Royal Gold Inc (RGLD) 2010 Q1 法說會逐字稿

Good afternoon. I'll be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal year 2010 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. Ms. Gross, you may begin your conference.

Thank you, operator, and good morning everyone. Welcome to our fiscal 2010 first quarter conference call that's 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 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; Bill Zisch, Vice President Operations; Bruce Kirchoff, Vice President and General Counsel; and Stan Dempsey, Chairman. A Q&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 I'll turn the call over to Tony.

Good morning and thank you for joining us today. We're very pleased to have an opportunity to share our record financial results for you during the quarter. Both Bill Zisch and myself will have a few brief prepared remarks and then we'll open it up for question and answer after that.

This morning, we reported a great quarter that included an all-time high for revenues of $26 million. We also achieved record free cash flow of $22.6 million or 87% of total revenue. Net income was $7.1 million or $0.18 per basic share and our percentage of revenue from gold was 86%. After several decades of positioning the company for gold exposure, it was wonderful to see our portfolio perform as gold continues to reach new highs.

Our balance sheet remains strong, with working capital of $328 million and no debt. I should just mention that we also satisfied our Chilean debt of $19 million during the quarter. This balance sheet, coupled with our $125 million credit line, positions the company well for future opportunities beyond the closing of the previously announced Andacollo transaction with Teck Resources.

Our top performing royalties during the quarter were Cortez and Taparko. Both of these properties achieved solid operating results with a combined contribution of nearly $12 million in revenue. In addition, Leeville, Mulatos, and Robinson contributed another $6.4 million in cumulative revenue. This continues to demonstrate the strength of our diversified royalty portfolio, as no single royalty contributed more than 25% to the total revenue for the quarter. Now I'll turn the call over to Bill Zisch for an update on our key assets.

Thank you, Tony, and good morning, everyone. I will focus on the principal producing properties that have had notable accomplishments or changes since our last conference call. First, at Penasquito, ramp up activities associated with the sulfide project continue to go well and production from the oxide ore is meeting expected levels. Last month, Goldcorp announced the first lead and zinc concentrates from the first sulfide circuit have been produced with shipment to the smelter plant for later this year, and in fact, today Goldcorp updated that schedule as our reported concentrate shipments began on Monday, November 2nd. Commercial production is still expected in the first quarter of calendar 2010. Construction of the second sulfide circuit is well underway and is expected to be completed in the third quarter of 2010.

At Cortez for the quarter, Cortez royalty production was ahead of plan by 6%, bringing calendar year-to-date royalty revenue to within 5% of expectations. [Barrick] continues on track to produce gold from the Cortez Hills mine in the first quarter of 2010. When ore from Cortez Hills is fed to the mill, we will see a falloff in royalty revenue from mill production, but concurrent production of heap leach ore from our area of interest is expected to continue. As I mentioned during our last call, reserve subject to our royalty interest increased to 4.3 million ounces at the end of last year, so in spite of variable production over the next few years, Cortez will continue to be an important asset for years to come.

Taparko continues to be one of our most substantial revenue contributors. Compared to last year's performance, we would characterize Taparko as our most improved property. There has been no report of excessive vibration levels since the outage completed at the end of June. While a routine seven day outage limited the [press] availability during the quarter, September and October availability began to achieve planned levels. Throughput, on the other hand, has been significantly improved because previously high vibrations in the mill circuit resulted in the throttling back of operations. For the quarter, throughput and grade exceeded planned levels by 2% and 10% respectively, resulting in net production and associated revenue exceeding expectations by 13%. At Robinson, last quarter, Quadra reduced their annual guidance for copper production at the Robinson mine from 140 million pounds to 130 million pounds to reflect the impact that high wall issues had on access to the veteran pit. Full access to the hypogene material in the veteran pit required for blending was not reestablished until midway through the quarter, which adversely impacted the production of gold and copper. Sales for the period were also impacted by the deferral of concentrate sales and the stockpiling of lower grade concentrate in the third quarter.

The Dolores mine continues in the rampup stage of development. Not uncharacteristic of a project during the rampup phase, the mine is working to eliminate bottlenecks and to balance their operation in order to sustain desired levels of production. Mechanical issues in the screening section of the crushing circuit limited throughput for the first two months of the quarter. Gold production in September met plan levels, while silver lagged planned production. Regardless, Mine Finders expects year-end production to be within the guidance they have provided.

