Royal Gold Inc (RGLD) 2009 Q1 法說會逐字稿

Good morning. My name is Leslie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal 2009 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. Miss Gross, you may begin.

Thank you, operator. And hello, everyone. I want to welcome you to our first quarter fiscal 2009 conference call on such short notice. The call is being webcast live today. You will also be able to access a replay of the call on our website at www.royalgold.com. Also on the website you will 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; Stan 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'll turn the call over to Tony.

Good morning and thank you for joining us today on short notice. We felt it was important to make our team immediately available to discuss our press release issued this morning. Prior to turning to our first quarter results I would like to address our intention to file an amended 8-K for fiscal 2008. Royal Gold has a team of accountants and an engineer that review royalty payments as they are received.

This team also conducts annual site visits at all our major royalties. Our agreement with Barrick at Cortez allows Royal Gold 18 months after receiving a payment to audit such payment. In the course of our review procedures our Royalty monitoring team discovered that we have been paying for production at Cortez that was not subject to our royalty. We had discovered errors in the past and we have always brought positive and negative changes to the attention of our royalty counterparts, just as we did here. In late October our monitoring team met with Barrick to discuss our finance and confirm that overpayment of $3.1 million. After this confirmation we worked with our auditors to perform a number of materiality tests both for making a correction in the first fiscal quarter as well as materiality for fiscal 2008. It was determined that this overpayment was material and the decision was made to restate financial 2008 results.

The impact of the restatement is a reduction of royalty revenue from $69.4 million to $66.3 million, a reduction in net income from $26.1 million to $24 million, and a reduction in earnings per share from $0.69 to $0.62. We have made changes in our controls and procedures for our Royalty monitoring program to ensure that Royalty revenue associated with co-mingled production is properly reconciled and reviewed on a timely basis going forward. We are also working with Barrick to avoid such mistakes in the future. And we intend to provide an amended fiscal 2008 10-K prior to November 10. Obviously we are very disappointed that a correction to our 10-K is necessary especially under the situation where we discovered an error that was not caused by Royal Gold. However we felt it prudent to do so and to communicate the issue in a straightforward manner. With that address I would like to move to our first quarter results for fiscal 2009 and will ask Stefan Wenger to review our financial performance and the recent expansion to our credit line.

Thank you, Tony. For the first quarter of fiscal 2009 revenue was $16.1 million, an increase of approximately 29% over the $12.5 million for the comparable quarter. Net income was $5.8 million or $0.17 per share compared with $5.5 million or $0.19 per share in the first quarter of fiscal 2008. Free cash flow increased 36% to $13.3 million, compared with $9.8 million for the prior year period. And we continue to have no debt. Our combined portfolio of a royalty revenue producers more than offset lower protection from Cortez and the interruption in processing in Taparko. Net income increased marginally as higher DD&A was realized from our more recent transactions. As an illustration of Royal Golds high margins, 83% of revenues reported directly to free cash flow during the quarter.

Last Friday we announced a new amended and restate credited facility with HSBC and the Bank of Nova Scotia. We have increased our available line of credit to $125 million, the borrowing rate varies between LIBOR plus 1.75% to LIBOR plus 2.25%. Adding the nearly $60 million that we have in cash on hand today, this total credit facility gives us $185 million in total liquidity providing us with a great deal of financial flexibility. We are pleased with the timing of this increased credit facility as we look for accretive opportunities in this very unique market.

Now I'll turn the call back to Tony and he'll review the operational and development elements of this business with you.

Thanks, Stefan. Our royalties at Gold Strike, Leeville, and Robinson were outperformers during the quarter. This coupled with new royalties acquired in our Battle Mountain and AngloGold transactions during the fiscal -- during fiscal 2008 more than offset lower performance at other operations such as Cortez and Taparko. This is the benefit of having the diversified portfolio and I would like to comment on a few of the assets within the portfolio.

Although Cortez still contributed $4.5 million in royalty revenue during the quarter, there was a significant decrease in production to approximately 61,000 ounces compared with 128,000 ounces for the previous year's comparable quarter. This was due to the fact that mining was conducted in areas that were not subject to our royalty interest. We understand that ore development stage nine is slightly behind schedule and that ore will be supplemented from GAAP in Cortex until the same ore is available in stage nine in a couple of months. This is important because we have a royalty over the entire part of stage nine but our royalty only encumbers about 50% of GAAP and we do not have a royalty at Cortez Hills.

