Royal Gold Inc (RGLD) 2010 Q2 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal second quarter 2010 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. Karen Gross, you may begin your conference.

Thank you, operator. Hello, everyone. Welcome to our second quarter conference call that is being webcast live. 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. 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 CEO; Stefan Wenger, Chief Financial Officer and Treasurer; Bill Heissenbuttel, Vice President in Corporate Development; Bill Zisch, Vice President Operations; and Bruce Kirchhoff, Vice President and General Counsel. 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 release.

Now I will turn the call over to Tony.

Good morning, and thank you for joining us today. We are pleased to report another quarter of record financial performance, our fourth consecutive quarter of record revenues and free cash flow. During the quarter we achieved $34.7 million in royalty revenue and free cash flow of $28.6 million or $0.71 per share. Free cash flow was 82% of total revenue. Net income was $9.6 million or $0.24 per basic share and our percentage of revenue from gold was 84%.

In looking at our financial performance over the first six months of our fiscal year, Royal Gold achieved record revenue and free cash flow for this period as well. In our first half, royalty revenue was $60.9 million, free cash flow was $51.2 million, and net income was $16.7 million or $0.41 per basic share. This compares to royalty revenue of $30.7 million, free cash flow of $24.8 million, and net income of $27.1 million or $0.80 per basic share for the first half of fiscal 2009. It is important to remember that last year's comparable periods included the effects of a one-time gain of $31.5 million or $0.60 per basic share resulting from the restructuring of our Cortez royalties in conjunction with the Barrick transaction. Excluding that one-time event, you can see that our earnings were significantly higher in the current period.

Our top performing properties in the second quarter were Cortez and Taparko. Together, these two properties generated nearly $18 million in revenue, while Robinson, Leeville, and Mulatos contributed a combined total of $9 million during the period. The average price of gold for the quarter was $1,100 per ounce compared with $795 per ounce for the period ending December 31, 2008. While this represents a 38% increase, our revenue increased by 138%. This demonstrates the strength of the production performance of our portfolio. And these record results come prior to any meaningful contribution from the Penasquito and Andacollo royalties. Both of these projects are in the commissioning and ramp up stage and expected to become our two largest revenue contributors over the next six to nine months.

I will turn the call over to Bill Zisch for an update on our key assets.

Thank you, Tony, and good morning, everyone. While there were many contributors to the quarter's record performance, I will once again focus my comments on the principal properties that have had notable accomplishments or changes since our last conference call.

I will start with Penasquito. As I reported during last quarter's call, the first lead and zinc concentrates were shipped in early November and Gold Corp has continued to produce and ship concentrates since that time. They began operational production in January and expect commercial production for both the first and second sag lines to be reached in the third quarter of this year. Gold Corp expects 2010 production to be over 150,000 ounces of gold, 10 million ounces of silver, and 100 million pounds of both zinc and lead.

At Canadian Malartic, as of the end of December, construction start up at Canadian Malartic is complete and the relocation program is about 95% complete. Osisko has identified good advance stages of detailed engineering, sound planning, and collaboration with all stakeholders as keys to their progress. Investments today represent about 30% of the project budget, with commitments slightly over 60% of budget. Full project funding is in place and Osisko remains on track for a 2011 startup. Osisko announced allege 8% increase in gold resources at the Canadian Malartic South [Barnett ]project. They anticipate that the completion of an economic valuation study during the first quarter will allow them to update the reserves at that time.

In a few minutes, Tony will discuss the Andacollo closing and the significance of this new property to Royal Gold. However, as part of my operations review, I want to share a few of the key updates. Teck has announced construction at the Andacollo hypogene project is substantially complete. Wet commissioning is also finished, and ore processing has begun. Teck has been successful in resolving its water issues by developing a secondary water source for the long-term and by obtaining the water necessary for initial production to the execution of a water exchange agreement with a local water utility. This agreement will benefit the regional community by securing additional and higher quality potable water for the utilities customers. Production is expected to ramp up over the next several months with the shipment of copper concentrates in April and commercial production expected in the first half of calendar 2010.

