Royal Gold Inc (RGLD) 2011 Q2 法說會逐字稿

Good afternoon. My name is Melissa. I will be your conference operator today.

At this time, I would like to welcome everyone to the Royal Gold's fiscal 2011 second-quarter conference call. (Operator Instructions) Thank you.

Ms. Karen Gross, Vice President and Corporate Secretary, you may begin your conference.

Thank you, operator, and hello, everyone.

Welcome to our second-quarter fiscal 2011 conference call. This event is 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 will find our release detailing our financial results. As always, this discussion falls under the safe harbor provisions 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 CEO; Stefan Wenger, CFO and Treasurer; Bill Heissenbuttel, VP Corporate Development; Bill Zisch, VP Operations; Bruce Kirchhoff, VP 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 also free cash flow reconciliation in today's release.

With that, I will turn the call over to Tony.

Good morning, and thank you for joining us today.

Royal Gold had another quarter of very strong financial performance, achieving record revenue and free cash flow for the eighth consecutive quarter. We reported $56.3 million in royalty revenue, a 62% increased from $34.7 million in the comparable period. Quarterly net income rose 90% to $18.3 million or $0.33 per share. Free cash flow increased to $48.9 million or $0.89 per share. Free cash flow as a percentage of revenue was 87% for the quarter.

In looking at our financial performance on a 6 month basis, Royal Gold achieved record results in all three financial measures of revenue, free cash flow, and net income. Approximately 45% of our royalty revenue for the quarter came from Andacollo, Penasquito and Voisey's Bay, three of our cornerstone properties. Two of these three properties have yet to reach their full design capacity indicating additional growth potential in that it in these key assets. In addition, we have further growth built into our portfolio in 2011 as we await new production from the Holt, Wolverine, and Canadian Malartic projects. Bill Zisch will provide more detail on the status of these projects and other key assets in just a moment.

During the quarter, we also close our Mt. Milligan transaction with Thompson Creek in conjunction with their successful acquisition of Terrane Metals. We payed $226.5 million at closing and will fund an additional $85 million over the construction period for a 25% bolstering from the 6 million-ounce deposit. We are very pleased with this transaction, and we look forward to similar opportunities where we can add value in the future. We also completed two previously announced transactions during the quarter for additional royalty interests at Pascua-Lama, where we now hold a collective royalty interest of 5.23% at a gold price above $800 per ounce. These were very important transactions, because at present, we envision the Mt. Milligan and Pascua-Lama projects will become our largest revenue sources once they reach full production.

We've had a tremendous amount of activity on the operations and development side. I will now turn the call over to Bill to give you an overview of operations.

Thank you, Tony, and good morning, everyone.

Record production during the fourth calendar quarter was a result of balance within our portfolio and it's built in growth opponents. Ramp up towards design capacity at Andacollo and Penasquito, resumption of full product at Voisey's Bay, and increased production at the Cortez mine, more than offset the previously discussed revenue impact at Taparko and Siguiri, as both met royalty caps. Specifically, at Andacollo, continued ramp up of production during the quarter resulted in an increase in royalty revenue of 39% over the September 2010 quarter. Andacollo is expected to operate at near full capacity levels during the entire quarter ending in March 2011. Tech has estimated during the first 10 years of production, Andacollo is expected to average about 55,000 ounces of gold and concentrate, annually.

Now at Penasquito, sulfide plant production continues to expand as the high-pressure grinding units come on line and the site continues to ramp up to full capacity of 130,000 tons per day. Gold Corp. expects to sustain this level by the end of the first calendar quarter of 2011. Penasquito realized gold production of 170,000 ounces in 2010 with overall gold equivalent production at planned levels. For 2011, Gold Corp. has announced that they anticipate gold production to almost double at Penasquito, increasing to 350,000 ounces. Initiatives to build an [infit] crushing and conveying system are underway with construction starting in 2011 that will be completed in 2013.

At the Voisey's Bay operation, Vale recently announced the ratification of a new five-year agreement with United Steel Workers. Throughout the strike, placement workers have been supplementing other permanent employees to allow the ramp up to full production of 6,000 tons per day. Accordingly, our royalty revenues increased 89% from this property during the quarter. In addition, Vale has continued with the construction of the hydromet project at Long Harbor and remains on schedule for project completion in the first calendar quarter of 2013.

