Royal Gold Inc (RGLD) 2011 Q3 法說會逐字稿

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold's fiscal 2011 third quarter conference call. (Operator Instructions). Thank you. Miss Karen Gross, Vice President and Corporate Secretary, you may begin your conference.

Thank you, operator, and hello everyone. Welcome to our third 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.

This morning we also put out our reserve release. Both of these releases can be found on our website. 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 CEO; Stefan Wenger, Chief Financial Officer and Treasurer; Bill Heissenbuttel, VIce President Corporate Development; Bill Zisch, Vice President Operations; Bruce Kirchhoff, Vice President and General Counsel; and, Stanley 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 release.

With that, I'll turn the call over to Tony.

Good morning and thank you for joining us today.

Royal Gold reported another quarter of robust financial performance. Revenue increased 59% to $55.5 million and free cash flow increased by 60% to $48.9 million. Accordingly, quarterly net income rose to $19.6 million or $0.36 per share and free cash flow as a percentage of revenue was 88%. In looking at our financial performance on a 9-month basis, Royal Gold achieved record results in all 3 financial measures of revenue, free cash flow, and net income.

50% of our royalty revenue for the quarter came from Andacollo, Voisey's Bay, Penasquito, 3 of the cornerstone properties. Andacollo was once again our largest revenue source, contributing approximately $12 million. Voisey's Bay returned to full production following their strike and reported a very strong quarter resulting in approximately $10 million in royalty revenues, and we saw a significant year-over-year growth at Penasquito as this operation continued to ramp up production, providing $5.6 million in royalty revenue.

We hit several milestones in our development portfolio with containment commercial production at Holt and initial shipments of concentrate at Wolverine during the quarter, and in mid-April, the Cisco's Canadian Malartic mine had its first gold pour. We now have 35 properties of revenue to Royal Gold, and a significant number of royalty interests are properties that are either in construction, making the transition out of construction and into production or are considering expansions. This is an unprecedented level of activity for our portfolio.

And, I'll now turn the call over to Bill Zisch for those operational and development details.

Thank you, Tony, and good morning everyone.

Once again the portfolio effect of our producing properties was evident as several producing properties reported exceptional improvements, balancing a few properties where production was down slightly from the previous quarter. Starting with our producing properties, at Minefinders Dolores mine, there was a significant increase in quarterly production. Improvements implemented during the fourth quarter of calendar 2010 associated with commissioning of the phase 2 Leach pad continued to produce results as sales during the first calendar quarter exceeded the previous quarter by more than 50%. Minefinders guidance for calendar 2011 production is 65,000 ounces of gold and 3.3 million ounces of silver.

At Teck's Andacollo mine in Chile concentrate recoveries and grades were above planned in the first quarter; however, ore being mined is harder than expected which is adversely impacting the throughput. In the short term, they are increasing blasting efforts in the pit to reduce the size of run-of-mine material and are using available oxide crushing capacity to pre-crush material being fed to the sag mill.

Teck is evaluating options and taking measures to obtain their desired throughput. In addition, Teck announced that they are conducting a new expansion study to examine the feasibility of adding an additional sag mill, ball mill, and other equipment in order to increase annual production to 100,000 to 120,000 tons of copper and concentrate. This would increase production by 25% to 50% over the original design capacity. The study will also include drilling to confirm additional reserves as expected to be completed by the end of calendar year 2011.

At Penasquito, Gold Corp averaged about 9,4000 tons per day of ore processed for the month of March and reported that production at the sulfide plant achieved design capacity of 130,000 tons per day by the end of the quarter. They are now focused on sustaining throughput at the design capacity level. Strong production performance at Vale's Voisey's Bay operation continued, and we believe mine production is now at steady state. We are likely to see continued variability in concentrate shipments because Vale's schedule, as dictated by permits, includes periods that limit or prohibit continuous shipments.

Barrick's Cortez mine has returned its focus to production of Cortez Hills ore. As anticipated and discussed last quarter, this will limit production of pipeline ore subject to our royalty interests. Barrick has provided a gold production estimate for calendar 2011 of 126,000 ounces, subject to our royalty interests, principally resulting from heat bleach operation. We envision Barrick will continue to show priority to Cortez Hills for several years before returning more substantially to our royalty interests, which still contain 3.4 million ounces of gold reserves.

