Royal Gold Inc (RGLD) 2009 Q3 法說會逐字稿

Good morning. My name is Ken, and I will be your conference operator. At this time I would like to welcome everyone to the Royal Gold fiscal 2009 third quarter earnings call. (Operator Instructions) Now I'd like to turn the call over to Ms. Karen Gross.

Thank you, operator, and hello, everyone. Welcome to our third quarter fiscal '09 conference call that's being webcast live today. You will be able to access the replay of the call on our website at www.royalgold.com. Also on the website will you 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 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, Bruce Kirchhoff, Vice President and General Counsel, and Stan Dempsey, Chairman. A Q-and-A will follow our comments. We will also be discussing the company's free cash flow, which is a non-GAAP financial measure. There is a free cash flow reconciliation in today's press release. Now let me turn the call over to Tony.

Good morning and thank you for joining us today. There's been quite a bit of news during the quarter, and certainly additional news that's come out this morning, which we very much look forward to updating you on all those issues. Our portfolio of assets once again generated strong revenue during the period as we reached an all-time quarterly high of nearly $21 million. Gold Strike, Leeville and Mulatos achieved solid operating results, with combined revenue of $5.4 million. Taparko provided another $5 million, and we received $3.6 million from the royalty interest we acquired this past October from Barrick. Combined these assets more than offset revenue declines at Cortez and Robinson which together contributed $5.6 million. This continues to demonstrate the strength of our diversified royalty portfolio. Our royalty interests are focused on precious metals. This quarter's gold production contributed to 89% of revenue, while silver contributed an additional 3%. Now let me turn the call over to Stefan for a more detailed discussion on our financial results.

Thank you, Tony. Highlights for the quarter include revenue of $20.8 million, compared with revenue of $18.7 million for the comparable period. Net income of $4.1 million or $0.12 per share compared with $6.9 million or $0.11 per share for the third quarter fiscal 2008. The decrease in net income was due mainly to increased DD&A costs of $4 million in the quarter.

Free cash flow of $17.5 million or 84% of revenues compared with free cash flow of $15.5 million, or 83% of revenues for the prior year period. And we ended the quarter with a cash balance of $51 million and no long-term debt. Our current cash balance as of April 30 was approximately $292 million, reflecting the proceeds from our recent equity offering. Of course, about $218 million has been set aside for the closing of the Andacollo transaction. For the nine-month period royalty revenue was $51.5 million, net income was $31.3 million, or $0.92 per share, and free cash flow was $42.3 million, or 82% of revenues.

Revenue at Robinson was down by $2.6 million on a quarter-over-quarter basis. This was primarily due to the impact of lower copper prices, a decrease in copper and gold sales, and a final negative pricing adjustment for the quarter totaling approximately $200,000. As we discussed last quarter, our Robinson Royalty will continue to be impacted by positive and negative pricing adjustments in future periods.

Our DD&A costs increased to about $10 million for the third quarter compared with about $6 million for the comparable quarter of fiscal 2008. This quarter's increased depletion cost is the result of lower production at Cortez and a strong revenues from our recent Royalty acquisitions which carry a higher cost per ounce than our more mature properties like Cortez and Robinson. Now I will turn the call back to Tony to review the operational and development elements of the business with you.

in reviewing our portfolio this quarter Gold Strike, Leeville, Mulatos and Siguiri all turned in solid performances. However, production at Cortez was lower than expected during the period mainly due to lower grades being mined. Barrick reported that they expect production to improve in the coming quarters as higher grade ore is mined.

Production continues to ramp up at Dolores, and just this morning mine finders announced that they reached commercial production at the end of April. This threshold is important to us as it triggers the payment of our 2% NSR royalty on gold and silver production, which is in addition to our 1.25 NSR royalty on gold that is currently providing us revenue. Recovery on the leech pad is meeting or exceeding expectations. The mine produced 14,000 ounces of gold and 282,000 ounces of silver during the quarter, resulting in gold royalty revenue of $200,000.

Production at Taparko has been improving despite the mill only achieving 68% available. Sales of 23,000 ounces resulted in record royalty revenue for the quarter. Extensive maintenance on the mill was completed during two shutdowns, one in January and another in March, to further reduce drivetrain vibrations and improve the contact between the pinion and the bull gear.