A calendar fourth-quarter emphasis on mining pipeline at Barrick's Cortez mine resulted in them exceeding their plan for processing of ore (inaudible) interest by about 4% for the year with an 80% increase over planned levels in the fourth quarter. With a continued focus on mining of Cortez Hill ore we do not expect this quarterly pipeline production level to continue through 2013, but we are currently awaiting annual guidance from Cortez.

At Taparko, we reached the $35 million payment cap on the GSR1 royalty in September. The remaining GSR3 (inaudible) royalty of 2% is now applicable. Following our review of the results of the completion test and extensive discussions with High River, we released the collateral securing our original investment subsequent to the end of the quarter. We received the last of our royalty payments from AngoGold Ashanti's Siguiri mine in Guinea as cumulative revenue of $12 million was realized in October.

Minefinders reduced their guidance for the quarter at the Dolores mine to a range of 11,000 to 12,000 ounces of gold and 500,000 to 600,000 ounces of silver. Actual production for the quarter was over 16,000 ounces of gold and 500,000 ounces of silver. With the temporary cessation of leaching on the Phase 1 pad, all gold and silver productions since mid-September is coming from the Phase 2 leach pad. Production volumes in October, November, and December were 3,000, 6,000, and 7,000 ounces of gold, respectively, with silver in December at record levels of over 260,000 ounces.

Inmet's Las Cruces operation in Spain continued its ramp up over the quarter and plans to continue working on plant modifications. Las Cruces ended the year of the are producing about 60,000 pounds of copper, about 5% below their recent year-end guidance for the operation. Inmet recently announced that it expects to double copper production at the mine to over 50,000 tons of cathode in calendar 2011. As planned at Robinson, they completed mining to the Veteran pit during the fourth quarter, shifting all mining to the Ruth pit. Copper production was about 6% below annual guidance as lower grade material and severe weather conditions hampered fourth-quarter production.

Calendar 2010 production of gold was above guidance, totalling slightly more than 75,000 ounces. Alamos's Mulatos mine realized a strong fourth-quarter production at 45,800 ounces, only 5% behind their record quarterly production of 48,000 ounces in 2009. Despite earlier shortfalls associated with extreme weather conditions, they ended the year with production of 156,000 ounces coming close to their annual guidance of 160,000 ounces. Avocet's Inata Mine in Burkina Faso seems to be hitting its stride with several quarters of performance that have exceeded planned levels. 2010 production totals over 135,000 ounces against a plan of 100,000 ounces and Avocet has indicated that their new average annual targeted production will be 165,000 ounces versus the previously planned level of 120,000 ounces.

On the project development front, at Mt. Milligan, the winter work program has been developed and camp accommodations were finished to support the season's activities. Activities are progressing with construction of the south copper dam, clearing of the plant site, and geo-tech drilling all underway. We understand the project remains on schedule for start up in 2013.

Yukon Zink has completed its startup of the Wolverine project. The processing plant is being commissioned and is operating at about 30% of capacity with expected design capacity of 1,700 tons per day to be realized in the end of 2011. A small amount of concentrate has been produced in the haul up to the port in Stewart, British Columbia and will be shipped during the processing of the first quarter of 2011.

Osisko reports that production is scheduled to start at its Canadian Malartic project in the second quarter of 2011 against a revised budget of CAD951 million. Osisko has invested $842 million with commitments of $71 million bringing their total spent and committed to 96% of plan. Saint Andrews Goldfields announced in November that they had commenced pre-production activities at the Holt Mine. They expect the mine to be a full production earlier this year with a complement of 125 miners, tradesmen, and technical staff.

With that, I will turn the call back over to Tony.

Thanks very much for that extensive report, Bill.

