Royal Gold Inc (RGLD) 2008 Q2 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold second quarter 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. Ms. Gross, you may begin your conference.

Thank you, and hello, everyone. Welcome to our second quarter fiscal 2008 conference call that is being webcast live today. You will be able to access a replay of this 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 and today's 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 of 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'll turn the call over to Tony.

Thanks, Karen, and good morning, everyone. Our core producing properties continue to provide a strong revenue base for the Company. In addition, the Taparko royalty and the three producing properties we acquired from Battle Mountain are now contributing to our revenue stream. Financial highlights for the quarter include record revenue of $15.4 million, an increase of approximately 19% over the year ago quarter, net income of $5.1 million or $0.13 per share compared to $5.6 million or $0.24 per share for the second quarter of fiscal 2007. Free cash flow of $11.2 million or 73% of revenues compared to $10 million or 78% of revenues for the previous period. Working capital as of December 31, was approximately $201 million and we ended the quarter with a cash balance of approximately $196 million. Earnings and cash flow were impacted during the quarter due to several non-recurring Battle Mountain and business development charges, totaling approximately $0.05 per share on an EPS basis. We also had an earnings adjustment of $1.2 million or $0.04 per share due to accounting for the accumulated dividends of the 7.25% mandatory preferred shares and as you know, we have been building our asset base over the last year through the purchases of the the Penasquito, Pascualama, and Battle Mountain royalties. This resulted in a greater number of shares outstanding compared to the prior period, but as you'll hear in a bit, these acquisitions will help provide the basis of our future growth.

During the quarter we positioned the Company to consider a large potential transaction. Our review was extensive but ultimately we were unable to reach an agreement that was mutually beneficial to both parties. This review resulted in larger than normal business development expenses during the period. Given that those discussions have since terminated we have reviewed our capital structure and our options regarding the mandatory preferred shares that were issued in November and decided to redeem those shares by converting them to common shares. The conversion amount will depend upon the average share price during the pricing period. We have also approve a limited share repurchase plan to be opportunistic and support this effort if necessary. This redemption will simplify our capital structure and significantly reduce our cost to capital since we are eliminating the 7.25% after-tax dividend payment.

Turning to the revenue side of the business, I'd like to first highlight the fact that approximately 82% of our revenue was generated from precious metal royalties during the quarter, a figure that distinguishes us from other royalty companies which have a much lower mix of precious metal royalties in their portfolios. The Cortez, Gold Strike, and Robinson mines recorded solid production contributing about 73% of revenues for the the quarter. Marked on a smaller scale also continues to operate well and core just commissioned the mill last month on time and close to budget which is remarkable in this environment. This mill will likely enhance the value of our royalty as we anticipate improvements in the cost structure which should drive additional reserves over time.

While Leeville fell short of their annual goal, the mine finished the year at the design production level and contributed $1.3 million in royalty revenue for the quarter. We understand that the infrastructure is now in place but that manpower continues to be a challenge for the operation as it is in many parts of the world. In the coming quarters we're hopeful that Newmont will be able to deliver sustained and persistent production at the design capacity of 3200 tons per day.

Both Bald Mountain and Troy provided less royalty revenue than was expected. Bald Mountain simply produced fewer ounces from our royalty ground than originally projected and at Troy the mine was limited for much of the quarter due to an Amshaw imposed restriction on mining in the east ore body following an earlier accident. Troy obtained permission to start mining in this area in October but production levels during the the quarter did not return to pre-accident levels.

Now I'd like to discuss some of our more recent revenue generating properties. The Taparko mine at Burkina Faso began in production in July of 2007 and has been in the ramp up stage. Taparko produced 5900 ounces during the second quarter and contributed approximately 1.1 million in royalty revenue. This payment amount was significantly impacted by increased RA levels in transit at year-end. As well as relatively straightforward but untimely mill alignment problems. In our last conference call, we said that it would take a couple of months for the operation to reach full capacity. Both October and November proved challenging as the mine experienced problems in October when a coming failed between the mill motor and the gear box due to a misalignment. The replacement coupling was sourced from outside the country which caused significant down time in November. The mill started up again in December and the drivetrain was completely realigned in January to correct misalignment problem.