Turning to the development stage properties, just this morning Barrick formally announced the development decision at Penasquito following the resolution of cross border fiscal issues and provided some key statistics on the project including a reserve of 17.8 million ounces of gold and 718 million ounces of silver, a mine life of greater than 25 years, average production over the mine life of 600,000 to 700,000 ounce of gold and 20 to 25 million ounces of silver at a total cash cost of $200 to $250 per ounce. Production rates in the first five years are higher, and cash costs are notably lower as higher grade is mined earlier in the mine life. Commissioning is expected in late 2012 or early 2013. Royal Gold holds a 1.08% NSR royalty on this project at existing gold prices on the gold mineralization that is mined within Chile. We understand about 80% of the gold will be sourced from Chile. At existing gold prices this royalty could add about $7 million in revenue annually for the first five years of production.

Another major pillar of our future revenue stream is Penasquito. We understand that GoldCorp remains on track for a start up of concentrate processing in just a few months and expects to reach commercial production on the first sulfite circuit by the end of the year. Elements of the operation are beginning to come on line as commissioning of the primary crusher and conveying commenced in April. Royal Gold owns a 2% NSR interest in Penasquito and at current metal prices, an average annual royalty revenue would be in the $22 million range over the first ten years of production.

At Andacollo, the final pricing for the transaction is $218 million in cash and 1.2 million share of common stock. The share consideration is now equal to only 3% of our outstanding shares of 40.7 million. The total consideration for the transaction at our current share price is about $260 million, which equates to approximately $220 per contained ounce, or $385 per payable ounce acquired. And remember, as a royalty company, we don't have any further obligations to pay for operating for capital costs. We understand the construction remains on track for a start-up in the fourth calendar quarter of this year and ramp-up in the first half of 2010. Andacollo is expected to be a substantial source for Royal Gold in the near future. At gold prices of $900 per ounce we expect to receive about $32 million per year in revenue. We are working with tech to complete items necessary to close the transaction which is scheduled to occur prior to October 30 of this year.

I would like to take this opportunity to introduce you to and welcome Bill Zisch to Royal Gold's management team. Bill joined the company a month ago as Vice President of Operations and has nearly 30 years of professional mining experience. He has spent the past 12 years with Newmonte, many of those years on international assignments where he was operations manager at the Anacocha Mine in Peru, and later, Vice President of African Operations while based in Ghana. Prior to his position with Newmonte he spent 16 years with FMC company, starting in coal and gold operation, then advancing it to the company's chemical group in operating and strategic sourcing roles.

Bill will be responsible for providing oversight and management of our expanding portfolio and will lead all our technical due diligence activities associated with the company's acquisitions efforts. We're really excited to have Bill join our team, and will you hear more from him in the coming conference calls, but today we have him hard at work in Chile, so he was not able to join us.

In summary then, our diverse royalty portfolio which now comprises 27 producing properties performed very well, resulting in record quarterly revenue for the company. We also are pleased with the substantial progress accomplished at our core development royalties. For the remainder of this calendar year we anticipate increased revenues from Dolores and Penasquito as those properties continue to ramp up production. We also executed on our strategic growth plan during the quarter. Our recent agreement with Tech on the Andacollo mine further enhances our world class Royalty portfolio, maintains our focus on gold, and will be a core royalty for years to come. We're also pleased with our substantial progress made over the past nine months in growing our portfolio. Our financial condition remains strong, even after completing the Andacollo transaction and we are well positioned to continue to pursue opportunities. Operator that concludes our prepared remarks, and we'd be happy to entertain any questions, if there were any for us.

Thank you very much, sir. (Operator Instructions) First question comes from Andy Schopick with Nutmeg Securities.

I have a couple of questions. If you could first give any additional color on the situation involving Taparko beyond what you have communicated in the press release. Is there anything new you care to add on that?

Andy, the operation has been performing better. The vibrations are going down, and I think they seem to be manageable at this point. I don't know that we could ever expect the mill to probably achieve availability similar to what we'd expect in North America. But nonetheless, we understand the finances of Somita, the holding company of Taparko, are sound, and the operation continues to improve ever since the new gearbox went in, in November. So we're pretty pleased with it. I think $5 million in royalty revenue with only 68% availability kind of shows you the power of that royalty on the early years on that project. So we're pleased with what's happening there, and I think they're just making some steady progress towards resolving the issues.

Let me ask you a couple more general type questions. I'm just curious to get your comment on these. How does the current conditions in the credit markets affect the prospects for doing any new royalty deals, and secondly, how does the current low interest rate environment impact your rate of return analysis or expectations on any new royalty type negotiations?

