Royal Gold Inc (RGLD) 2009 Q2 法說會逐字稿

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

Thank you, operator, and hello, everyone. Welcome to our second quarter fiscal 2009 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 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 of 1995. A discussion of the Company's current risks and uncertainties is included in the Safe Harbor Statement in today's press release and is presented in greater detail in our filings with the SEC.

Participating on the call today are Tony Jensen, President and Chief Executive Officer; Stefan Wenger, Chief Financial Officer 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. Our core producing properties provided a strong revenue base for the Company during the period. The initial revenue contributions from the producing properties acquired in the Barrick transaction totaled $12 million during the quarter. We also received first revenue from the Dolores and Benso mines. We had two extraordinary events that influenced our second quarter results. In connection with the Barrick transaction, we recorded a $31.5 million gain resulting from the restructuring of our royalties at the Cortez mine. If you remember, we lowered our GSR2 royalty to match the GSR1 royalty rates and removed the NVR1 and GSR3 royalties from the cross roads deposit. The second extraordinary event was the negative pricing adjustments associated with final concentrate settlements at Quadra's Robinson mine. During the fourth quarter, the average price of copper was $1.79 per pound, while the average price of copper during the third calendar quarter was $3.49 per pound. This 49% decrease resulted in Quadra having significant negative final price adjustments that's translated into negative revenue adjustments for Royal Gold as well. I'll turn the call over to Stefan so he can discuss the financial results for the quarter.

Thank you, Tony. Highlights for the quarter include revenue of $14.6 million compared with revenue of $14.7 million for the comparable period. Net income was $21.4 million, or $0.63 per share compared with $4.6 million, or $0.11 per share for the second quarter of fiscal 2008. Free cash flow was $11.5 million, or 79% of revenues compared with $10.6 million, or 72% of revenues for the previous period. We ended the quarter with a cash balance of $55 million and no long-term debt. For the six-month period, royalty revenue was $30.7 million, net income was $27.1 million, or $0.80 per share, and free cash flow was about $25 million, or 81% of revenues. The negative pricing adjustments at Robinson decreased our royalty revenue by about $3.3 million during second quarter. Absent this pricing adjustment, the metal sales from Robinson from the quarter would have contributed approximately $2 million to royalty revenue. Therefore, on a net basis, we recognized negative royalty revenue from the Robinson royalty at approximately $1.3 million for the quarter.

The negative royalty revenue will be offset in future -- offset against future metal sales subject to our royalty. There is no provision in our royalty agreement that requires cash settlement by Royal Gold. As we look forward to our third fiscal quarter, our royalty will continue to be positively and negatively impacted by pricing adjustments. At the current copper price, we expect that our royalty would be subject to additional negative price adjustments ranging from $1 million to $1.2 million. Our DD&A charge increased to $8.5 million for the second quarter compared to $3.6 million for the second quarter of fiscal 2008. Our average depletion rate on a gold equivalent basis was $436 per royalty ounce compared with $172 per royalty ounce of gold equivalent production in the prior year period.

The increased depletion cost per ounce this quarter was a result of lower production at Cortez, the impact of negative revenue at Robinson, which reduced recorded royalty ounces of production, and the strong contribution to revenue from our more recent royalty acquisitions, which carry a higher cost per ounce than our more mature properties like Cortez and Robinson. The long-term carrying costs of our royalty portfolio as a whole is less than $400 per ounce. And as such, we expect that our depletion expense will be below this level over the life of our royalty assets, assuming existing reserves. Now I'll turn the call back to Tony to review the operational and development elements of our business with you.

Thanks, Stefan. Leeville and Goldstrike turned in solid performances for the quarter. Both operations slightly increased their production goals -- slightly exceeded their production goals for the year, and Leeville was our second highest revenue source for the quarter. Production at Cortez was less than expected due to a change in the pit sequencing. The production focus was shifted to the GAAP deposit, an area where Royal Gold has a royalty interest on about half of the deposit. The original mine plan called for a greater amount of production from stage nine, where our royalty interest covers the entire area.