Robinson had strong results during the quarter due to solid production and timing of concentrate sales contributing $4.8 million in total revenue to Royal Gold. As we mentioned last quarter, Quadrant increased its guidance at Robinson for the calendar year to 115,000 ounces of gold and 150 million pounds of copper. And given their current production levels they may well exceed those revised targets, particularly on gold production. I would like to add a word about Robinson going forward. Revenues at this operation consist of provisional payments for concentrates produced during the current period and final satellites for prior production periods. In light of the rapid and notable decline in copper prices, final settlements will be subject to downward price adjustments going forward with a corresponding impact on royalty revenue in the current October quarter. At Taparko excessive vibration in the grinding mill drive train caused primary production to cease on June 11. Third party mill specialists have determined the vibration originated from a failure of the gear box which is a component within the drive train. Gear boxes have been on order since this past April and the first unit arrived on site just last week on October 29, and was immediately installed. Our project engineer is currently on site at Taparko where we are pleased to report that mill production started about an hour and a half ago. So far we are pleased with the performance of the mill at this very early stage.

On October 31, High River announced that its special committee of their Board of Directors has been in the process of reviewing High River's corporate liquidity and strategic alternatives which could include a financing or sale of all or some assets. [Someta] is High River's 90% owned subsidiary and operator of Taparko and pursuant to our funding agreement Someta is in breach of certain obligations.

To date Royal Gold has not agreed to forebear from pursuing any of its remedies under the funding agreement or other agreements with High River and its affiliates but we are in regular communication with the Company, its Board and other lenders. As security for the Company's investment in Taparko, two of High River subsidiaries have pledged their equity interest in Someta and High River West Africa the corporate parent of Someta. In addition Royal Gold obtained as collateral, pledge it's shares of certain equity investments in public companies held by High River. It is premature for me to outline exactly what action Royal Gold might take as the situation is very dynamic, but let me say that we will act as needed in the best interest of Royal Gold when necessary.

Now I'd like to update you on progress at some of our development properties. We are pleased to have received notice regarding the commencement of royalty production at two additional properties. Newmont reported mining is now taking place on our Royalty ground at the Twin Creeks mine in Nevada. This is a new property that we acquired in the recent Barrick transaction and illustrates the upside of that portfolio. We hold a 2% gross proceeds royalty which applies to production about 50,000 ounces of gold. The 50,000-ounce threshold was met in September and we expect to report royalty revenue in the current October quarter from this property.

Golden Star announced in early September that delivery of high grade ore from the Benso property in Ghana commenced in August. We acquired this 1.5% NSR royalty less than one year ago and are pleased that the production is coming in ahead of schedule. Golden Star estimates production of 25,000 ounces of gold during calendar 2008.

Moving to bigger development projects, construction is doing well at Penasquito where we own a 2% NSR royalty. Oxide heat placing circuit continues to ramp up with production sales of 5, 000 ounces of gold and 124,000 ounces of silver during the quarter. The phase 1 sulfite circuit is still scheduled for commissioning during calendar 2009 and for metal production in about one year from now. Approximately $1.3 billion of the $1.5 billion construction capital budget is either spent or committed. In addition the potential for underground operations, the construction of a dedicated power plant and the in pit crushing and conveying are all under evaluation.

In late October Minefinders Corporation announced the commencement of leaching operations at Dolores where we hold royalties equivalent to a 3.25% MSR on gold and 2% on silver. Pregnant Solution is being gathered and a recovery plan is being commissioned with the first gold pour -- excuse me, gold and silver pour expected in just a few days. Processing rates have reached 15,000 tons per day and are expected to increase to design capacity of 18,000 tons per day as ramp-up continues. We anticipate some royalty revenue from Dolores in the current October quarter.

We also will be receiving new revenue from eight additional royalties during this current October quarter as a result of our acquisition of the Barrick Royalty portfolio which closed on October 2. This transaction added 72 new properties to our portfolio. In addition to the eight producing properties, there are two development stage properties, 19 evaluation stage properties and 43 exploration projects and over 75% of this portfolio consists of precious metal royalties. We are now integrating these new royalties into our accounting and auditing systems and updating our communication materials to include the new assets. We will be talking with all of the new property owner/operators in the coming months and we will update you on production and reserves after the first year when we issue our annual reserve statement.

Finally, I wanted to update you on where we are with the evaluation of one of our business development opportunities. Six months ago we filed an 8-K stating that we entered into a letter of intent to acquire two royalties from MinEx on the Limpopo platinum project in South Africa for $19.25 million subject to a number of conditions. We have since decided not to move forward with the acquisition of these royalties.