Well, the first bit I think when you talk about the current macro economic financial conditions, I think this is really the stage that set us up well to be able to do the Andacollo transaction. While base metals came off some of those companies became stressed with leverage. At the same time, we were very much capable and able to exercise new opportunities. So I don't know if there's additional time. The window is still open to do additional gold streaming with base metal companies that might need to restructure their balance sheet, but that certainly has been a focus of ours during this macro economic condition. So I think it's a wonderful time. We see a lot of good deal flow. There's companies that are in the gold only sector that aren't able to access capital. Capital is too expensive for them. And so we see us being able to really compete quite nicely at this time. With regard to the low interest rate environment, I think that low interest rate is really only available for some and not many. If you look at some of the costs of capital that's coming out in the bond issuance, even some major mining companies, the cost of capital I think has gone up pretty substantially, and it's more of a cost of funds for the lenders rather than a cost of capital. So I do think these are all good things for us to continue to grow our business within.

Thank you.

Thanks, Andy.

Our next question comes from Victor Flores from HSBC.

Good morning, Tony and everyone. I have three questions. The first, sort of a follow-up to the previous question regarding Taparko. I mean to try to frame it, it looks like we're sort of in a half-pregnant sort of situation with them, because the mine isn't performing the way it's supposed to, which means that they're technically in violation of the covenant. On the other hand it's working well enough that you got $5 million during the quarter. So just trying to understand sort of more from a legal point of view what happens going forward. And perhaps the answer is nothing.

Yes, Victor, we haven't forebeared on any of our defaults. We haven't stood down on any of those. The major one is they did not reach commercial production as was required, I think it was the end of September. So we still have maintained all of our legal rights. We still have the collateral and securities that we have access to. We still have the pledges, both at the Somita level, which is the Proquino Faso entity, and the Cayman Islands level as well, so we really would like to continue to see the project make strides towards improving, and that's really where our focus has been. I think you really framed it quite nicely. It may not be up to expectations but it's still performing reasonably well for us on a royalty basis.

Perhaps to press you a bit, how bad would things to have get for you to perhaps get a bit more grumpy with them?

You know, Victor, I can't be specific on any issues, but let me just be general and say as long as you see good progress going the right direction, I think you will find us supportive.

Second question goes to the Andacollo transaction, and for the life of me, I've meant to ask you this question several times and I keep forgetting, Is this royalty kick in upon the production of the first gold and concentrate, or do you have to wait for them to achieve technically commercial production to get paid?

No, it's he every ounce that comes out of the property. So the first ounce.

Great, thanks. Then the final question goes to the other royalty properties. You're getting $3.5 million bucks from various projects, and I see from the footnotes that Benso and El Chanate were quite good contributors. Were there perhaps one or two other royalties within that other, which are in the Barrick portfolio, that are noteworthy?

I'm looking at Stefan just now. You hit on two nice ones. Capital Gold has done a fabulous job for us and it's been producing going revenue, and Benso I think came up with about $.5 million this quarter so they had a really good quarter. Stefan, apart from those, does any come to mind?

Victor, Troy contributed $500,000 for the period. And As we look toward our fourth fiscal quarter we would expect to be close to our cap on that 7% GSR. But Troy is producing at a pretty good rate there. Really, no other notables to comment that had significant revenue during the period. One I'd point out is Twin Creeks that had a pretty good quarter as well.

Thank you very much.

Thanks, Victor.

(Operator Instructions) Our next question on the line Imaru Casanova from BJM.

Hi. I had a lot of the questions that have already been asked, but I was wondering if I could ask any sort of guidance on next quarter's production. I'm not really sure if the 23,000 ounces, how they were distributed, is production still ramping up, should we expect the same levels for next quarter or a little better? I guess I'm a little bit in the dark on what to expect there.

Imaru, are you specifically talking about Taparko?

Yes.

We think the 23,000 ounces was a really good quarter for them. I don't know if they're going to be able to repeat those numbers, but I do think that we're seeing some good revenue flow there. I would just hasten a guess and say somewhere around 15,000 ounces is probably closer to, maybe a little north of that, where we would expect to be.

That's good, that's helpful. Now, regarding the production reporting, and I realize the number of properties have gotten very large, so you might be changing the way you report, but in the 10-Q should we expect a little bit more detail on what was produced where and what the revenues from each asset? Where are we going to keep that same format the other category?

Imaru, this is Stefan. In our 10-Q you'll see a similar format as what you saw in the press release with the Other footnote, and in the footnote we've broken out any other significant ones within that Other category. Everything in that category is below 5% and not really a meaningful contributor to our revenue. You'll see that same level of detail.

So we shouldn't expect to see all the line by line production on each. For example, I guess we can back calculate Troy - what the production was, but you won't be reporting that going forward?