At current gold prices, and at the design capacity, Royal Gold would earn about $60,000 per day in royalty revenue from the mine, which equates to about $5.4 million per quarter at steady state production. We expect this royalty will soon be one of our top revenue generators. Also during the quarter, we received initial royalty revenue from the Battle Mountain producing properties. Collectively, we received approximately $700,000 from the Williams, Don Mario, and Alamos mines for the two month period after closing which took place on October 24. Now, I'd like Bill Heissenbuttel, our Vice President of Corporate Development to give you an update on several of our development stage properties. And our recently announced acquisition with AngloGold.

Thank you, Tony, and good morning, everyone. I'd like to begin with some great news that was announced last month at the Penasquito property. In early December, Goldcorp announced the approval plans to expand mill throughput by 30% and to accelerate the construction schedule at the project. Goldcorp now estimates the average annual life of mine production to be 400,000 ounces of gold, 31 million ounces of silver, 417 million pounds of zinc, and 214 million pounds of lead. Royal Gold holds a 2% met smelter return royalty on all metals at the Penasquito project. These operational expansions will increase and accelerate our royalty revenues and significantly enhance our return on this investment.

Goldcorp also reported that the project remains on schedule and is expected to produce gold from heap leaching of oxides in late calendar 2008 with mill start up in 2009. In addition, Goldcorp reported exploration drilling, metallurgical evaluations, and optimization efforts are continuing to provide further project enhancements. We expect this project will be our cornerstone royalty for the next couple of decades. At current metal prices and full production capacity we estimate this royalty would generate approximately 20 million to $25 million annually.

Turning to the Battle Mountain acquisition, the key asset is a royalty on the Dolores property just being constructed by Mine Founders. We understand the project is still expecting production to commence in the second calendar quarter of 2008. At current metal prices and full capacity, this royalty should produce about 4 million to $5 million per year in royalty revenue. In December, we closed the Benso transaction, a 1.5% net smelter return royalty on Golden Stars Benso concession in Ghana, West Africa. According to Golden Star construction of the road from Benso to the Wassa processing plant began in October and we expect the first ore to be mined and hauled in the third quarter of 2008. Last month, the Operator also reported that based upon positive drill results, further drilling would be done in the second quarter of 2008 to help them understand the full potential of the deposits.

Last week we announced an agreement to acquire three royalty assets from AngloGold Ashanti for $13.75 million. The assets include a 2% net smelter return royalty on the Marigold mine and open pit heap leach mine located in Nevada. Goldcorp is the majority owner and operator of the mine. The royalty covers five sections to the North of the Basalt and Antler pits, the current source of production for Marigold. We've estimated that 35 to 40% of the current 2.1 million ounces of reserves are covered by the royalty. Production subject to the royalty is expected to recommence in 2010 as the operation moves North from its current focus.

The other two royalties included in the the transaction are a 2 to 4% sliding scale net smelter return royalty and a 10% net profit interest royalty on Capital Gold's El Chanate mine in Mexico. The NSR royalty remains at 4% at gold prices above $350 per ounce. El Chanate is an open pit heap leach gold operation with an estimated annual production capacity of 50,000 ounces and proven and probable reserves of 832,000 ounces. Production at the mine commenced in the third calendar quarter of 2007. The NSR and MPR royalties are capped at $17 million and $1 million respectively. El Chanate is now producing well above the the design capacity and Capital Gold is looking to increase production to 60,000 ounces in calendar 2008 with a study underway to determine if production levels can be increased to 100,000 ounces per year. At 60,000 ounces per year at current gold prices we could receive revenue of over $2 million per year. This agreement is still subject to due diligence with closing targeted during this quarter. Now I'll turn the discussion back over to Tony.

Thanks, Bill. We obviously are quite excited about having grown Royal Gold into a Company with a portfolio that have 19 royalty properties with reserves, including the AngloGold transaction. It is rare to find a Company of our size with this level of diversification. 13 royalty assets in production today and six in the near term production are development pipeline.

Our financial strength has never been better, with nearly 200 million in working capital and strong and growing internal cash flow. Last week, we extended the term of our credit facility with HSBC until December 2012 which has a borrowing capacity of $80 million. We now have liquidity of about $280 million giving us ample resources for continued growth.

I'd also like to take this opportunity to welcome Bill Hayes to our Board. Bill has a wealth of senior executive experience with both Exxon and Placer Dome where I had a chance to work with him for about 10 years. His political, financial, and international experience in the mining industry will supplement the Board in these critical areas.