At Alamos' Mulatos mine, higher than budgeted gold recovery and grades were offset by lower than budgeted crusher throughput. They re-stated their calendar 2011 guidance to between 145,000 and 160,000 ounces of gold. Alamos also announced the detailed engineering and procurement for the 500 ton per day Mulatos high grade mill, commenced in the last quarter of 2010. Mill construction is planned to begin this quarter and is expected to be completed in the fourth quarter of 2011.

Quadra's Robinson mine was near prior quarter production levels with a focus of their mining turning to the Ruth pit. Limited by lack of flexibility in the Ruth pit copper and gold sales during the first calendar quarter were about 31% and 13%, respectively, below their annual guidance. Currently, a secondary access ramp is being constructed and mud is being removed from the bottom of the pit, both of which will improve flexibility for the remainder of the year. Quadra has indicated that Robinson's production calendar 2011 will be back-end weighted. They also reported that expiration is being conducted at the Ruth and Liberty pits to increase global resources.

Inmet's Las Cruces mine in Spain continued its improvement of operations as we received almost 27% more revenue during the quarter than the December quarter. The mine produced 8,100 tons of copper cathode during the quarter, but was affected by disruptions in the supply and distribution of oxygen in the leaching process. New generation oxygen distributors are being installed, and Inmet remains confident that they will reach design production rates of 60,000 tons of copper cathode per month by calendar year end.

As Tony mentioned earlier, the Holt and Wolverine mines moved into the production category during the quarter, as did the Canadian Malartic mine subsequent to the quarter end. On April 13, Osisko reported that they poured the first gold bar from their Canadian project and that they are on track to achieve commercial production by the end of this month. Timely achievement of these milestones within the project's budgeted cost along with recently announced increases in reserves, is a tribute to the Osisko organization and the Canadian Malartic project team.

Moving on to the Wolverine mine, Yukon Zinc's processing plant is operating at 300 to 500 tons per day and is expected to hit commercial production levels of 60% to 70% of design capacity by late in the calendar third quarter. Concentrate was shipped in the first quarter of 2011, marking the beginning of the Wolverine property as a producing and paying entity within the Royal Gold portfolio. Yukon Zinc expects to increase production to design capacity levels of 1,700 tons per day by the end of calendar 2011. St. Andrew goldfields Holt mine in Ontario, Canada, began production during the quarter after operating for 90 days. At an average throughput of between 450 and 500 tons per day, St. Andrew announced that commercial production had been achieved. They will continue to ramp up throughput to 1,000 ton per day during 2011.

With regard to our development properties, Orvana announced it completed construction of the new plant at the Don Mario mine in Bolivia. Startup and commissioning are currently in progress. Over 200,000 tons of ore from the upper mineralized zone have been stockpiled for processing. Additionally, Thompson Creek announced the completion of $132 million equipment financing facility for their Mt. Milligan project. The mobile equipment fleet is expected to be delivered to the mine throughout 2012. Phase 1 of the construction camp was operational in January and phase 2 was completed in March.

Finally, at Pacua-Lama, Barrick reported that approximately 45% of the pre-production budget of about $3.3 billion to $3.6 billion have been committed and Earthworks are more than 65% complete, with preparations underway to begin pre-stripping at the fourth quarter of this year. Construction of the power transmission line is progressing and the new access road is expected to be available during the second quarter.

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

Thanks for the update, Bill.

We also announced today reserves and resources subject to our royalty interest as of December 31, 2010. Net of depletion gold reserves increased 7% to 83.9 million ounces and silver reserves increased 4% to 1.4 billion ounces. However, these increases were larger on an equity basis, as much of this reserve addition was due to our acquisition at Mt. Milligan, but we are entitled to 25% of gold reserves. As such on the gold equivalent basis, we estimate 7 million ounces of reserves are attributable to Royal Gold's interests, which represents an increase of 26% over the prior year. It is also important to remember our attributable reserves are essentially cost free, as we don't have to pay for the cost to recover these reserves.

I also want to imagine a couple of small changes to our portfolio during the quarter. We signed an agreement to sell our Legacy Sands interest for $4 million. Legacy stands is a non-core, non-precious metal interest that we acquired in the IRC acquisition. In addition, Osisko exercised their buy down right at the Canadian Malartic royalty for a sum of $1.5 million, which we fully expected.

