Royal Gold Inc (RGLD) 2011 Q4 法說會逐字稿

Good morning. My name is Jessica and I'll be your conference operator today. At this time I'd like to welcome everyone to the Royal Gold Fiscal 2011 Fourth-Quarter Conference Call. (Operator Instructions) Thank you. Karen Gross, Vice President and Corporate Secretary, you may begin your conference.

Thank you, operator, and hello, everyone. Welcome to our fiscal 2011 fourth-quarter and year-end conference call. The event is being webcast live, and you will be able to access a replay of it on our website.

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, 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'll turn the call over to Tony.

Good morning and thank you for joining us today. Fiscal 2011 was an outstanding year for Royal Gold. We achieved record revenue, free cash flow, and net income, and continue to execute on our long-term growth plan by adding another high quality, long life royalty to our portfolio.

During the year, we closed the Mount Milligan transaction, where we acquired the right to 25% of the payable gold produced from this project in British Columbia. We also completed a transaction to acquire an additional NSR sliding scale royalty on the Pascua-Lama project in Chile, bringing our royalty interest to 5.23%, at gold prices above $800 per ounce.

Our total property count now stands at 184, of which 36 are producing properties, and 21 are development properties. In addition, we recently announced a transaction with Seabridge Gold on the KSM project that allows us an excellent entry point into one of the largest undeveloped gold deposits in the world. I'll speak more about this later in the call. We also saw growth in reserves during the year with gold reserves increasing -- gold reserves subject to our royalty interest increasing 7% to 83.9 million ounces, and silver reserves increasing 4% to 1.4 billion ounces. More importantly, we considered the impact of these reserves on Royal Gold by calculating royalty ounces, which are simply the reserves subject to our royalty interest, multiplied by the applicable royalty rate.

On a royalty basis, then, we estimate that reserves of 7 million gold equivalent ounces are attributable to our interests which represents an increase of 26% over the prior year, largely due to Mount Milligan transaction. Our growing revenue stream for fiscal 2011 was primarily driven by production growth at our cornerstone properties, solid production from our other key royalties and higher metal prices. Revenue from 3 of our cornerstone properties, including Penasquito, Andacollo, Voisey's Bay, totaled $98 million, or 45% of total revenue for the year.

Now, Stefan Wenger, our CFO will review the financial highlights for both the year and the quarter in more detail. After that, Bill Zisch, our Vice President of Operations will provide an update on certain producing and developed royalties. Stefan?

Thank you, Tony, and good morning, everyone. For the fiscal year we had record revenue of $217 million, an increase of nearly 60% over revenue of $137 million in fiscal 2010. Net income increased 232% to $71.4 million, or $1.29 per share, compared to $21.5 million or $0.49 per share for fiscal 2010. Our free cash flow for fiscal 2011 was a record at $190 million or 88% of revenues. This compares with $100 million or 73% of revenues for fiscal 2010.

Free cash flow was negatively impacted during fiscal 2011 by higher production taxes of $9 million compared to $2.9 million in fiscal 2010. Higher production taxes were associated with the increase in revenue at our Voisey's Bay royalty, which carries a production tax burden of 20% of revenues. Before production taxes, our free cash flow increased to 92% of revenue during fiscal 2011, demonstrating the strong operating efficiency of our royalty model. Working capital, as of June 30, was $140 million, including cash and receivables on the balance sheet totaling $163 million. We also had $125 million in additional liquidity available from our revolving credit facility, to fund future growth. We ended the fiscal year with $226.1 million in debt under our credit facilities.

I would like to briefly comment on our income statement presentation as we have changed a few things this year. For fiscal 2011 we broke out our production tax expense into a separate line item on the income statement, as production taxes have become a larger component of our cash costs. In addition, going forward, all of our corporate costs including operating costs associated with managing our existing portfolio, as well as business development expenses and non-cash compensation, will all be included in the G&A line item. For fiscal 2011, our total cash operating expenses, net of production taxes, were approximately $14.6 million, compared to $12.2 million in the prior year.

The increase in cash expenses was associated with higher corporate costs, including accounting, tax and legal fees, primarily resulting from the restructuring activities we completed during fiscal 2011, resulting from the IRC acquisition. Our average DD&A rate for the year, on a gold equivalent ounce basis was $426 per ounce, compared to $430 per ounce in the prior fiscal year. For fiscal 2012, we expect DD&A expense to be in the range of $400 to $450 per royalty ounce. One final highlight for fiscal 2011 was the amendment of our credit facility with HSBC and Scotia, resulting in improved long-term financial flexibility and the financial capability to continue to pursue growth opportunities.

Moving on to the fiscal fourth quarter, we had record quarterly revenue of $59 million, a 46% increase over revenue of $41 million for the comparable quarter. Net income was $21.7 million or $0.39 per share, compared with $10.5 million or $0.23 per share for the prior year period. We also had record free cash flow of $51.6 million, or 87% of revenues, compared to $35.1 million or 86% of revenues for the prior year period. If you eliminate production taxes, free cash flow as a percentage of revenue for the quarter was 92%.

In summary, we had another very successful year of financial growth and record performance. We are beginning fiscal 2012 with a strong balance sheet. The flexibility within our balance sheet combined with our growing cash flows positions us well for the future.

Now, I will turn the call over to Bill Zisch.