At Cortez, calendar year-to-date royalty revenue was 8% above expectations. A positive grade variance in the fringe areas of Phase 9 of the pipeline pit contributed to the quarter's strong performance. While Barrick is working with the BLM to resolve permitting challenges at the Cortez Hills project, ramp up of underground operations and development of the open pit operations continue. As I mentioned last quarter, when ore from the Cortez Hills is fed to the mill, we will see a falloff in royalty revenue from the mill production, but concurrent production of heap leach ore from our area of interest is expected to continue. The near term production schedule at Cortez may be influenced by the permitting challenge. However, it is important to note the area of the mine subject to our royalty interest is permitted.

At Taparko, calendar year fourth quarter results at Taparko demonstrated solid operating performance that exceeded expectations. With record quarterly sales that exceeded plan by 65%, Taparko continued to be one of our most substantial revenue contributors. At the beginning of December, Somita began a 90 day operational completion test in an attempt to satisfy conditions of the Royal Gold funding agreement. Performance during September was good, with production exceeding plan by 11%. Mill availability was 97% and throughput was 18% above design levels, both of which exceeded the operational completion test target level. Record production in sales for the quarter were supported by throughput, grade, and availability that exceeded plan.

Robinson's fourth quarter copper production was significantly above their two prior quarters. However, for the year, production shortfalls through the first three quarters of 2009 were not entirely overcome in the fourth quarter. Full year sales were slightly below Quadra's reduced annual guidance of 120 million pounds of copper. While prior period pit access and blending issues impacted calendar year end results, guidance for 2010 is back to the 130 million pound range.

Production at the Mulatos mine was approximately 20% above plan for calendar year. Previously reported operational improvements continued to pay dividends as recovery ratios exceeded budgeted levels. Alamos remains focused on incremental improvements and expects to see future positive contributions from crusher modifications during the fourth quarter.

At Leeville, fourth quarter progress in development and backfilling led to good productivity at Leeville with year end production 10% above plan.

In summary, six of our nine principal producing properties exceeded plan production in 2009 as they combined to produce 2.1 million ounces of gold that were subject to our various royalty interests, exceeding the 2 million ounces forecasted for these properties at the beginning of the year. Once again, this is a tribute to the quality of our diverse property portfolio and the capabilities of those operating these mines. With that, I will turn the call back over to Tony.

Thanks for the update, Bill. Now I would like to talk about some important developments that have recently taken place. First of all, I am very happy to report we closed the Andacollo transaction last week. Total consideration for the transaction was approximately $218 million in cash and 1.2 million shares of Royal Gold common stock. This significant transaction is our single largest deal in the history of the Company, and we expect this property to be a cornerstone royalty for the next couple of decades. We are pleased to be associated with an operator of Teck's capabilities. We maintain frequent contact with Teck as they work through the water issue at site, and their responsible management of community concerns allow Teck's subsidiary CDA to achieve a mutually beneficial resolution for them in the region as well. As Bill mentioned, operations are ramping up as planned and we look forward to full commercial production during the first half of calendar 2010.

I would just like to step off line here for a moment and mention that we had our entire board to the site just two weeks ago, and we are all very impressed with what we saw. And certainly for me it was an amazing transformation over the one-year period since I had last been on site seeing the entire property ready to go into production. In particular, exciting to be there at a point in time where the first ore was introduced into the sag mill. No doubt there was a great sense of pride with the CDA staff and also the construction team as the first ore did go through the mill. We're simply pleased to be associated with this project. It is going to be a fantastic royalty for us, we believe, and perhaps a bit of my bias coming through -- we're very, very pleased to be associated with a great host country like Chile. I spent four years of my career there and we're pleased to build our portfolio in Chile.

Turning to IRC, another important development for the Company occurred in mid-December when we announced a plan of arrangement with International Royalty Corporation. Under the arrangement, Royal Gold would acquire all of the issued and outstanding common shares of IRC. IRC shareholders can elect to receive either cash or common shares of Royal Gold or a combination of cash and shares. IRC's Board of Directors has unanimously determined that the arrangement is in the best interest of the shareholders and has recommended that they vote in favor of the transaction. We're moving forward with the transaction last month object obtained an interim order from the Ontario Superior Court of Justice approving a special meaning of the IRC shareholders, which will take place on February 16th.