In closing, then, we look forward to the final quarter of very exciting year of growth for Royal Gold. It is rewarding to see several key development properties come into production. Our portfolio is starting to show its strength as we see significant contributions from our core properties, strong continued production from our second-tier properties, and initial contributions from properties that are competing construction. Specifically, we expect continued growth in the coming quarters at Penasquito, Holt, and Wolverine, as well as an initial contributions from Canadian Malartic and the upper mineralized zone at Don Mario. With this built-in growth we would expect to see continued volume expansion and our portfolio, and in today's cost environment, it is important to note that we are not subject to production cost inflation due to our business model, so we would also expect margin expansion at both flat and increasing metal prices.

Operator that concludes our prepared remarks. We'd be happy to take any calls or any questions on the call, if there were some.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Patrick Chidley from HSBC.

Hello, gentlemen; hello, everybody.

Just one quick question, you mentioned the Legacy Sand sale, obviously, you are going to realize $4 million for that, but was there a gain or a loss on that? Is that going to be reported in the final quarter?

Thanks, Patrick. I will turn the call to Stefan Wenger.

Good morning, Patrick. How are you? I will answer that question.

During the quarter, we also completed the final purchase accounting for the IRC transaction and under the accounting rules, we were able to adjust the purchase price for that interest rather than have any gain or loss, which is properly reflects that interest.

Okay.

That would be the current quarter or would it be the one that's just gone past?

The March quarter that has just gone past, and you'll see the final purchase accounting in our 10-Q that will be filed -- expect to be filed tomorrow.

Great. Okay. Thanks very much.

Thanks, Patrick.

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

Hi, guys.

I just have a quick question on the Holt royalty. I saw that the revenue realized for this quarter corresponds to about an 18% royalty, and -- royalty rate, and I was wondering do you actually get the cash from -- or do you expect to get the cash? And who is that royalty now given the litigation that is going on there?

Ima, we are accruing the cash associated with that royalty. Remember that -- just for the benefit of everybody on the call, that's a royalty that is in litigation and it's really a subject of who is responsible to pay the royalty. The -- there is no contention that the royalty is due, it's just a matter of who has to pay, whether it be Newmont or St. Andrew, Newmont being the previous owner.

That case is argued in appellate court in Ontario, March 28, and we're just waiting for the outcome of that, but that revenue is due from us and we have not put a claim for to either party yet, pending the outcome of the litigation.

Okay. Thank you.

And I just have a question on the Canadian Malartic project. You did mention that they should be achieving commercial production by the end of this month. Would you guys expect to receive royalties in the next quarter and for the June quarter or should we assume that you'll start to see that revenue flow in the September quarter?

I would expect even that we will accrue some revenue during the quarter that we are in right now, the June quarter. I would -- I don't remember exactly how that royalty reads, but I imagine the payment's due, say, 30 days or so after the quarter end.

Okay. All right.

And is there -- I haven't looked, but I guess there is some guidance there to the production for this year, so we can use that to estimate what a month's production would be?

Right, Ima. On our reserve statement that we put out this morning, we put a table on there that shows all our productions. And, if you also though on our website on the front page, you'll see a button that will take you to the entire royalty portfolio.

Okay.

Ima, this is Bill.

Also on that production schedule, there is some footnotes there that are with respective estimates and one of those for Canadian Malartic clarifies that.

Excellent. Thank you, guys.

Thanks, Ima.

Your next question comes from the line John Tumazos of John Tumazos Very Independent Research.

Congratulations on the results.

Thank you, John.

By no means is this a criticism. First question, could you just explain the $21 million or $22 million of various operating expiration administrative expenses as to what the larger day-to-day costs are? They are splendid and low. We appreciate them.

Second, could you explain the geographic risk controls that you have in looking at new assets? Particular appeal to me is your -- I'm a shareholder -- is that you are not in a lot of places, but, for example, Mexico is almost the $55 million in revenue. Just how you manage country risk and how you'll manage that going forward?

John, I will turn first to your question regarding our G&A costs to Stefan Wenger and he will explain how that cost is impacted by production taxes.

Sure. Hi, John.

I think your question broadly was to talk about what characterizes the roughly $23 million in operating costs? The largest component of that is DD&A, which of course is non-cash. DD&A for the quarter was $15.8 million. We look at that on a per ounce basis, and on a per ounce basis, that is about -- it's just less than $400 per equity gold ounce, if you look at it on gold equivalents. That is the largest driver of the cost side.

We did have about $6 million in cash expenses for the quarter, and of that about half of that $6 million is production taxes, so those are taxes that are variable based on production from both Nevada and also production from the Voisey's Bay royalty; the largest piece of that is Voisey's Bay which has a 20% production tax locally, which is reflected in -- both of those -- all of the production taxes are reflected in our cost of operations line.