Total production subject to our royalty for calendar 2008 was approximately 288,000 ounces compared to the operators' original estimate of 367,000 ounces. We are pleased to see initial production commence at Dolores during the quarter. We understand that the crushing and stacking rates averaged about 14,000 tons per day, and at times have exceeded the design capacity of 18,000 tons per day. Recovery of precious metals from the leach pad appear to be ramping up, consistent with expectations. Minefinders expects to reach commercial production in just a few months in the second quarter of calendar 2009. Once commercial production is reached, our 2% NSR royalty on gold and silver will take effect, which is in addition to our 1.25% NSR royalty on gold, which is currently providing us revenue.

At Mulatos, Alamos was recently announced strong fourth quarter and calendar year production. We are pleased to add additional royalty revenue for the quarter due to our increased royalty rate. Prior to the Barrick transaction, we had a 1.5% NSR royalty on this property. The acquisition consolidated the Mulatos royalty and increased our royalty interest to 5% at current gold prices. During the quarter we recognized approximately $1.1 million in additional royalty revenue from Mulatos for a total of $1.5 million for the period. Robinson announced a new mining plan that is expected to maximize revenue and reduce operating costs over the next several years based on a copper price in the range of $1.50 per pound. The new plan alters the mine sequence from the veteran pit to a smaller satellite pit and then to the [Ruth] pit at the end of calendar 2010. The previously announced veteran extension, which is expected to add two years of additional reserves, will now be deferred until after the [Ruth] pit is complete. The shift in mine plan does not impact our royalty interest, as our royalty covers all of these deposits.

We've been keeping a close eye on operations at Taparko and had our consultant on site just last week. Since the Taparko mine commenced gold production in August 2007, we have received approximately $9 million in royalty revenue. The mill recommenced operations during the quarter, on November 4th, following the installation of a new gearbox and a grinding mill drive train. Since the mill restarted, Taparko has been running at about 80% of design capacity, which seems to be a comfortable balance between throughput and recovery. However, implemented scheduled mill shutdown which took place in mid January to further reduce drive train vibrations. While we understand that those efforts were successful, there is further work planned to improve the contact between the [pinon] and [bull gear]. One final property in our producing portfolio I would like to mention is the Benso royalty, which we acquired in October 2007. We saw initial royalty revenue of approximately $400,000 from this property during the second quarter on production of nearly 39,000 ounces.

Turning to the development stage properties, at the Malartic project in Canada, we own a 2% to 3% sliding scale NSR royalty. In November, as [Cisco] announced the results of a positive feasibility study highlighting improvement in probable reserves, a 6.3 million ounces of gold, of which four million ounces are subject to our royalty interests. We also understand that the economics of the project could be enhanced with the addition of the nearby south Barnett deposit. Even though our royalty does not cover this area, we are encouraged by this news, as it could benefit overall project feasibility. And at Penasquito, we are moving closer to mechanical completion for the construction of the first sulfide circuit. We understand that the project remains on schedule for a midyear startup in the sulfide mill and production of initial concentrates in the fourth quarter of 2009.

So in summary, while our second quarter fiscal results were impacted by extraordinary events, the majority of our portfolio performed well. This is the advantage of having a diversified revenue portfolio. In particular, we were pleased with initial contributions from our recently acquired properties, as well as from Benso in the continuing rampup of our newer producing properties. We have a portfolio that is concentrated in gold, and during the past six months 81% of our revenue came from gold. As a diversified global precious metals royalty company, we have generated a track record of strong performance, blending low operational risk with strong long-term growth potential. This is an excellent business model for the current economic environment of tight credit and potential inflation on the horizon, with the expansion of monetary policy through government spending. This is a very good environment for gold and for Royal Gold. With that, operator, that concludes my prepared remarks, and we would be happy to take any questions, if there are some.

