Royal Gold Inc (RGLD) 2008 Q4 法說會逐字稿

Good morning. My name is Jackie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal 2008 fourth quarter year end 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. Ms. Gross, you may begin.

Thank you, operator. And hello, everyone. Welcome to our fiscal fourth quarter and year end 2008 conference call that is being webcast live. You will be able to access the 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 are included in the Safe Harbor statement in 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 CEO; 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 nonGAAP financial measure. For your reference, there is a free cash flow reconciliation in this morning's release. Now, I'll turn the call over to Tony.

Thanks, Karen, and good morning. We are pleased to share with you today our record financial results for both our fourth quarter and the fiscal year. Fiscal 2008 was another year of significant growth and exceptional performance for Royal Gold. We continued to execute on our plan to expand and diversify our portfolio of precious metal assets, with the addition of new royalties across all stages of our portfolio. We experienced new revenue from the producing Battle Mountain properties and the El Chanate property acquired in February. We also began receiving a return on our investments that we've made over the past several years on our development stage projects, including Taparko and Penasquito, which commenced production during the fiscal year. We also are anticipating the start of production from the Delores property during the current quarter. No doubt it has been a great year of growth in revenues and royalty assets for the company.

Let me review some of our full-year highlights, and on the financial side, we had record revenue at $69.4 million, an increase of 43% over the comparable fiscal year revenue of $48.4 million. Net income was $26.1 million, or $0.69 per share, after nonrecurring items compared with $19.7 million, or $0.79 per share for fiscal 2007. The nonrecurring items totaling $4.8 million or $0.15 per share, were related to our related convertible offering and the noncash adjustment related to the conversion of the preferred shares to common shares. Free cash flow was a record at $55.8 million, or 80% of revenues, compared with $37.9 million, or 78% of revenues for the prior fiscal period. Working capital as of June 30 was $204 million. We ended the year with a cash balance of $192 million and we increased our annual dividend to $0.28 per share.

On the transaction side, we closed the Battle Mountain transaction in October, adding three new producing properties, including El Limon, Williams and Don Mario, and as I mentioned earlier, Dolores as a development stage property. In December, we added a royalty on Golden Star's Benso project in Ghana, which we expect to commence production this quarter. In February, we completed the acquisition of three royalties from AngloGold, two at the El Chanate mine in Mexico, operated by Capital Gold, and one at the Marigold mine in Nevada, operated by Goldcorp. El Chanate made an immediate contribution to our revenues, with over $1 million in royalty revenue accrued since the acquisition.

In our royalty on Marigold is scheduled to begin paying in calendar year 2010. For our fourth quarter of fiscal 2008, record revenue was $21.7 million, an increase of approximately 51% over the $14.4 million for the comparable quarter. Net income was $7.9 million or $0.24 per share, compared with $5.7 million or $0.20 per share for the fourth quarter of fiscal 2007. In free cash flow was $18.3 million or 84% of revenues, compared with $11.3 million or 78% of revenues for the prior year period.

Turning to the operational and development highlights, Robinson had very strong production this year due to better grade and recovery, contributing $16.6 million in total revenue for fiscal 2008. [Coeur] recently increased its guidance for the calendar year by about 15% to 115,000 ounces of gold and 150 million pounds of copper. As you know, we have been waiting for Leeville to achieve sustained production levels and we are very pleased that the mine continues to operate at full capacity. Mining and processing approximately 3,200 tons of ore per day. Newmont reported total production of 361,000 ounces of gold for the fiscal year compared to 230,000 ounces for the prior fiscal year, an increase of approximately 57%. Their production estimate for calendar 2008 is 415,000 ounces.

The Taparko company mine commenced gold production in August 2007 and has already returned $7.5 million of our $35 million investment, despite start-up challenges. Most areas of the Taparko mine are capable of achieving feasibility study expectations, however mill performance has suffered throughout the year due to problems associated with the grinding mill drivetrain. This has resulted in low mill availability and throughput. While monthly mill availability is greater than 90% have been achieved, those levels have not been sustained. On average, quarterly mill availability has been closer to 60%. Several problems with the original installation were identified and corrected, but mechanical problems have persisted. Production ceased on June 11 when vibrations were detected. The entire drivetrain was reevaluated and is now in the process of reassembly, with the assistance of third party mill specialists. Continuous and sustained production is dependent upon resolving the mill drivetrain problems.

Now I would like to touch on the progress at some of our larger near-term development properties. Construction is progressing well at Penasquito. The oxide plant was commissioned and the first gold was poured on May 10th. We received a royalty payment during the quarter based upon production of 1,600 ounces of gold and about 92,000 ounces of silver. By the end of the second quarter, Goldcorp spent $801 million and committed another $341 million, for a total of about $1.1 billion spent and committed for the construction of the mine. As you can see, they are well advanced in the construction, as this number compares to the total capital cost estimate of about $1.5 billion. Goldcorp reported construction remains on schedule and is estimating production of approximately 67,000 ounces of gold and 2.3 million ounces of silver in calendar 2008.

