is currently reoptimizing the project in light of the significant new reserves reported in June of this year. They're considering expanding throughput to 130,000 metric tons per day which will have the effect of substantially increasing our annual royalty revenues. We look forward to the results of this study near year end.

We also just announced the purchase of a 1.5% net smelter return royalty from Fair West Energy Corporation on the Benso gold concession in Ghana for $1.875 million. The Benso concession controlled by Golden Star Resources is located approximately 25 miles south of Golden Star's Wassa mine. The deposit as of June 15, 2007, contains 252,000-ounces of reserves with a projected mine life of four years. We believe that this property located in the prolific Ashanti Greenstone belt will be a near term contributor to our revenues with the possibility of reserve expansion. Lone Star recently announced construction of the road from Benso to the Wassa processing plant and the Company hopes to begins haulage of high grade ore from the project in the third quarter of calendar 2008. Now I will turn the discussion back over to Tony for a brief summary.

Thanks, Bill. As you can see we are very excited about the pipeline of new royalties that we have in Royal Gold. In conclusion, let me say that I am pleased to report another strong financial quarter. We expect that the coming quarters will continue to reflect the successful execution of our growth and diversification strategy. As we realize increasing levels of production at Taparko, greater contributions from Leeville, new revenue from our producing Battle Mountain properties, and initial revenue from the Delores mine in the second half of fiscal 2008. These new revenue streams along with continued performance from our core royalties should result in a strong performance throughout fiscal 2008.

We remain determined to grow the Company through the creation and acquisition of royalties and are constantly evaluating new opportunities. We are pleased with how the Company is currently positioned and the growth potential ahead of us. Operator, that concludes our prepared remarks. We would be happy to take any questions that there might be at this time.

(OPERATOR INSTRUCTIONS) Your first question is from the line of John Doody with Good Stock Analysts.

It is John Doody at Gold Stock Analysts. Congratulations on another good quarter.

Thank you, John.

I wanted to see what your thoughts are on a big new addition to the royalty business. It looks like Franco, Nevada, is going to be spun out on some basis from Newmont and how do you see that impacting Royals business? I know that they've been -- I presume they've been actively competing against you for royalties up until now, and maybe they will be more so in the future. What would your thoughts be, Tony?

John, on the front end, I would say that we have not seen the Newmont Capital folks in the Royalty, new acquisition of Royalty sector. They really have been focused on a lot of things that were strategic to Newmont as a whole. More along the lines of equity partnerships and the like, but certainly if they do accomplish the IPO, we would anticipate seeing Franco, Nevada, as a competitor and probably see them more and more involved in some of the things that we're looking at. As you know, they're running two parallel processes, and certainly we're aware of what's going on there and looking at things pretty closely. We don't know exactly the ultimate outcome of the IPO process, but we're obviously watching it pretty closely, John.

Is that something that you would consider bidding on? I don't think they want to piecemeal it out, but maybe.

Again, we're certainly aware of the process, but we would never be able to comment about any future business transactions, so we just wouldn't have a -- we wouldn't number a position to comment on that today.

Have you been to the data room?

Again, I wouldn't be able to comment on those details.

Okay. Fine.

Thanks for the question, John.

Your next question comes from the line of Victor Flores with HSBC Securities.

Thanks. Good morning, Tony. Question for you on Taparko. You mentioned you were out there and they're still working through some start-up issues. Could you just give us a sense of what those issues are and I guess your sense is they'll be able to get through them without too much trouble?

Victor, good morning. It was a very wonderful visit to get out there and see them inaugurate that mine, and I was quite pleased to see the progress they made on all of the infrastructure. Everything is in place now. We still have to complete, or they still have to complete the what was called a completion test for our release of securities on the project. We don't think that will start for another couple of months. There is still some issues they need to work through. I think there is an issue currently surrounding one of the couplings in the Ball mill area, but we're very very confident that they're going to get through those. I had a chance to spend quite a bit of time with the Senate folks who actually were the constructors on the project, and I was very impressed with the work quality that's been done on the site. I think there are just a few things mechanically that they have to get performing at steady state, and I think the bulk of it is really ready to roll.

Okay. Great. Thank you very much.

Thanks, Victor.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Mike Delonen] with Merrill Lynch.

Hi, Tony.

Good morning, Mike.

Good morning. Hopefully I'll be called a good stock analyst also.

There you go. We'll get your last name right one of these days.

And just wondering, I say to you your Benso deal this morning, and sort of like I say out of character for Royal Gold given your recent transactions of being much larger then this one sort of crops up, and I am just wondering what the rationale was? Is there greater exploration potential than Golden Star's property because they see it more as a satellite deposit or do you just see you can make a few -- a good return on it?

I think really looking at a couple of things, you're right, the transaction is smaller than the deals we've done previously, but any time we see an opportunity to make a nice return on an asset, that's something that we are going to consider, and the other thing I just noted is although we are in West Africa we haven't been in Ghana, and sometimes when we go into a new area we might be a little a little more conservative.

We also -- that was Bill speaking, Bill Heissenbuttel, and we also would like to continue to grow the business in that part of West Africa and this is an opportunity for us to learn a bit about Ghana.

Are there a slew of royalties over there? I think there must be given the Company's cash costs look pretty high.

Well, any time Canadian companies go around the world it seems as though there's often a royalty type of legacy that has been developed. I think there's opportunities there. We are aware of some things there.

Luckily you won't have to use Canadian dollars to buy them, they would be more expensive.

Exactly. Good point.

Thank you and good luck.

Thanks, Mike.

(OPERATOR INSTRUCTIONS) At this time there are no questions.

Well, thank you very much for joining us today. We appreciate your interest in our Company, and we look forward to continuing to update you in the upcoming quarters. Thank you for your interest in Royal Gold.

This concludes today's Royal Gold fiscal 2008 first quarter earnings conference call. You may now disconnect.