Before closing, I'd like to mention our announcement yesterday regarding our credit facility and term loan. We have amended our credit facilities with HSBC and Scotia, thus increasing our unavailable liquidity by $120 million and improving our long-term financial flexibility. We believe it is currently attractive to capitalize our Company with debt at these low LIBOR rates, particularly on an after tax basis. Highlights of this amendment include an increase in the maximum availability under the revolving credit facility of $125 million to $225 million; an increase in the total borrowing under the term loan from $110.5 million to $130 million; an extension in the final maturity date for both instruments to February 1, 2014; an interest rate that's the same for both facilities currently at LIBOR plus 1.875%; and a reduction in the term loan amortization requirement from 5% to 3% for the quarter. As a result of these amendments, our available liquidity has grown to approximately $225 million, resulting in much greater flexibility as we continue to look for opportunities to grow our business.

In closing, and for those who have actively followed Royal Gold, you've heard us spend much of 2010 discussing the revenue transition within our portfolio with Taparko and Siguiri reaching royalty revenue caps. In the case of Taparko, the change was significant as our royalty rate fell from an effective 25% to 2%. While we still expect normal production variability in our portfolio, there are no near-term royalty assets with similar provisions that could abruptly curtail royalty revenue. It is particularly gratifying to have our financial results move higher even after reaching these caps, as our earlier investments began to contribute materially over the past two quarters. We expect this transition to new high-quality long-lived assets will continue over the next several years as additional royalty interests are already in our portfolio come into production.

With that, our prepared remarks are concluded and we'd be happy to take any questions if there were any.

(Operator Instructions)

Your first question comes from the line of Imaru Casanova from MLV.

Hi guys, thank you for taking my question. I just have a few questions. The first one is regarding the timing at Holt. I'm wondering if St. Andrews won't start production there until this dispute over the royalty is resolved. And also, the second part of the question is, does the royalty apply only to the Holt and not to Holloway Mine, just to clarify that? And what production rate do you guys expect there at steady state?

Good morning, Imaru. Thanks for the questions. Let me try to respond to all of them, and if I forget one, please bring me back on course. Timing of Holt; we understand that Saint Andrews is moving ahead with pre-development and production irregardless of the dispute at this time, and we understand they are recruiting folks to keep the -- or to get the project up to full production within the first quarter of this year, so we'd expect steady state perhaps by the end of the first quarter of the quarter that we're in presently. It appears that the production is decoupled from the dispute. So, that's the first issue.

The second one is -- it does -- our royalty only is on the Holt site; it's not on the Holloway piece of the property. And with regard to the third of what steady-state production is, I don't know that Saint Andrews has come out with a specific number there; I don't know it.

Okay.

But we'll continue to seek some guidance. As you know, this time of the year is very important for us because we're getting all of the reserves, the production numbers from our operators as we speak. And then we'll, of course, in April or May with guidance for the entire year on both of those issues, so stay tuned and we'll get that to you and as soon as we have it.

Okay, great.

Now, I just have a quick question on Voisey's Bay, similar to -- now, that the strike is over, and it looks like the operations have normalized, should we expect the same rates of nickel and copper production that we saw for this last quarter, going forward?

I'll ask Bill to respond to that.

Imaru, good morning. Voisey's Bay, what we recognize for revenue is based on what they ship and sell, and their shipping schedule, particularly on copper, is a little bit what I describe as lumpy, in that they have certain periods of the year where they are shipping and other periods where they are not allowed to ship. So, we still need to fully understand what their plan is after the strike, but it's certainly -- their production rates that they have been realizing over the last quarter are at their capacity, at their production capacity, depending upon whatever grade they're putting through. So, we anticipate that we will see similar nickel as we have seen; they're at full capacity. And copper at their current capacity, but again, I would caution that we're going to see some lumpiness in our revenues from copper because of the shipments.

So, we think, essentially, that the ramp-up happened in the prior quarter, and we're pretty well off to steady-state production at present.

Okay; excellent. I think that's it for me. Thank you.

Thanks, Imaru.

(Operator Instructions)

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

Thank you. I'd like to follow-up on a question on Voisey's Bay. Now that the strike is over, and that there will be a resumption to normal operations, can you give us any type of an annual guidance as to what the royalty expectation would be going forward now that the strike has ended?

Well, again, we haven't got the numbers specifically from Voisey's Bay on what they plan to produce now that the strike is settled, but we do know, Andy, that the number -- the mill there is capable of 6,000 tons per day, and if we just look forward at -- if we use that number at the average grade, and I am turning to Bill now, which is 2.8% nickel, we would envision at our 2.7% royalty somewhere around $8 million per quarter.