Minefinders recently reported that its initial production at Dolores has been delayed due to a blockade that was established in May by a group of protesters. However, they expect production at the mine to commence yet this quarter. Minefinders also stated that they will provide an update for 2008 production in the near future. Their previous production estimate for the year was 40,000 ounces of gold and one million ounces of silver. We are obviously excited to see Penasquito coming into production and we look forward to the revenue from Dolores in the very near future. Both of these properties are expected to provide substantial and long-term royalty revenue for Royal Gold.

Now I would like to highlight our latest transaction. Just two weeks ago, we signed a definitive agreement to acquire a portfolio of royalties from Barrick for a net cash consideration of $150 million and a restructuring of our royalty positions at the Cortez mine in Nevada. The portfolio we acquired consists of royalties on 77 properties, including eight producing properties and over 75% of the portfolio consists of precious metal royalties. We are very excited about the unique opportunity to acquire such a sizable package of royalties in a single transaction. This acquisition has three key benefits to Royal Gold. First, it's accretive in all financial -- key financial measures and provides immediate cash flow with the eight royalties now in production. This will grow our number of producing royalty properties to 20 in total.

Second, and equally important, we expect this transaction will provide the catalyst to develop the crossroads deposit at Cortez. Our GSR2 royalty had largely been a dormant asset in our portfolio that we always believed held significant value. This agreement monetizes some of that value through the restructuring of our Cortez royalties, and we have retained upside by keeping a 5% royalty on crossroads at today's metal prices. We are very encouraged by Barrick's comments that they expect to declare reserves this year at crossroads and that they are working hard on engineering and exploration activities.

Third, this deal expands and diversifies our royalty portfolio. While we have made great progress in growing our portfolio over the past several years, this transaction advances that goal. We now have good critical mass in producing and developing projects and excellent option value leverage and exploration stage projects. Clearly we are excited about the significant financial and asset growth achieved in fiscal 2008. I would like to just step offline and say that I very much would like to recognize the valuable contributions of our employees for their efforts during the course of this year. There's no doubt that these record results are a testament to their very hard work.

Going forward, our fundamentals remain strong, with robust cash flows and a strong line of credit to fund future acquisitions. We believe Royal Gold is well positioned to continue its progress and look forward to sustaining our growth and revenue diversification plan into fiscal 2009. Operator, with that -- that concludes our prepared remarks. We would be happy to answer any questions if there were some.

(OPERATOR INSTRUCTIONS) We'll pause just a moment to compile the Q&A roster. Your first question comes from Andy Schopick. Your line is open.

First thing I wanted to ask, Tony, is how the company goes about calculating returns on deals, such as the pending Barrick deal, and what types of returns it typically looks to achieve. I mean, for example, if last year these properties generated $12 million in royalties, it's going to cost you $150 million to acquire, it's like on the surface about an 8% return, but I really would like to know a little bit more of how you go through the process of evaluating something like this transaction.

Fair enough, Andy. What we usually do when we look at value in royalties is we'll take a good look at the production profile and use our assumptions for gold and a discount rate that might be single-digit when it goes into the initial calculation. But the differentiation for us is that we are engineers and geologists and the like, and we very much take a position on the long-term value of properties. And so we'll look into resources as well and have an expectation of what we think will come about there. So while I won't go into detail as to exactly what our hurdle rates are and the like, I will say that we're always looking for double-digit returns on every investment that we make.

Okay. And secondly, I just wanted to ask if the company has any strong preference going forward between gross smelter return, revenue-based royalties and say profit-based royalties. What are the advantages and disadvantages from those two basic approaches?

We always, wherever we can, Andy, we want to be at the gross smelter return line. We want to be as high in the cash flow stream as possible and that just leaves us less exposed any operating cost inflation or anything like that. When you look at a profit space, then all of a sudden you're kind of tied to the inflation that there might be in the business. So we like to stay up on the highest level that we can, and whenever we write our own royalty agreements, that's where we want to be. Now, you do realize that some of the -- many of the royalties that we do have in our portfolio were written by other folks, and so at times we do get exposed to a net smelter or a profits-based royalty. But the vast majority of our royalties are GSR, at least the vast majority of our value-driven royalties are GSR.

Thank you.

Thank you, Andy.

Victor Flores (OPERATOR INSTRUCTIONS)

Are you there, Victor?

One moment, please. Mr. Flores, your line is open.

Can you hear us, Victor?

I'm not sure --

Victor, can you hear us? Operator, maybe we can go on to the next call and see if Victor can come back in.

Victor is there. Victor Flores, your line is open.

Thank you. Sorry. I've delayed the proceedings here. Hopefully you can hear me now.

Loud and clear, Victor. Thank you.