Thank you, sir. (Operator Instructions) We'll pause for just a moment to allow the question and answer roster to compile. Alright. Our first question comes from the line of Victor Flores with HSBC. Your line is open.

Yes, thanks. Hi, Tony. Help me out a bit with this, with this provisional pricing situation at Robinson. Is this situation where they paid you based on the royalty rate and then based on their contracts with the smelters they have had to pay money back, and so they are going to take it out of your future revenues, or did they just not pay you because they knew that was going to happen?

Victor, I think the former is the correct one, where the first pricing happened -- there's three different pricings during the course of settlement. The first pricing happens immediately when they load it on the ship and of course that was done back four months ago or so at higher copper prices. And then there's a second provisional that gets paid that trues up the grade and the tonnage at the smelter. But the final pricing, the final value of the metal is not determined until about four months or three to four months after shipment. So the initial payments were essentially an overpayment from the smelter and then there's an adjustment down with the reduction in significant copper price movements. So we don't have to pay any money back, but our -- we were paid in advance as well and so the revenues that we received earlier are just being netted against royalties that we otherwise would receive during the fourth quarter, plus calendar quarter.

So you did receive payment during the quarter.

No, and the reason for that is because the negative price adjustments exceeded what the production royalty would have been. So let me try --

So you got -- the number was sort of negative [1.3], but they just didn't give you anything, and then you're going to have to, I guess not get revenue from them once the copper price improves.

You've got it.

Okay. Thank you. I mean it should be clear, but I just wanted to ask the question on that.

No, it's an anomaly this quarter. So thanks for everybody on the phone for clarifying that.

I hope it's an anomaly.

Well --

Second question goes to the Barrick portfolio. I quickly sort of added up what I saw from the press release and the 8K as to the revenue. And you mentioned a figure of $4 million. I could only get just a hair over $3 million. What am I missing?

I -- Stefan, do you want to handle that?

Yes, Victor, what you might be missing is you need to take our revenue from Mulatos which was $1.5 million for the quarter. 70% of that was new revenue coming from the Barrick acquisition.

Right, so that was $1.1 million.

$1.1 million, and then you add all of the other Barrick--

Then we had Siguiri at about $1.3 million.

Yes, Victor, it's Bill Heissenbuttel. The producing properties Mulatos, Siguiri, Mt. Goode, Balcooma, El Toqui, Allan, Twin Creeks and Wharf, if you add all of those up, you'll get to exactly $4 million.

Sorry. I left -- now I know which one I was missing. I was missing Twin Creeks. Okay. We're good. We're good. And then finally, I was a bit surprised to hear you say that the 2% Dolores royalty doesn't kick in until commercial production, even though the other one is already generating revenue. Was that a specific clause in that royalty, or is there something else there that I'm missing?

No, Victor, those are really two different royalties, and one allows for payment at the first ounce of production, and the other one allows payment after the mine has reached 75% of commercial -- or installed capacity. So we think that's going to happen. They were very close to that figure during the month of January and we think that's going to happen during the next three months.

Okay, so just the particular details in that royalty agreement?

Yes, you'll remember we didn't write that one. That's one we purchased in the [Battle] Mountain acquisition and that was just one of the features of that acquisition.

Right. No, I just assumed it would pay from day one. My mistake. Okay. That's good.

Thank you, Victor.

Thank you. I'll let someone else ask questions. Thanks.

Thank you very much. (Operator Instructions) And our next question comes from the line of Paul Durham. And Mr. Durham is with HSBC Securities. Your line is open.

Hi, Tony. Just a quick one. I sort of see the comment in Taparko in the statement. But is there anything else you can sort of flush out for that for us, because clearly it's still an issue as far as you're concerned. Can you give us any more skin on the bones?