In closing, I'd like to say that we are very excited about having grown Royal Gold into a Company with a portfolio of 24 producing properties in seven development stage royalties. At the end of our evaluation stage royalties we now hold a total of 56 royalty assets that have reserves and resources associated with them. In addition to our diversified royalty portfolio, we have a strong balance sheet and growing internal cash flow. Our new line of credit provides us with current liquidity of approximately $185 million, giving us ample resources for continued growth. We will steward our resources carefully and as always look for quality accretive opportunities. With that, operator, that concludes our prepared remarks and we'd be happy to answer any questions if there were some.

(OPERATOR INSTRUCTIONS) Our first question is from [Ima Casanova] of BJM. Your line is open.

Hi, everyone. This is Ima from BJM. Hi. Obviously a lot of us are focusing on the Taparko situation, as it is important to your near-term earnings. So I was hoping you could just try to give us a little bit more color on perhaps what some of the options for Royal Gold are as far as recovering the investment and any estimates that you could have on how much you could recover if it came to that just to make sure I was -- somebody spoke to me. Did you say that the mill was restarted just recently?

That's correct Ima. We just had word from our project engineer that's on site that the mill did start up and it's running smoothly so far.

Okay.

Again, that information is only an hour and a half old.

Okay.

And we will continue to watch that very, very carefully.

Okay.

Do you want me to move into some of your first questions there?

Yes, please.

So I think it's important to realize that we have invested $35 million in this project and we have gotten in return about $7.4 million back already. We feel pretty good about the recoverability of our original investment because we hold equities that are valued at about 8 million or $9 million, we hold those here as collateral in our Company. If we were to exercise our, or declare default and we have the ability to get our hands on that set of collateral, but even probably more importantly is that we have the pledge of Someta shares which is the operator of Taparko and of course that would put us into a position where we would have the, essentially the ownership of the asset and we have not yet moved down that road. We haven't made any -- haven't ruled out anything that we might or might not do but it would be our intention to work with the other lenders in the Company to see this thing in the operation successfully. So just to summarize, I think our original investment we feel quite good about , what we are more focused on is trying to get this up for future value as

Thank you. The only other question I had, maybe I missed it, but the Twin Creeks royalty, somehow it caught me by surprise. Had that been mentioned before? Did I miss it in the previous releases?

No. Ima, that one is brand-new to us, it just came to us on October 2, with the Barrick transaction and frankly, we were surprised they were that that far along in the 50,000-ounce threshold and we received that notification during the quarter, I guess maybe less than a month ago.

Okay.

So we are quite pleased so see that that project kick into production. It's quite a bit faster than what we anticipated, but nonetheless, it was a piece of the overall valuation that we assigned to the Barrick transaction.

I see. I think that's it for me. I'll let others ask some questions. Thank you very much.

Thank you, Ima.

Your next question comes from Victor Flores of HSBC. Your line is open.

Yes, thank you, good morning, Tony. I have two questions for you. First of all, could you give us a sense, you talked about some of the opportunities that might be out there given the market environment and obviously you're potentially cash up to do things. I don't want you to talk about specifics obviously but can you give us a sense of what the environment is for Royalty deals now that the market has slowed as considerably as it has?

Very good. You mentioned a couple of questions. I'll handle that one and maybe you have another one afterwards but what we have seen that there is companies that certainly aren't able to go to the equity market or are willing to go to the equity market at this kind of share price and the debt markets are very much restricted to close to many. We are -- as Stefan mentioned very, very pleased to have extended our credit line. I think it's a real show of strength of Royal Gold's balance sheet and it's portfolio to be able to do that in this environment. So we have, in addition to just companies that are looking for everything from exploration to evaluation to capital, to build something, I think we are also seeing some stress points in the marketplace that people have actually invested quite a bit of money in some assets and they are running a bit short. So I think it's time for us to be patient, it's a time for us to be selective and I think good things will come our way in this type of environment. We are perfectly positioned for it.

Great. Thanks. I guess that was a multi part question because I do have another one and that goes to the Barrick portfolio. I suppose since you closed on the 2nd of October you're going to have pretty much a full quarter of contribution from that transaction. And I was just hoping you could comment on some of the performance from those assets and if they are generating the kind of royalties you expected given that it's already early November, you may have some sense of how those guys are doing.

Bill, are you comfortable answering that question?