At the Mulatos mine, Alamos reported another very good quarter, which they attributed to several operational successes including mitigation of adverse effects of heavy rainfall, a lower waste to ore ratio than estimated in the block model, and increased recovery resulting from a variety of operating initiatives implemented over the last several quarters. Alamos's next initiative for improving recoveries and increasing production is closing down the crushing circuit to deliver a finer crushed material to the leach pad. Studies indicated crushing ore to a three-eights inch size may increase recovery by 4 to 7 percentage points. Crusher modifications are scheduled to be completed by the end of this month.

Other principal properties like Leeville, Siguiri, and Goldstrike continue to deliver on their expected plans and have met or exceeded our expectations for the quarter. Overall, as Royal Gold continues to engineer and construct an operating portfolio, we see good production balance resulting in reduced revenue volatility. This reflects the diversity and underlying quality of our royalty portfolio.

Now I'll turn the call back over to Tony.

Thanks, Bill. Now I'd like to update you on a change of our interest at the Troy mine. Last month we restructured the company's royalties on this property. We previously held three gross smelter return royalties. The initial 7% royalty was satisfied under a revenue cap of $10.5 million and the remaining two royalties were restructured into a perpetual 3% GSR royalty. Under the terms of our previous agreement, we have projected a probable three year hiatus between the end of the 7% royalty and the start of the two remaining royalties. Our new agreement brings our royalty interest forward as our restructure royalty will take effect on July 1, 2010. The new royalty applies to all production from the Troy mine in addition to an expanded area of interest in the vicinity of the mine. Looking forward, we are keenly focused on our growth profile over the next three years, with new or expanded production expected from the Dolores and Penasquito mine in Mexico, the Holt and Canadian Malartic mines in Canada, and the Pascua Lama project in the Andacollo mine in Chile.

Bill already reported on Dolores and Penasquito, so I'd like to say a few words on the others. Last quarter, we reported the Ontario court ruled in favor of St Andrew Gold regarding litigation over the royalty on the Holt mine. The court upheld the royalty and ruled the prior operator, Newmont Canada, was responsible for paying the royalty to Royal Gold. That decision was appealed in late August and the court is expected to consider the appeal over the next several months. At the current gold price, our royalty rate at the Holt mine is about 14%. St Andrew hopes to be producing at Holt in the second half calendar 2010. Osisko has been very busy during the quarter putting financing in place to construct the Canadian Malartic mine.

In addition, the Quebec government approved the project for construction in August, and on site activities are now advancing at a rapid pace. Osisko plans to be in production the second quarter of calendar 2011. [Terra] Gold has mobilized a project team to Pascua Lama and has begun work on the construction infrastructure. Orders for long lead items have been placed and production is anticipated in the first quarter of calendar 2013. Teck continues to work through issues regarding water resources for the Andacollo mine. They have responded to concerns from a local community and are implementing plans to mitigate any potential impacts on other water users through the use of alternative water sources. We are in close communication with Teck on these issues and we certainly support their community efforts.

In closing then, our fundamentals remain strong, including a strong balance sheet, growing cash flow, and an ample line of credit. This strong financial foundation will provide us with the ability to add to our robust portfolio of producing and development assets. Operator, that concludes our prepared remarks and we will be happy to answer any questions.

(Operator Instructions). Your first question is from the line of Adam Schatzker.

Just two questions. First, I guess is more of an accounting question. I notice in the cash flow that the gain of distribution and non-controlling interest, and I'm wondering if that is rolled somewhere in the income statement, perhaps under the interest and other income. And if so, can I assume that the difference between those is interest?

Adam, I'll ask Stefan Wenger, our CFO, to address that question.

Hi, Adam, thanks for the question. And just to answer your question there, that's related to our consolidated CDP partnership, which -- that gain is related to the outside interest in that partnership. You're absolutely correct, there's $1.6 million in that interest and other income line on the income statement that relates to the outside partners. And there's also about $300,000 that relates to those outside partners that's consolidated in our royalty revenue line. And then all of those outside interests come out in the non-controlling interest line to bring us down to the net income attributable to Royal Gold stockholders of $7.1 million. So there's no net income effect going through our financials related to that partnership. So you're absolutely right that the difference there is interest income on that interest and other income line.

Okay, thank you. And I guess the other one is a more general question. How do you see the environment for additional royalty acquisitions these days? Is it active given the high gold price, or are you looking more at the base metal by-product? Which direction are things going?

Adam, Bill Heissenbuttel is our champion in that regard. I'll ask him to make a few comments.