Out of those -- the remaining $3 billion of cash expenses, if you will, reside in the -- also in cost of ops, general and administrative and business development costs. Those are really the costs to run our operation here with our 20 people that are here in Denver and one office here in Denver. And also legal and accounting and other costs associated with being a public company.

If I wasn't specific enough and will follow up.

It's good. The production costs are hidden in that cost of operation.

Yes.

Makes it look like you're living fatter than you are.

It's a great point John. We're looking at how we can make that more transparent as well.

John does that answer your question? I'll turn to the geographic risk question if that is sufficient.

Sure.

Okay the -- you're right, we do have very robust to graphic distribution when it comes to our reserves, 97% of our reserves are in Canada, the US, Mexico, and Chile. And, we like that distribution, and we're very familiar with operating in the Americas. We do look elsewhere. We've got some interest over in Africa, I think, on our reserve basis; they're less than 2% of our reserves.

And, we will continue to look elsewhere, but we often take a look when Bill Heissenbuttel is looking at a new business opportunity. One of the things he will look at is whether there is risk insurance, political risk insurance, offered in a particular country. If there isn't any there, that gives us a pretty good indication that we might want to think pretty carefully about going.

We don't necessarily place political risk insurance in each one of our properties, but we do have a look at that, so we are quite pleased with the portfolio as it now stands. I think it is one of our strengths, and one of those things that we will continue to look pretty carefully before making any investments outside of our real comfort area.

Thank you.

Your next question comes from the line of John Doody, Gold Stock Analysts.

Congratulations, guys, on the quarter.

My question is on Andacollo. As I recall that is the one where you have 0 cost for the ounces you receive from Teck?

That's correct.

Which is a terrific royalty. And should Teck decide to go ahead and expand by 25% or 50%, the operation, would there be any cost to Royal Gold on that? Would you have to participate in any of the capital costs?

No, John. We wouldn't. All that additional throughput would come at no cost to us as well as if they were to find additional reserves within our area of interest; all of that would come in at no cost as well. It's a very efficient royalty for us.

Great.

So, it would just speed up the 912,000 ounces that -- after which you'd switch to 50% of the ounces for free?

That's correct. And, of course, Bill had mentioned that they are looking at some expiration opportunities there, too. Hopefully, that'll add some mine life; speed up the mine end and perhaps add some mine on the back side.

Great. Congratulations on that royalty. That's the best in the business in my opinion.

Thanks, John.

(Operator Instructions).

Your next question comes from the line of Andy Schopick, private investor.

Thank you and good morning.

A couple of questions. First, can we assume from the remarks that the visibility into the Voisey's Bay royalty stream now is pretty stable and predictable going forward, assuming all things remain as they are today?

Andy, this is Bill.

Yes, I think that assumption is reasonable. Assuming all things go as expected, we think there operation is back up to steady-state, and short of, as I mentioned, there's some variability that we will see in the shipping schedule, which is impacts what we receive as revenue, but generally, it looks like they are back at steady-state and operating just very well.

My impression is that what we have seen this quarter and from your comments, that the results here were somewhat better or certainly your confidence in the performance was better than perhaps a few months ago on our last conference call.

I think that's a fair comment.

Secondly, Stefan, can you give us an estimate of how much of your revenue increase this quarter is directly attributable to the increase in the price of gold from a year ago?

Sure, if you look at -- the way we look at it, there's 2 factors there. 1 is volume and 1 is price. The gold price is up 25% year over year, but our revenue is up about 59%, so you can see that gold is playing some part of that, about 25% increase in gold, but the larger driver of that is built into the volume of our new assets coming into the portfolio.

Yes.

No, that I understand, but I'm just wondering if -- to what extent, the increase in the price of gold year over year, from this quarter versus the quarter a year ago -- to what extent that contributed to the dollar increase in your revenues?

I don't have a specific numbers for you on the breakout on the price volume analysis. We can call you back on that. I can tell you that we look at the variability of the price of gold and how it impacts our production on a regular basis. We have a disclosure that will be in our 10-Q on that tomorrow.

That would be great. All right, thank you.

Thank you Andy.

There are no further questions at this time.

I turn the call to Mr. Jensen.

Thank you for joining us today. We very much appreciate your interest in Royal Gold. We look forward to this last quarter of our fiscal year and reporting to you sometime in July.

Thanks very much.

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