In conclusion, we had a strong -- we had strong revenue and free cash flow for the quarter, and we anticipate increased production levels from Taparko and Troy, a full quarter of production from the Battle Mountain assets and fresh and immediate revenue from El Chanate. All of this should result in a stronger second half of fiscal 2008. Operator, that concludes our prepared remarks and we would be happy to take any questions if there are any.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [John Sergei]..

Yes, go ahead, please. John, are you the?

Go ahead, sir.

John, I heard you for just a bit. Can you hear us?

I can hear you. Can you hear me now?

Yes, please go ahead.

Okay, on the non-occurring, reoccurring charges of 2.2 million, do we expect any in the current quarter, any non-reoccurring charges either from Battle Mountain or the evaluation of new business?

Stefan, will you take that?

Yes, John, this is Stefan. With respect to the Battle Mountain and the business development charges we don't expect any of those additional charges in the current quarter. I should highlight with respect to the the preferred dividend on the the preferred shares, that dividend will cease on March 10 when the conversion is complete with respect to the preferred dividends.

Okay so we expect some outlay of cash there then?

Yes. The remaining dividend will be paid on March 10, and that will be the end of that instrument.

Okay, another question on the Battle Mountain acquisition. At one-time they had had a loan outstanding that was to be paid back in actual gold ounces, and originally it was 7500 ounces, I believe they had that paid down somewhat. When we went ahead and inherited that, I assume we inherited that debt as well. Had that been paid up to this point?

John, this is Stefan again. We paid that immediately following the acquisition actually about a week or so following the acquisition so that debt is no longer outstanding.

Terrific, and and I don't see anything from Jewel Man. That property was once producing for Battle Mountain. Is that now defunct?

This is Tony, John. That property totally mined out its reserves but it has just been sold to another firm and I can't think of the firm right off the top of my head, and they're talking about doing some additional exploration on the property but we don't expect any near term production until they get some reserves out in front of them.

Okay, and the last question is on the pipeline, have we been given any estimates for the current calendar year?

Not yet but you will see those probably in late March, early April. We were actually in the process of going to visit all of the sites just now and the reserves are coming into us in bits and pieces and as well as the production profile for this calendar year, and we'll publish a press release in late March, early April.

Okay, I know that property has been going for a long time. How much longer can you expect realistically, for that mine to continue?

Last year, I think, Karen, if you can make sure I say this correctly, we had 2.3 million ounces or 2.4 million ounces that were subject to our royalty interest. I think they consumed probably around 550,000 of that, so if you just do that math and look forward, there's a few more years out in front of it and we still expect that there's still some good exploration potential in the property, also I think we've talked about a number of time on these calls, we want to highlight the Crossroads deposit which just sits to the South of South pipeline and I think there's in the order of 3 million ounces of resource there that have not made their way into reserves and we have always been pretty high on that property, particularly at higher gold prices, so we're still pretty excited about being associated with that property, John.

Yes, that's fantastic. That's what I wanted to hear, great. And if you will, have you heard anything about Taparko, and I know you talked about the alignment and so fourth but currently have you heard how they're cranking out right now?

Well, they had a pretty good steady state production in the month of December when they came back up and they had pretty good steady state production in January and then they went down to completely reevaluate that alignment issue and then laser aligned everything so they're just coming back up from that and keeping a close watch on that entire drivetrain so apart from that one issue, which is not a real complex issue, and normally a problem area in the mill, apart from that everything else seems to be operating very nicely. So we, as you are very eager to see them get up in that sustained production mode.

Sure, so February and March could be very well there.

We're watching it close.

Okay, all right, guys, thank you very much.

Thanks, John.

Your next question comes from the line of Victor Flores.

Yes, thank you. Good afternoon, Tony and everybody at Royal Gold. First a couple of financial questions. Going to the extra business expense that you incurred during the quarter, is that also included in that jump in interest expense?

No, it's not. It's all included up in the business development line item, Victor. The jump in interest expense was part of the Battle Mountain charges, and that line item relates to I'd say about $400,000 of Battle Mountain one-time charges there, related to actually paying down that gold loan. And the rest of that is related to our Royal Gold Chile interest. So about 400,000 of that interest line will be non-recurring.

That's fine, and then turning to the preferred dividends, I have two questions. One is do you have an estimate for how much you will pay in total on the preferred dividends before you convert them?

Yes. Victor, with the sure payment date now of March 10, which is the conversion date, the total dividend on the preferred shares for the entire outstanding period will be $2.8 million. $1.2 of that was accrued into our financials for the three months ended December 31, 2007, so about $1.6 is what's remaining.

Okay.