Sure, Adam. It's a very active market. We are actively looking at both opportunities on primarily precious metal mines as well as potential precious metal streams out of the base metal project. So we're looking at both of them and we're quite busy.

Your next question is from the line of Cosmos Chiu.

Good morning.

Good morning.

I've got a few questions here. Number one at Robinson, I know there were some production cutbacks there in the past quarter. But with the robust copper prices and things like that, should we be seeing positive provisional pricing adjustments going forward?

I would expect, Cosmos, that would be the case. I think they're on what's called a three months after arrival for three or four, so I would expect that as the price environment goes up, we'll have positive price adjustments going forward, just the reverse of what we had a year ago.

Okay, and at Taparko, $6 million in royalty revenue -- I think that's the highest in a year's time. Is that just a function of higher production, and maybe can you remind me how much more production is left under the 15% higher royalty rate for Taparko?

Let me take the first part of the question, while Stefan I think he actually has that number already in the top of his mind with how much is left, but it has been hitting in sparks. The throughput is way up, as Bill Heissenbuttel mentioned. The grade, they're mining at a grade that's higher than the reserve grade. All of the aspects of the mines and the mills seem to be forming very very well. So we've been extremely patient with that project for a long time and now it's really gratifying to see that the folks at High River are bringing on the production as we had always hoped it would be, so we think the project is going quite nicely. With regard to the amount that's left under our primary royalty, what is that number, Stefan?

The remaining cap under the first royalty or what we call PP1 is about $20 million, and about $3.5 million of that $6 million came from that PP1 during this period. So if you took that out, there's a 1.5 years or two years left under that royalty itself. Now, one other thing to note is royalty rates. At current prices we're getting about a 26%, just shy of a 26% royalty on that property and that's what's driving the revenue increase as well.

And I guess my next question is also for Stefan. When I worked out the tax rate for the quarter, there seems to be a little bit lower than the run rate for -- I think usually I have you at mid 30% tax rate. I think if I calculate for the quarter, I'm coming out to something closer to mid 20s? Am I correct?

Yes, Cosmos, thanks for that question. We had a lower tax rate this quarter, primarily because we released a valuation allowance at our Chilean subsidiary. So we were able to take a tax benefit for past losses during this period, and going forward I still see our effective tax rate in that mid 30% range.

Your next question is from the line of Victor Flores.

Hi, Tony, good morning.

Good morning, Victor.

A question on Penasquito -- Goldcorp has now reported, seems some initial production from the sulfide plant and I'm wondering if you're receiving revenues on that or if those revenues that you showed today were just from the ongoing oxide production?

Well, the revenues that we've reported so far are just oxide revenues, and although they shift, we're paid on a quarterly basis there if I remember correctly -- Stefan is shaking his head that's true. So we would get provisional payments on anything that's made during the quarter, so I think these new sulfide shipments that Bill just reported on would hit the quarter that we're currently in.

I see, so there was some production during September, but you would be paid for that in the December quarter?

You've got it.

Great, thank you. And just following up on Taparko, could you give us a sense of how the operations are going? As we see from the numbers, the production is better, but I don't think they're quite where they wanted to be, and maybe you could update us on how the thing is progressing.

Bill was just recently on site, so I'll turn the question to him.

Victor, as far as their availability and how the plant is running, it has improved. And as I mentioned the last two months, they're getting to the design levels about 91% availability, and have been able to sustain that and are not seeing recurring issues with the vibration. What they're seeing now is typical down time. Where they have been able to improve significantly with the finalization of the vibration work is throughput. They've consistently been able to meet or exceed their planned throughputs, which has been a real tribute to what they're doing over there, and then they have realized a little bit higher grade than they had anticipated, so things look reasonably positive. We'll be going back over there and visiting with them in the near future, and things seem to be stabilizing quite a bit.

Fantastic, so maybe we should expect that that level of production that they reported for the September quarter is sustainable and perhaps they might even beat it a bit?

If they maintain their plant throughput and availability, that level is probably what we would expect.

It's the other issue to comment there is grade. They have to maintain the higher premium grade to the reserve as well. But I think they're up around 3 grams or something like that during the quarter so it's about 50% higher than what the reserve grade is, Victor, at the present time.

And they will be revising their plans and taking a look at where they see that in the future.

Okay, so we have to be mindful of the possibility that reserves might start to trend towards the average?

I think that's absolutely right.