The hearing of the final order is expected on February 19th, subject to the approval of the arrangement by the IRC shareholders at the special meeting. Royal Gold has entered into voting agreements with IRC directors, senior officers, and several significant IRC shareholders who have agreed to vote their shares in favor of the transaction. Collectively the shareholders represent about 34% of IRC common shares on a fully diluted basis. In late January we also completed definitive documentation for a new $100 million secure term loan which will be available in conjunction with the closing of the transaction. We're very excited about the combination of IRC and Royal Gold, as this will bring together two high quality royalty portfolios with excellent growth in gold, substantial cash flow generating capacity, and a very impressive pipeline in its development assets. The combined portfolio with a total of nearly 200 royalty interests will provide scale and efficiencies that is are advantageous for competing and participating in even larger transactions. Most of the future growth in the IRC portfolio comes from precious metals, and we believe both sets of shareholders will benefit from gold focused revenue growth.

In closing, we are obviously pleased with the growth and diversification Royal Gold has achieved over the past several years. This is a very exciting time for the Company. With the producing portfolio generating robust financial results and with Penasquito, Andacollo, and potentially Holt coming into commercial production in 2010. If we include the IRC development portfolio, [Annetta], South Laverton, Tambor, and Wolverine gold and silver royalties are expected to receive full production in 2010 as well. We are dedicated to building a premium precious metal royalty Company and welcome IRC shareholders to participate in this high quality royalty portfolio.

Operator, that concludes our prepared remarks. We would be happy to answer any questions if there were some.

(Operator Instructions). Your first question comes from the line of Adam Schatzker from RBC Capital Markets. Your line is now open.

Good morning, everyone.

Good morning, Adam.

A few questions if I could, please. Looking -- as you mentioned in your comments there at the performance of Cortez, Robinson, and Leeville, can you comment on the sustainability of those or should we expect to see those coming down a little bit in this year coming forward here?

Well, on those three specific ones, I would answer that Cortez, as Bill remarked, is scheduled to have a bit of a softer year this year, although there is a bit of uncertainty associated with the permitting challenge they have there currently, Adam. And so there is a stay that's being filed on the Cortez Hills property and that may impact the decisions of where Barrick chooses to mine during the course of this year, so that's a bit up in the air. With regard to Robinson, I think their revised -- or I shouldn't say revised, their forecast for what they're looking to produce this year is a little bit above what they actually produced last year, so that seems to be sustainable. With regard to Leeville, I think that's a reasonably solid and secure property now. They did have a very good 2009, but we don't have any information at the present time that would indicate that they would be less than what they did in 2009.

Okay. And just a question on Taparko if I could. I was looking at what you have written in the press release today with respect to the completion test. Can I assume from what you mention there they have achieved the completion test?

Bill, would you like to answer that?

Adam, thanks for the question. The completion test is a 90-day completion test started on December 1st. So it will end the end of February. So right now we really can't assume anything with regard to where they will end up. As I mentioned, their December performance was quite good, and they exceeded the completion test results in December. Their results in January continue to be similar, so everything looks pretty good, but we can't determine anything until the end of February.

Okay. And one of the things looking at the model here, am I right in assuming that they're very close now to hitting the cumulative payments of $35 million?

I will ask Stefan to answer that.

Adam, this is Stefan. To date they we received about $20 million under the first royalty, the PP1 on that royalty. I think about $5 million of the $9 million for this quarter came from that PP1, so you can assume at those consistent levels, there is three or four more quarters under that before we reach that cap under the PP1.

Okay. And I guess I have to ask about IRC before I let you guys go to the next question. You're probably not going to answer it, but if Franco comes back with another bid, how aggressive do you think you guys would be? Is this something that you feel you absolutely have to have or is there certainly a limitation?

Adam, you're right. We're not going to answer that question directly on. It doesn't make sense for us to do that. I will say that we are very pleased with the combination of IRC and Royal Gold. We think there is certainly some merit to getting these two companies together at the right price, but we are a disciplined organization, and it is not -- we never pursue a transaction that doesn't make sense for our shareholders.

Okay. Great. I appreciate your time, everyone. Thank you very familiar.

Thanks for the questions, Adam.

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

Stefan, I will come back to Taparko. I have several questions. What I just heard you say has confused me a little bit, because in 2008 you generated royalties of about $7.4 million from Taparko and $10.43 million in fiscal 2009, and now I see another $8.9 million, which would bring us up to a cumulative $26.8 million of royalty revenue. That suggests to me that that $35 million could be recovered in its entirety in the next quarter or the current quarter, so I am a little confused about the response that you gave.