Per quarter.

About $8 million per quarter.

Would that be a minimum expectation?

I think that would be an average expectation, because again, all we're doing is taking the mill through-put as 6,000 tons a day times the average grade. Now, as you know, most miners mine higher grade than the average grade, so there is probably some upside there, but I just don't want to go to far out in advance of expectations until we have a real number for you, Andy.

Okay.

There's a footnote to that royalty revenue contribution this quarter. So, I guess what I'm trying to get at here is, what am I really looking at? Can you quantify what the final settlements for prior production periods were?

If we can quantify the settlements for prior production periods -- we get the shipment statements and all of that, so I guess the answer is yes to that, but please help me on the question.

Well, there's Voisey's Bay and Penasquito, are the two that I'm most interested in trying to get underneath these royalty revenue figures that you've reported to understand them more properly. And in that footnote, it just says revenues consist of provisional payments for concentrates produced during the current period 'and' final settlements for prior production periods. Again, I'm trying to understand these royalty revenue contributions this quarter, and --

Yes, so, it's really an issue of timing that you are trying to dial-in on?

Especially for Voisey's Bay and Penasquito.

Bill, can you talk to this?

Yes, Andy, I don't have the numbers in front of me, but what I can tell you is that on a steady-state operation when Penasquito gets ramped-up, those settlements, short of price variance, are going to be similar quarter-over-quarter, so once we get ramped-up, that steady-state is not going to necessarily fluctuate a lot because of those settlements unless again prices change significantly.

Okay, I think I understand your response. Thank you.

Your next question comes from the line of Kwong-Mun Achong Low from Scotia Capital. Your line is now open.

Hi, good day, guys. Sorry, I may have missed a piece of it, but on Cortez Hills, I know are awaiting annual guidance, but the revenue you got there was much higher than the previous quarter. I just want to know some more color on perhaps the way it's going for next quarter and beyond?

On the schedule for Cortez production 2010, if you take a look at the year, as I said, we were about 4% off for the year, but the first quarter and the last quarter, because of their production schedule, were significantly above the second and third, and I'm talking calendar quarters for the year. So, what we saw in the fourth quarter, as I mentioned, we do not anticipate to be continuing. That we are still waiting for them to show us the plan that they have for our material in 2011.

On the long-term, what we have been mentioning, and what we expect, is that we will be seeing some decline in the annual production from Cortez, and we will probably continue to see quarterly variations in that, as they are blending in Cortez Hills ore with the pipeline ore. And that's somewhat a function of ore availability in mine sequencing, but on the year's basis, they were just about at plan. We expect them to be declining a bit in 2011, and we await that guidance.

All right. Also on the Andacollo ramp-up, can you tell me how that's going?

We're very pleased with the Andacollo ramp-up. The -- you know, they hit very close to full production already last quarter. I think they were at 53,000 tons versus a 55,000 ton design capacity. For all practical purposes, they seem to be at design capacity. What will change this quarter is that we'll have -- well, we hope to have all three months at full capacity, so we still expect a little bit of ramp-up on a revenue side from Andacollo this quarter.

Okay.

And lastly, just the operating costs. It seems to be about double of what it usually is at $4 million a quarter. Do you expect that going forward?

Let me bring our Stefan Wenger, our CFO, in on that question.

Yes, thanks. This is Stefan, thanks for the question.

The operating costs are really a function of production taxes, and what you saw this quarter was a much stronger contribution from Voisey's Bay, and there is a Labrador production tax that we pay associated with our royalty up there. Also, you saw higher production from Cortez, which also is subject to a Nevada net proceeds tax, so both of those factors drilled that higher cost of operations number that you're quoting. Now, we expect that that will continue with respect to Voisey's Bay, as we mentioned, and then with respect to how much revenue is coming from Nevada, will also cause variability in that number going forward.

All right, geat. That's it, thanks.

Thanks, Kwong.

(Operator Instructions)

I think, operator, we can conclude the call, and I just thank everybody on the call for joining us today. We appreciate your interest in Royal Gold, and we look forward to updating you as we get some more of these production and reserve numbers through, we'll certainly pass those along, and look forward to talking to you again on the next quarterly call, if not sooner. Goodbye for now.

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