Yes. Victor, I mean, many of the royalties that we acquired are paid on a quarterly basis, so the only indication we would have so far would be one or two that are paid monthly. So I really can't give you a good sense for where they are in this particular quarter. I can say I think that what we have said is that for the first two quarters of this year that the portfolio generated about $10 million in annual revenue.

Yes, but so far what you know from -- of this royalty portfolio is it's, what you can tell is that it's doing okay?

Yes. I haven't found any surprises.

Okay. Great. Thank you.

Thank you, Victor.

Your next question comes from Andy Schopick of Nutmeg Securities. Your line open.

Thanks. I've got a few I'd like pursue. First on Dolores, that finally now seems to be progressing and assuming that Minefinders is able to meet its current forecast, what would be your range of expectation for Royalty from that project in the current fiscal year? Can you give us any kind of general sense based on what you believe the situation will be going forward?

Andy, you've asked a question that we probably aren't directly on point for but we expect about 4 million to $5 million on an -- at a full production rate at these prices, so--.

For silver and gold?

Pardon me?

For silver and gold at current prices?

Exactly.

4 million to $5 million annually?

4 million to $5 million.

Annually?

Annually.

Okay.

And it's going to take them a couple of months to really hit their full stride in heap leach -- in the heap leach circuits so maybe half of that or something would be somewhat appropriate.

Well, let's just hope there aren't any more setbacks there. You've given me a sense of what that could contribute. I'd like to come back to Taparko if I can to really fully understand what the situation may be at High River and in terms of their liquidity, in terms of what financing options they may or may not have and what your involvement is in any of those kinds of discussions. Could you better describe, just what the situation is now that they are in breach of certain obligations, what are those obligations if you can be a little more specific?

Well, I can to some degree, but, again, I would stir you back to High River Gold to talk specifically about their liquidity. We think the issue is serious and we are taking it very, very serious, and I thought their press release just of the other day was very forthcoming. We are in constant communication with those folks and so we have a pretty good idea of how things are going and, again, we are focused very much on getting the mill up and running because I think that's really one of the main sources of potential liquidity for them. So that's -- that's what I would have to say there. And you had a second part to your question. I'm sorry I lost it.

I think you essentially answered my question here. So let me move to another one. With the acquisition of the Barrick Gold royalty portfolio, you've acquired some nonprecious metals projects here and I wondered whether the Company, having purchased this really as a portfolio, would have any interest or opportunity to perhaps monetize in some small manner that remainder of the portfolio that really is a nonprecious metals. Do you have any interest in selectively perhaps monetizing some of that portfolio so that it's really not part of this deal?

Andy, the short answer is, yes, we think that makes good sense if we can get good value and we would -- we would look for opportunities not only to monetize it but to really turn other metals into gold whenever possible. So if those -- those situations presented themselves, we would be quite interested in pursuing them.

Okay. Great. Thank you.

Thank you.

Your next question comes from [Paul Durham] of HSBC. Your line is open.

Hi, Tony, good morning. Just a couple of clarifications. The -- any sort of legal systems that have to be or any legal undertakings that have ton done presumably on the Burkina Faso, it's French Civil all right. Are there any peculiarities to that versus anything else that we should be aware of is that sort of, as far as you're concerned, relatively straightforward and sort of cast in stone the procedures?

Well, Paul, it can get kind of complicated in a hurry here because we have really three systems to deal with.

Yes.

We have the Canadian entity, we have South African and the Caymans and also Someta and Burkina and so we are learning in all of those systems but we don't know of any real special peculiarities there would be from Burkina Faso in civil common law there. Do you have any--? French civil law. Do you have anything to add to that, Chris?

No. I think that's very accurate.

I mean, obviously from the way you describe it, you sound as though you are the, if you want to call it for want of a better term the preferred creditor there at Taparko. Is that a fair assumption?

Absolutely. We have seniority. We -- I should just back up and say normally we don't put security interest on our royalties but I think it was very wise for the Company to prepare itself for an incident like this. We certainly didn't envision it but nonetheless it's making ourselves prepared for such a situation. It's put us in a very strong position today.

Good and finally one last check here. You mentioned the value of the securities that you got was about 8 million to $9 million US. Now, is that current as of today or was that as of the end of September?

That's as of today, Paul.

As of today. Okay. Great. Okay. Thank you very much. And I just hope that new gear box keeps working well.

Yes, we all are very focused on it.

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just another moment.

Operator with that, I think we can go ahead and conclude the call and we'd just like to thank very much for everybody joining us today and we certainly appreciate your interest and continued support in Royal Gold and as always look forward to updating you on the progress of the next quarterly conference call if not before. Thank you.

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