Let me just address that and step back to Taparko. There's two royalties that are currently paying right now at Taparko. The first royalty is a fixed rate of 15%, and that's the one on which the $35 million cap is determined, and then there is a second royalty also contributing to those numbers you just gave, which I don't have a cumulative number for combined royalties, but they sound good. So that PP2 royalty is a sliding scale based on gold price divided by 1,000, so right now it is paying 10%. So that cap is only based on the first royalty.

Which is a fixed rate?

Yes, which is a 15% royalty.

So of the cumulative payments to date, how much of that is fixed rate? We have $26.8 million cumulative.

$20 million under that fixed rate royalty.

$20 million has been paid? Okay. Thanks for clarifying that. Also, I have several other questions. I want to come back to Robinson and the situation there. There were provisional pricing adjustments at Robinson, and I am not sure I understand the conditions that cause that and what to anticipate in the current fiscal year. Copper is down over $50 just so far this year. What are the issues with respect to royalty recognitions at Robinson?

Essentially I think you're referring to last year, where we had some negative provisional pricing investments.

Yes.

Last year we saw copper during the second -- our fiscal second quarter last year we saw copper drop from nearly $4 to I think $1.50 in just over 1.5 months. So during that quarter we had some provisional pricing adjustments that negatively impacted our royalty, and I think we recorded negative $1.3 million in royalty revenue during that quarter last year.

Correct.

The way that royalty -- the way Robinson is paid on their copper shipments, they get paid on an initial shipment based on volume and price at that time. The volume is trued up about a month or so following that provisional payment, and then pricing is settled somewhere in the neighborhood of three to four months following that initial shipment. So when you saw those significant price changes last year, we follow Robinson's payment, so we also had to participate in those negative pricing adjustments. During this year-to-date we have not had significant pricing adjustments that have impacted our revenue materially. Over the last couple of quarters, there have been positive adjustments, but they're not significant.

With copper coming down again, is the likelihood of pricing adjustments increasing as we go through the balance of the fiscal year?

Yes. We're subject to both positive and negative pricing adjustments, so it is something that's resident in our revenue from Robinson each quarter.

Okay.

To the extent prices change on copper, we're going to have some impact to that. I can't forecast what the copper price --

I understand. Either for you or Tony, if gold had averaged $1,000 an ounce in the quarter instead of $1,100, how would that have, back of the envelope, how would that have impacted your royalty revenue in the quarter?

We have a chart we're actually disclosing in our 10-K that we'll file tomorrow that covers the change in price. I think for the quarter if gold had averaged $50 higher or lower, we would have had an impact on revenue of about $2.5 million. So if you take that to $100, that would have been a change of $5 million either way.

Of course the situation is changing because of the acquisitions and the properties now that you acquiring here, I don't know how that enters into the equation with Andacollo and possibly IRC coming into the mix, but I expect there will certainly be some impact there. The other question I had was with respect to the Barrick royalty portfolio in general. That contributed according to the annual report $12.2 million in fiscal year 2009. Can you give us some sense of how that contribution is likely to track in the current fiscal year?

I don't have a specific number for that. We really don't think of that as the Barrick portfolio any longer. It is part of our portfolio. I can follow up with you with a specific number following the call, and we can put that out.

Okay. Thank you.

Giving him a good workout, Andy.

I can go on, but, Karen, you're right. I have do follow-up questions for you after the call.

Let's move on. Thank you, Andy.

Thanks.

Your next question comes from the line of Imaru Casanova from BJM. Your line is open.

Hi, everyone. I had a couple of questions on Andacollo as it nears the beginning of production. I know Teck has guided production of about 53,000 ounces of gold on average. Do you guys have any indication of what the ramp up is going to be like starting mid-this year and/or for the following calendar year as well?

Tony here. Let me address that and I will turn to Bill to see if he has anything more to add to that. But the 53,000 was an average over the first 10 years. Now, we know the grade is a little higher on the front end of that, so we would expect a little bit better than the average. You're right. We have a ramp up period here that Teck has said is going to be at commercial production in the first half, so these things take a little time. It is a little difficult for us to forecast whether commercial production would be achieved in one, two, three, or four months, so I think I am going to have to just stay a little bit light on guidance there, although the early indications are the ramp up is going very well.

Okay. That's good. Now, if you could help me clarify this so that I can adjust my model. The 53,000, is that payable gold production or should we apply a recovery to that?

Looking to Bill Heissenbuttel here.

53,000 ounces is the produced amount, so we would apply 75% to that.