Okay, and just one further question on Taparko, it appears that with the new ownership, at least the financial situation there has stabilized. Is that accurate?

That is accurate. We continue to have good communication with Severstal and it looks like they're taking steps to satisfy some of the debt obligations there. So I think the financial status has improved significantly, certainly much better than a year ago at this time.

Great. Thank you very much.

Thanks, Victor.

Your next question is from the line of Imaru Casanova.

Hi, everyone.

Good morning.

A lot of my questions have been answered already, but I do have a couple more. Regarding the status of the Andacollo transaction, which you touched on, could you tell us a little bit more and specifically what the plan is there as far as sourcing the water and how that might be a solution to the problem there, and also the timing of the transaction is still you're expecting early 2010 completion?

Sure, Imaru. First of all, the outside date is still January 29th of next year, and we hope that they make significant progress and we'll be able to close as we anticipate there. And we have again had good communications with them, so we're quite pleased with the work that the on site team is doing there. With regard to specifics, I'm reluctant to make any further comments there, because I think it is important for us to honor the discussions and negotiations that are going on down at the local community level. But suffice it to say, there are a number of options that Teck does have in the area. They have water rights that are almost double the amount that they actually need, somewhere around 700 liters per second of water rights and they only need 340 to operate the mill. And so I think they do have options, and I do think that it's quite a collaborative effort that's going on right now. So we're just patient and we are very interested as is Teck in following through with the transaction, and I think we couldn't be in a better position as far as our relationship with the company and the mine.

Thank you, and I have one more question on the other category of your revenue stream. It's after Taparko and Cortez, it's the largest contributor, it was this quarter with $3.8 million total from that category. I know from your notes there that El Chanate and Domario are included, and Troy, and then there's a $2.2 million under the Barrick portfolio, another $0.5 million or so. Can you just tell us to help us with modeling this -- what are some of the main contributors with what's left, that other $3 million?

Yes, I'll give you, this is Stefan.

Hi, Stefan.

I'll give you the properties. We really don't break out the revenue from each of these properties. They aren't significant in the whole to Royal Gold, but really you're seeing contributions from Mount Good, from [Otoke], [Alcuma], and the other Barrick properties we required there. No longer any revenue from Troy, as Tony noted in his comments.

Right. Okay, so basically, of those $3 million, included in those $ 3 million would be -- ?

Mount Good.

Otoke and Alcuma, and basically those are main contributors you're saying?

Yes, those are the largest contributors. We have some fairly small accounts.

Smaller ones?

Smaller, and just Allen and Twin Creeks provide revenue to us, Martha as well.

Okay, and out of the depreciation expense which I understand is higher because of the newer properties and some of the recent acquisitions, does this other category contribute a significant amount or is that still insignificant?

The other category doesn't provide a significant amount in that DD&A, but on a relative basis, the newer properties there are providing a higher dollar per ounce level. The two drivers there as I mentioned I think last quarter was just the shift to some of our newer asset production that has relatively higher DD&A rates than our more mature properties like Cortez, and also with some of the capped royalties like Siguiri and Taparko, those DD&A rates do shift as gold prices go up. So that we're recovering the basis in those assets over the same time as the cap. Those are the two main drivers.

Okay, so in that higher depreciation spend, you would say Siguiri and Taparko are contributing to that higher expense? Any other asset we should be looking to contribute higher expenses of depreciation?

No, I'd say the two drivers there are Siguiri and Taparko.

Okay, excellent.

Taparko is the main driver causing most of the variation quarter by quarter based on their production levels.

Got it. Thanks very much, guys.

Thanks, Imaru.

Your next question is from Mike Jalonen.

Hi, Tony.

Good morning, Mike.

Just a question on Penasquito. I noticed that you said here Goldcorp expects to obtain commercial production in the first quarter of 2010, calendar 2010, but in Goldcorp's press release today they made no mention of a commercial start update, so just wondering where did they tell you that?

Mike, this is Bill. That's the same date I think they've used in previous releases and that date has not changed for them. They did not perhaps mention it today, but they have not changed that.

To our knowledge they haven't changed it, we should say.

Because their conference call is at 1, right after you guys, so it will be a question to be asked of them. So I guess is the commercial production date for Goldcorp, does that affect -- when you start receiving revenue like say they pushed it back a few quarters, I'm just making that as an example, would you still start booking revenues for your P&L right away or would you wait for their commercial startup date?