That's correct.

And just to clarify, on the rate at Dolores, now that commercial production has been reached, should we assume that basically starting today you will step up that royalty rate to 3.25% for gold and 2% for silver?

You got it, Imaru, that's right.

So it's effective immediately. Okay. Thank you very much. I think that's it.

Our next question comes from John Doody from Goldstock Analysts.

Two easy questions. Stefan might have mentioned, but what are the number of shares out now?

John, we're at about 40.7 million.

And the underwriters overallotment, was it $38, and they have through the close of today to exercise that?

Yes, John, that option will not be exercised.

Even though stocks at almost $40 now?

The entire shares outstanding after this deal is 40.7, so there will be no more share did I dilution associated with the overallotment.

Okay, good. The other question, I know it's a familiar one from me, but with the revenues up this year versus last year's adjusted number should we be looking for a dividend increase, perhaps?

John, I'd be disappointed if you didn't ask me that question. It seems that I get that from you at least once a year. But we don't have a set dividend policy, as far as a yield or a payout ratio goes, and we are very proud, as a board of, stepping that up in a reasonable sense. As I said, many times in the past, we don't ever want to have to back away from that but this is a very good growth opportunity for us. At the present time we see good things in front of us, and as we assess the cost of capital and having to come back to the market to raise capital, we'd very much like to grow our business out of cash flow. So we still want to keep a lot of that cash flow around as long as there's good business to be done.

Okay. I'll take that as a dodge but also a maybe.

All right.

Our next question comes from Gregg Orrill from Orrill Capital.

I have one question really, and it has to do with strategy kind of going forward. The Andacollo transaction is certainly a gold deal associated with base metals. What is the plan in terms of doing similar deals in the future? Do you have plans to do that?

We have all kinds of different entry levels for our royalty and acquisition from expiration all the way through to development and buying existing royalties, and also buying precious metal streams off of base metal companies, and we're evaluating all those at the same time. I would hasten to guess where our next transaction would be, in what area. We very much would like to continue to do similar type deals as we did on Andacollo as opportunities present themselves.

So there's no concern of having too much revenue tied to projects of mostly base metal components and the potential that the base metal prices could go down, and therefore that mine would shut down and your revenue stream would shut down? Greg, I understand the question and the concern. I think the bigger issue is that we have to make sure we do business with properties that have good staying power, and that's where we spend a lot of our focus. We're not concerned about that at the present time, but I do understand your issue, and that's how we'd address that. On the Andacollo, what would be the break even on copper that you see that you guys use?

I think after we pull our gold credits out that would put Andacollo somewhere around $1.10. I'm looking at Bill Heissenbuttel, and he's confirming that. We look at that as an being an upper third quartile type of producer. To say that a different way, there would have to be about 25% of the world's production come off-line before it would impact Andacollo.

Appreciate it.

Thank you, Greg.

Our next question comes from Adam Schatzker from RBC Capital Markets.

Hello, everyone. Just a quick question and I guess it's a continuation of the last one. What kind of competition are you seeing when you look at royalties that are put out for bids? Is it getting more intense and are you finding that the returns are getting skinnier?

I'm going to turn to Bill and ask Bill Heissenbuttel, our corporate development fellow to answer that question.

Actually, it is a very competitive market. We see a lot of opportunities, but I can assure you there isn't an opportunity that we look at that we're assuming that isn't being reviewed by the Francos and the IRCs of the world.

Another point that I would like to make there, Adam, is that while the competition might be getting more pronounced, I think also the opportunities are there. I just don't know that there's enough capital for one company to do all the things that are available in market today. With more companies coming in, this whole space has become much more credible, both from an investor standpoint and from a counterparty standpoint, and as we do Andacollo-type deals, I think that just brings more business to the entire sector. I think both of those things would balance out. There might be more competition, but I think there's more opportunity.

Alright, thank you very much.

Your next question comes from Cosmos Chiu from CIBC.

Quick question here. Have you received the cash, the $5.1 million coming from the royalty revenue from Taparko? I only ask, given the financial situation of the operator.

Cosmos, this is Stefan, thanks for the question. We have received that cash. That payment's due by the tenth business day of the month. Taparko has paid us on time since production started, so there's no issue there.

Great, thank you, that's all I have.

Thank you.

And I have no further questions in queue. I'll turn it back to you for any closing and final remarks.

Thanks very much, operator, and thank you all for joining us today. We appreciate your interest and continued support of Royal Gold and look forward to updating you on our progress in the next quarterly conference call. Thanks much.