Good morning, Paul. I can maybe put a little more color to it. We were actually somewhat pleased with how the mill has been performing since November 4th. The new grinding -- the new gearbox went in and a significant amount of the vibrations went down at that point. We knew that that was an issue that had to be addressed. The work that was done in January involved putting a new sole plate, or it's the anchoring of the mill motor to the foundation, and that, too, we were aware it needed to be redone. And our independent engineer that was over there last week reports that that work was done very, very well. So now the -- we're just kind of knocking these things off and I use we very loosely. It's the High River folks that are doing all this work, but they are knocking the vibration off at each juncture and they still want to improve it over in the [pinon bull gear] side. So we applaud them for the work they have been able to and do the achievements they have been able to achieve, but there's still a little bit more work to do.

Okay. Thanks for that.

Thanks, Paul.

All right. Our next question comes from the line of Andy Schopick with Nutmeg Securities. Your line is open.

Thank you. My question also was on Taparko and it's just been answered. I'll pass it along.

Thank you, Andy.

Yes.

All right. Our next question comes from the line of Adam Schatzker with RBC Capital. Your line is open.

Hi. This is Adam Schatzker, RBC Capital Markets. Just a very quick question and maybe I missed it in your previous disclosure. But have you or will you be disclosing the allocations of the purchase price to the Barrick assets?

Stefan, would you take that?

Yes, Adam, we -- the first disclosure of our allocation to the Barrick purchase price will be in our 10Q that we expect to file some time in the next two days. The -- that won't be a final allocation. What we're going to do is we'll be updating our reserve estimates as provided by the operators over the next several months. And once we have those updates and we're able to complete our evaluation work on the deal completely, we'll put out a final purchase price allocation at that time.

Okay. Thank you very much. And one quick question. The Allan potash mine, was the tonnage that you reported there representative of what you think it is going to be going forward?

Bill, could you answer that question?

Sure. I think the fourth quarter at Allan was still affected by the strike there. So I can't give you sort of a full year estimate, but I would say it's probably a little bit lower than we would have expected.

Great. Thank you very much. Appreciate your answers.

Thanks, Adam.

Our next question comes from the line of Adrienne Day with Adrienne Day Asset Management. Your line is open.

Thank you. Yes. Thank you, good afternoon. I had sort of a bit -- about how you see the overall environment. Are you looking more at existing royalties or creating new royalties? And then in the environment, have you noticed, do you think prices have adjusted sufficiently for the credit problems that we see, or is it more terms that have adjusted, more than price? Could you just talk a little bit about the environment?

Adrienne, let me just clarify your second question here. You say have prices adjusted. Which prices are you --

I'm sorry, prices of royalties that people are asking for royalties.

Okay. So our acquisition potential --

Correct, correct. I'm sorry, yes.

That was the nature of the last bit of my closing remarks. I think this is a wonderful environment for Royal Gold. We've seen obviously companies that have not been able to get credit, or credit's very tight or expensive. Those companies tend to come to us, and also we've seen companies that heretofore, well, at least in the last six months have not been too interested in issuing equity. And so Royal Gold is a natural source of capital for those folks. So I think we've kind of moved a little bit more focus in the possibility of generating new royalties through financing than just focusing on existing royalties. Seems to be some -- many good things out there for us to review, and we certainly have Bill very busy these days.

And specifically though, are the acquisition prices, do you think they are now realistic, or do you think there's some downside still to come?

Well, I really believe that's a function of each and every individual that's selling. I can tell you that I feel that the cost of capital has gone up obviously throughout the market, and so we're probably in a little better position now to demand a little bit better terms, but we have good competition out there as well. So we obviously are going to be very prudent with our uses of capital and want to only get into things that are accretive over the long-term for us. So I don't know that the market's changed that dramatically, but I think the most important change is one in which there just seems to be more opportunities for royalty companies these days.

Okay, thank you. Thank you.

Thanks, Adrienne.

Thank you very much. At this time, there are no further questions in queue.

Well, thank you very much for joining us today. We very much appreciate your interest in Royal Gold, and we look forward to continuing to update you during our progress over the next quarter. Thanks very much.

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