Now all of that's in February and March, Victor so none of the cash had gone out yet.

Right, and then just an accounting question. My understanding is that when you pay a preferred dividend you recalculate your diluted earnings per share. By adding back the preferred dividend and then dividing by the fully diluted number of shares as if you had converted. Why did you not do that because it really makes you take a hit to earnings which I don't think you deserve to take.

Well, on the -- we did do that, actually, the dilutive calculation was anti-dilutive and I can walk through the details with you off line if you'd like. We did look at that in detail. With respect to the basic shares, you actually reduced the amount of net income in the numerator by the preferred shares but the shares are not included in the basic.

All right, well, it's just an accounting thing. We can deal with that later, thanks. And then just turning to the operations. Tony, could you remind me what "covenants" or requirements High River Gold has with respect to the performance of Taparko, given your rather large royalty financing and the agreements you made with them, because I mean, I understand mines have start-up issues, but they haven't come anywhere close to what they had guided towards, and they spent $90 million on this thing, you'd think it would run pretty well in its first six months and quite frankly, the performance there has been well short of what they've advertised.

Right, Victor and we still do hold security on it. We have a couple of layers of security there. Let me just talk about the performance test first. They have to run for 90 days at continuous performance and meet a whole series of different tests throughout the mill and in the mine, in the reserve all of that has to work and we have not yet been given notice by High River that they're in the position where they want to start that test and in the meantime, we still hold two pieces of security that, Stefan I don't know if you've looked at those lately but they're probably well in excess of our 35 million investment in the project, probably closer to 60 million or $70 million I would imagine.

Yes. We've got ample security off that.

Okay, so at this point in time, you're basically willing to take a wait and see attitude with respect to the the start up and at some point in time we hope that they're comfortable that the things running right and they can then initiate that 90 day period?

Absolutely. Let me just say that I've been over the property twice and it is a straightforward property. The facility that's been installed is, there's nothing unique about it, Victor, and it's just a matter of getting the critical spares on site and getting a few of these things ironed out. We've had a few other areas that have been addressed quite quickly like you'd have in any start-up issue but this coupling ended up being quite a delayed factor. So I don't see any reason why this is not going to operate smoothly in the near future. And frankly, we want them to succeed because when they succeed, we will as well. Stan just asked me to comment about our project engineer. We have a gentleman that we hired specifically for this task and he goes over and monitors the the project on a pretty frequent basis and so we do have a pretty good understanding of what the status is of the project and we're providing any kind of input we can along the way.

Okay, and just one final question if I may. Have you heard any updates from the folks at Mine Finders with respect to their start up at Dolores?

We still understand that they're looking for production to start in the second quarter of calendar 2008, so I don't know if they've given any specific guidance with regard to a month but we're just expecting some time in the second quarter.

Okay, yes, I mean that's generally what I've heard but I didn't know if you had a little bit of an inside track there, but thank you.

Thanks, Victor, for your questions.

Your next question comes from the line of Mike Jalonen.

Mr. Jalonen, welcome to the call.

Pronounced my name correctly. Full marks. But everybody gets it wrong though, just wondering, looking at Troy I guess we've had probably bashed Taparko enough, but Troy, you mentioned the mine hasn't come back to former production levels, operating levels after I guess this temporary shut down, just wondering where the mine stands now in the January of '08? Is it back up to full steam? It always seems to have problems, this mine.

Well, Mike, I can't tell you the exact number where their production level is today, but I think they're going to be in a position where they can regain what they were doing last July. June, July they started coming on strong and reaching a level that I think is quite economical to sustain, but where they're at today, I don't know whether they're at 2,000 or 3,000 tons a day but I suspect they're getting back close to June, July levels.

Okay, that's good. And I guess just staying with Troy, you have that financing I guess royalty that the initial money you put into it. Just wondering how much of that was left to be recouped?

Mike, this is Stefan. I think through this quarter we've put up -- we've received $6.6 million out of the $10.5 million cap, so we've got, depending on the production level, we've got a year, year and a half, two years left on that cap.

Okay, well, thank you.

Thanks, Mike.

Your next question comes from the line of Andy Schopick.

Good morning. I have a series of questions I'd like to ask. First of all, assuming an average share price, around $30, to how many common shares would the mandatory preferred shares convert?

This is Stefan, at $30, we would issue 3.9 million common shares.

Okay. I think that's probably a reasonable assumption at this stage. Could you repeat how much precious metals royalties represented as a percentage of the quarters royalties?