Oh, okay. Good. I could hear you all along. Not sure what I did wrong. Tony, my question, and I know I sound like a bit of a broken record on this, but could you walk us through your understanding of what's happening at Taparko. High River has provided some indications of what the issues are, but it seems that you have slightly more detailed information at your fingertips.

Well, first of all, we don't have any more detailed information at our fingertips. We really rely on the operator to manage the property. We do have a very collaborative effort going between the two companies, so we're contributing talent and knowledge wherever we can. It's safe to say that we're all frustrated with the mechanical problems that we're suffering, particularly at the present time, because we're trying to chase down exactly where that vibration is coming from.

And I think there is an effort onsite right now that has pinpointed the potential problem, and there is a new part that's being installed into the system, and they are going back with the entire drivetrain with the mill experts that I mentioned, with the hopes of making sure everything is in order. Having said that, we're going to have to wait for that work to be done and the mill to be -- to energize to see whether the vibration indeed has been corrected. So I'm not able to really go beyond that, Victor. That's about as much as we know.

So if I, if I understand correctly the mill was brought offline on the 11th of June, and it has still not resumed operations and we're now in mid-August.

Yes, but what I can tell you is there's been several corrections that have been made, several problems that have been identified during that period of time, and the mill has been reenergized during that period of time to see whether the problem's been resolved and we still have that same mechanical problem. And so it's not as though no work has been done. I can tell you that there's been an extreme amount of effort put into the work since June 11. So we're pleased with the effort that's been put forth by High River, and we're just all trying to work together to find the problem.

Now, a follow-up, the company had indicated that they also needed to replace some of the cyclone pumps, because I guess they were a bit undersized. Is that work being done concurrently, or is there going to be a future stoppage, again, to replace those pumps?

Victor, I don't, I don't have any knowledge of that, so it's not really on my radar screen at this point.

Okay. And then finally, is there the possibility or potential that at some point in time they just need to say, listen, it's probably more trouble to fix this mill, let's go buy a new one?

It's not, it's not really the mill, again, it's the drivetrain between the motor and the mill.

Right.

And so there may come a time where there needs to be a modification made. I don't think we're there yet, and it would -- I don't know that it would be so costly in dollars to make some modifications there, but it might be costly in time. So at the present time, I think the focus is very much on, let's get what we have working properly rather than let's go ahead and start over from ground zero.

Fair enough. Thank you so much.

All the best.

Your next question comes from [Imaru Casanova]. Your line is open.

Hi, everyone. Congratulations on what was a strong quarter and a strong financial year. I just wanted to touch on future transactions, and I know you can't tell us a whole lot. But Tony, you were quoted in the media saying that a transaction similar to the one that you just did with Barrick is not unlikely in the near future. And I -- mostly wondering if you would expect such transactions to be acquitted or debt financed, and a little bit about whether it would be gold, precious metals and maybe geography. I know you -- the reason I asked about financing obviously is because you have used a lot of your cash in the Barrick transaction, and you had $190 million and you still have about $150 million. So right now I'm estimating maybe about $40 million in cash. So to do a bigger transaction obviously would require additional funds.

Thanks, Ima, for the questions. Good question. I would just like to clarify what I think I said on the interview, and that was that the future transactions of the size of the Barrick transaction could be certainly possible in the near term, and particularly what we're thinking about there is royalty financing. For us to get involved in any kind of meaningful way, these things can be from $50 million to kind of $200 million. But I don't think there's going to be other transactions like the Barrick portfolio. That was a very, very unique opportunity to acquire all those royalties in one piece.

So having said that, let me address your real question, that's the -- what are you going to do next with regard to financing the company. And I think we'll always leave our options open when that need particularly arises. But we feel very comfortable. We don't feel pressured to have to do any kind of capital raising right now. We're in the position where we have a very good, strong credit line, and then I think our cash balance will probably be a little bit higher than what you're estimating when the transaction goes through with Barrick. Excellent cash flow coming in, and of course the Barrick properties are going to help us start contributing cash flow again in our 2Q. So I think we're in pretty good shape to do another sizable deal if one presents itself.

Good, thank you. I did -- I guess as far as precious metals, those transactions being gold or precious metals, I guess you have stated that you would remain with the focus rather than going to base metal type of assets. Is that correct?

That's a very strong business point for us. We very much want to stay heavy weight in precious metals. And when we say heavy weight, we would like to stay somewhere around 70% and above. So that's very much on our minds all the time.

Good. Well, thank you.

Thanks, Ima.

Your next question comes from Adrienne [Day]. Your line is open.

Yes, good morning. I'm sorry. That was my -- the last question was my question. Thank you. Sorry.

Okay, then, thank you. Are there any other questions, operator?

No more questions in queue.

Well, with that, then, we just thank you very much for joining us today. We certainly appreciate your interest and continued support of Royal Gold, and we look forward to continuing updating you on our progress in the next quarterly call. Thanks very much.

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