75%. Okay. I was being a little too optimistic supplying higher. Okay. I will make that adjustment. Thank you. The other question I had was in looking at your income statement for this quarter, we had -- you had a $2.8 million business development expense. Is that something that we should expect going forward? It is a bit higher -- considerably higher than I was expecting. I am wondering what is reflect there had and whether we should continue to expect that going forward?

That's a good question. We had IRC transaction costs that came in in a large way in this quarter.

Okay.

So that is not something that we would expect to repeat quarter after quarter. There will still be residual expenses coming in this period, but as you may be aware, we have some backstop protection in there with regard to reimbursement of those expenses if indeed we do not go forward with the IRC transaction. So that's really the nature of those business development expenses.

I see. Okay. I think that's about it for me. Thank you.

(Operator Instructions). Your next question comes from the line of John Tumazos from John Tumazos Very Independent Research. Your line is open.

Hello, John.

Hello. Thank you very much. Regarding the IRC acquisition, do you have people, all the people locked up under employment contracts? Do you expect to continue their creative personnel? And how much is the business synergy putting the two companies together and just getting rid of duplicative stock registration, et cetera?

John, good question. We have not come to definitive terms I should say or final decisions on the people at IRC. We recognize there certainly is talent there and I want to keep those cards rather close to my chest at this time. Although we have given significant thought to it. Let me not mislead you there. There is a tremendous amount of synergies just with regard to public accounting, to listing, and all of that, and there is duplicative personnel. As you know, it doesn't take a whole lot of expenses to manage a large royalty portfolio, so we certainly wouldn't expect to -- or let me flip it around and say we certainly expect to be a much more efficient on a cost basis organization going forward.

Might that be $5 million to $10 million sort of magnitude?

I don't think we have a -- Stefan, do you have a number with regard to that? I don't have a number in my mind as exactly what the additional -- I think what are you asking, John, is what additional costs might there be to what we have as a steady state Company?

I was thinking what savings it would be. What you're saying is your costs may not change and that the IRC costs might just disappear?

Significantly.

Thank you very much.

Thanks, John.

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

Stefan, on a different matter, the term loan in existence at this time, how much of that do you anticipate utilizing in the current fiscal year and what is LIBOR rate right now?

Tom, last I checked, 90 day LIBOR was 25 basis points, although I haven't checked the last couple of days, so someone correct me if I am off. We would expect to use that new term loan only at the consummation of the IRC deal, and we use a combination of that and our existing credit line, which is $125 million, so that gives us $225 million in total debt capacity with respect to closing that transaction.

Okay.

And also would depend on the elections. If you recall, there is a range of cash consideration in the deal.

Yes. And the other question I want to ask you if you can give me a general rough feel for this is how many fully diluted shares will be outstanding, making some assumption about IRC in the third and fourth fiscal quarters once that transaction completed? I mean, we have a general sense of how many shares might be involved. How much additional dilution are we going to see in the share count over the balance of the fiscal year?

Currently we have roughly 42.2 million shares outstanding following the Teck transaction.

Is that basic?

Yes, that's everything.

Okay. Diluted.

The max share consideration under the IRC deal is 7.5 million shares. That would bring you close to 50 million, about 49.7 million.

Okay. Exit would be reflected more towards the fourth fiscal quarter at that point.

Third and fourth quarters.

Okay. And I think there was one other thing that was on my mind. It has slipped my mind, so I will have to call back if I need to pursue anything further. Thank you.

Thank you.

Your next question comes from the line of Brian MacArthur from UBS. Your line is open.

Good morning. I just wanted to follow up on something you said. You mentioned the second $100 million credit facility would be available for the IRC, which I understand. But is that to imply, though, if you don't do IRC that $100 million is not available? Or is it conditional in the transaction or are you just getting another $100 million line either way?

Hi, Brian. The purpose of that $100 million line is for the IRC transaction.

So if for some reason you don't go ahead and close it, you don't have access for that $100 million to go and do something else?

That's correct. We could always look at other opportunities if we thought our credit facilities need to be higher, but the purpose of that $100 million is for the IRC transaction.

Great. Thank you very much. Just wanted to clarify that.

There are no further questions at this time. I would like to turn the call back over to the presenters.

Thank you, operator. Thank you for joining us today. We very much appreciate your continued support of Royal Gold, and we look forward to continuing to update you on our progress with IRC and also on our financial results on the next quarterly call. Thanks very much.

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