No, Mike. We receive revenue right from whatever they ship, right from the start, so we aren't contingent upon a declaration of commercial production.

Okay, I should have asked that question that way in the first place.

Okay.

Thank you very much.

Your next question is from the line of Andy Schopick.

Thank you. Adam asked the very first question that I wanted to ask, and I'm not sure that I fully understood that answer, so I'd like to come back to that line item on the cash flow. Will this now be a recurring item that is going to be more or less indeterminant from period to period?

Yes, Andy, this is Stefan again. You're talking about the CVP partnership?

Yes, I was grabbing the report looking for it, uh-huh.

We've had this the last several quarters, the FASB -- we adopted a new accounting standard this period that makes us call that non-controlling interest now rather than minority interest. But really the piece you're talking about is a gain on sale of gold by outside interest, minority interest outside of Royal Gold. There's no way for us to forecast that. It's completely at the partners' interest there. We don't forecast that. It really has no impact on our cash flow or our free cash flow or our net income.

Well, it does affect the operating cash flow statement?

Yes, it does. Because of the way the presentation is, you start with the consolidated net income instead of the --

But in reality, there's -- the likelihood is high that there will be some continuing future line item here that we were going to see that's just not going to be forecastable? But as you say, it won't affect your free cash flow, but it does appear on the operating cash flow.

That's correct.

Okay, royalty receivables, which have increased by about $4.7 million from fiscal year end -- what are the royalties here that we are seeing that have basically hitting the balance sheet as an increase in the receivables, and the timeframe for collecting the receivables that you are now showing? I assume this reflects to some degree a change in the royalty portfolio and perhaps the rates on the various properties, but I wonder if you can just comment a little bit about the royalty receivable situation.

Andy, that's a great question because of the impact on our GAAP cash flow. Really there's no change in our receivable collection. Most of our royalties are paid quarterly, so really most of our revenue hits that receivable line as of the end of the period. And then we receive payment for most of those royalties within a month of --

Within a month.

So as of today we've collected probably most of those receivables. There's a couple, maybe 45 days, but really it's not significant. Everybody is current. We don't have any past due royalty issues.

Secondly, I'd like to ask about more or less the financial strategy. The company is now flush with cash, has very good cash flow or free cash flow and has a $125 million credit line if you will. What are the circumstances or conditions under which you might resort to using that credit line? You're now effectively debt free -- just from a financial planning and strategy, why do you feel you even need to have that credit line and under what conditions would you more or less resort to using it?

Andy, Tony here, and we have $328 million in working capital. But remember, once we closed the Teck transaction, we had $218 million going off to them. So we'll still stand with over $100 million available to us. But in this market we want to make sure that we're positioned to do the size of the transactions that might come available in the marketplace. And so we would resort to using that credit line, I think we've actually dipped into it one-time before to bolster our cash abilities to do a transaction. So it's really a safety belt for us to do the things we want to do without getting too far ahead of us on equity type raises and diluting the shareholders too early in the process.

Okay. Thank you very much. Oh, one last thing on Andacollo. I understand there's a termination date of January 29th for that transaction, after which either party can more or less walk away if it chooses or there's not a further waiver. Are there any real concerns or issues that you have about the conditions being in place to close that transaction on the current date?

Andy, we want to make clear that the condition precedent that's in place that has prevented us from closing now is really a condition precedent that's favorable to Royal Gold. And so if we wish to take on the risk and waive that condition precedent, we can go ahead and close over the top of this particular concern.

Okay, that's a good point. Thank you.

Thanks, Andy.

(Operator Instructions). Your next question is from the line of [Peter Adamac].

Good morning, guys. I'm wondering if you could elaborate on the mine sequencing at Cortez and do you think that the last quarter is indicative of the production we would expect to see for the remainder of the year?

Bill?

This is Bill Zisch. I think the sequencing that we have seen is going to be a function of what they do at Cortez Hills. They're still working on their plans. And our heap leach operations represent probably from 20% to 30% of their production. Until we see their plans fully developed with Cortez Hills and how that plays out in the future, I'm not sure that we actually have a good indication of where we'll be, other than we know that heap leach is about 20% to 30%. So probably have to wait and see as they develop their plans.

Great. Thank you.

Thanks, Peter.

There are no further questions at this time.

Well, Operator, I'd just like to conclude the call by saying thank you all for joining us today. We very much appreciate your interest and continued support of Royal Gold and we look forward to being back here in one more quarter to update you on the progress of our company. Thanks very much.

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