Well, for the quarter we had 82% precious metals.

Okay, I think you mentioned that and I didn't hear it correctly. Also, I have just kind of a general question about why Royal Gold shares have not tracked more closely with the rising price of gold? I can go back to like the Spring of '06 when gold was still perhaps in the $500 range and it's kind of frustrating and disappointing to not see Royal Gold shares track more closely with the generally very strong rising precious metal prices. I'm kind of at a loss to explain it and wondered if you had any comment on it?

Andy, I think you've seen the financials come through quarter after quarter and in reasonably good shape. We're certainly building a Company for the future, and part of building a Company for the future was a couple of liquidity events that we had during the course of the year and I think there was some shares that might have been in some softer hands after our March event and perhaps we took on a bit of share short selling shareholders hedge funds with the mandatory convert and that could have pressured the shares a bit, but the fundamentals of the Company are extremely strong and we too would like to see a break out here.

Yes, I think that mandatory preferred share situation may have been a factor in this. How about the the common stock dividend? To what extent does the redemption of the preferred shares influence your future common stock dividend policy? Apparently you have also made an announcement pertaining to a potential up to a $30 million share buyback here in the first quarter. Just wondered if you'd want to comment on the overall dividend policy, given the expectations of the Company's future royalty streams?

We take a look at our dividend policy at least once a year at the Board level and we believe that it's important to provide our shareholders with a yield. Not only share price appreciation but also a yield along the way which is a bit unique in the gold space, so we want to maintain a dividend that we can sustain into the future, so we'll be continuing to look at that at the Board at least on an annual basis.

Did you say that Taparko had full production and performance will be generating $5.5 million of royalties annually to the Company?

That's per quarter. It's going to be a large royalty for about three years.

Okay, thank you.

Thank you, Andy.

Your next question comes from the line of John Doody.

You there, John?

Hello?

John, are you with us?

I hear you. Can you hear me?

Yes, sir.

Okay, good morning. Two questions. One is maybe you can refresh my memory on the security that backs the Taparko debt? And then I'll have a second one.

Can you take the securities, Stefan?

Yes, we've got, I'm not going to talk about the dollar amounts but we hold certain marketable securities as collateral for one piece of our agreement and I believe that falls away once they meet the completion test. We also hold shares in the subsidiary of High River Gold that holds the Taparko mine called Cimida.

So you hold some marketable securities of some other Company that High River holds?

Yes, correct.

And is that roughly 5050 kind of thing like that or is one disproportionately larger than the other?

You could argue that the value of the shares in the subsidiary are more valuable than the marketable securities but certainly the marketable securities have the liquidity so I think there's meant to be a balance there in that package.

Okay, and second since you're now sitting on a couple hundred million dollars in cash, which presumably could be earning some nice royalties if it was invested, can you give us any sense as to when this might get deployed or what kind of, I know you aren't going to go into exact details but what kind of stuff are you looking at?

John, I just, first of all say that we aren't in a position to comment on any particular business development activities, but we do have a good list of things that we follow on a continuous basis and Bill is always coming up with new and interesting ideas and we very much are pleased to have that kind of fire power on our balance sheet right now and we want to employ that as fast as we can.

Okay, I know you guys like to buy your royalties at some private market value as opposed to what the public might capitalize them at. Would we be out of line thinking that maybe the 200 million should you spend it all might be able to generate something in the range of $20 million a year royalty?

John, I just don't want to speculate on that but you've seen the kind of deals that we've done and the discipline we've had in our deal making. I think you can probably do your own math there and make an assumption.

Okay, one more shot, if you'll allow me. Anything like the Penasquito royalty out there?

We look at all sizes of deals. We very much would love to do a whole bunch more Penasquito deals but quite honestly, those are not -- something that could generate $20 million existing is not a frequent thing in the the marketplace, but we do like the portfolio approach as well, where we have a number of royalties in the -- active royalties in the the portfolio because small mines do make big mines at times. So I think you'll see us pursuing all of that, all of those existing royalties and at the same time trying to create royalties that -- out of our royalty financing products that tend to be a little bit larger in size.

Okay, great. Thanks. I think the sooner you can put the money to work, the more credit you'll get from the stock market for it.

Thanks, John.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Well, thank you, Operator and thank everybody for joining us here today. We certainly appreciate your interest and continued support of Royal Gold and we'll look forward to updating you on the progress during our next quarterly conference call.

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