Thank you, Stefan, and good morning, everyone. I'll begin by describing the overall performance of our portfolio of producing properties and then provide an update on a few of our development properties. First of all, in comparing our production with the comparable prior year quarter, revenue from our producing portfolio increased 46%, as Stefan mentioned. Comparing production with the prior quarter, that is our fiscal third quarter of 2011, revenue from production increased 7%. Quarterly price increases for gold and silver of 9% and 21%, respectively, offset other metal prices that trended down 2% to 10%. Key properties with production below the prior quarter included Leeville, Andacollo, Las Cruces, and Voisey's Bay. At Leeville, Newmont executed a scheduled 1 month outage of the mill 6 roaster.

Andacollo was slightly below the previous quarter's production as they continued to work through ore hardness issues, although shortfalls were partially offset by increased concentrate recoveries. Inmet continued to maintain improvements related to oxygen supply by installing and commissioning new oxygen distributors at its Las Cruces mine. The decrease in quarter-over-quarter sales was primarily a function of a scheduled 16 day maintenance shutdown in June.

At Voisey's Bay, as expected, there were limited copper concentrate settlements during the quarter, as the last shipments of copper concentrate were completed in the December 2010 quarter, before the normal restricted shipping period from December to May arrived. Nickel shipments at Voisey's Bay, however, exceeded the prior quarter as the operation had increased production of nickel concentrates. Key properties with production above the prior quarter were Penasquito, Robinson, Dolores, Gwalia Deeps, and Mulatos.

At Penasquito, despite Goldcorp's reduction in full year guidance, they did continue to ramp up production with quarterly results that were 21% higher than the prior third quarter. Guidance was reduced because they had not been able to sustain 130,000 ton per day through put. Lower processing rates were due to lower than forecast pebble feed to the high pressure grinding roll circuit, and slower than expected progress on the raising of the tailings dam embankment. Higher grades and recoveries did offset some of the through put shortfall, and Goldcorp does expect to resolve through put issues by the end of this year.

At Robinson, Quadra continues to work on improving production as they have reduced the congestion in the Ruth pit and continued development of the secondary access ramp into the pit. Access to higher grade material at the bottom of the pit, and additional haulage capacity are expected to increase production in the second half of the year.

At Minefinders Dolores mine, production was sustained at its improved level since initiating leeching of the stage 2 pad. Of particular note at Dolores is the increase in silver production which exceeded the prior quarter by 23%.

Gwalia Deeps, which suffered unseasonal rain that impacted production in the previous quarter reestablished access to the higher grade Hoover decline and exceeded the prior quarter production by 6%. At Mulatos, crusher through put improved for the third consecutive month, with stacked ore in June averaging a record 16,000 tons per day.

Moving on to our newest producing properties, Yukon Zinc's Wolverine Mine continued its ramp up with targeted design production expected by the end of this year. At Canadian Malartic, Osisko announced that in May they reached commercial production ahead of their previously scheduled August target. Ramp up is progressing well with an average through put of almost 39,000 tons per day through mid-June, moving them well along to achieve the design rate of 55,000 tons per day.

With regard to our development properties, I recently visited Thompson Creek's Mount Milligan project, and was pleased to see their progress and the professional approach they're taking. The earthworks for the plant, shop and administration foundations are complete, the concrete batch plant is ready to go, and a significant portion of their steel has been delivered. Thompson Creek reported project spending to date at 16% of the total project, and they are targeting completion in the fourth quarter of 2013.

At Pascua-Lama, Barrick has stated they expect costs to increase to between $4.7 billion and $5 billion. A portion of this increase is associated with maintaining the mid-2013 production schedule, which is beneficial to us as a royalty holder. Additionally, Barrick has reported that revised gold production estimates for the project have increased from 775,000 ounces to 800,000 to 850,000-ounces, in the first full 5 years of operation. Three development properties that have reached significant milestones include Kutcho Creek and Schaft Creek in British Columbia, and the Meekatharra gold project in Western Australia.

At Kutcho Creek, Capstone Mining recently completed a favorable pre-feasibility study. Along with ongoing exploration, the focus of their development activities this year will be to carry forward the environmental and socioeconomic assessment process with the goal of obtaining all necessary permits for mine development by mid-2012. We hold a 1.6% NSR on this project.

In July, Copper Fox Metals released a 43101 compliant report related to the resource estimation for their Schaft Creek deposit, one of the largest undeveloped copper, gold and molybdenum deposits in North America. They expect to complete a feasibility study by the end of this year. We have a 3.5% NPI interest in this property.

In Western Australia, Reed Resources is conducting resource re-optimization and a feasibility study to recommence production in 2012 from their recently acquired Meekatharra gold project. We have a 0.45% to 1.5% NSR interest on various properties within this project. With that, I'll turn the call back over to Tony.

Thanks for the update, Bill. I'd like to turn now to our recent transaction with Seabridge Gold announced in June where we acquired an option to purchase a 1.25% net smelter return royalty on all of the gold and silver production from the KSM project in northwestern British Columbia. As part of the transaction, we purchased just over 1 million shares of Seabridge common stock for approximately $30 million. Holding the shares for a minimum of 9 months gives us the right to acquire the royalty at a future date by paying CAD100 million.

Under the agreement, we may also increase the royalty to a 2% NSR by providing an additional CAD18 million private placement in Seabridge common shares prior to mid-December 2012 and holding additional Seabridge shares for a minimum of 9 months, and then paying an additional consideration of CAD60 million, if we choose to exercise this option. So to summarize these options, in total, we have the right to purchase a 2% royalty at KSM for a purchase price of CAD160 million.

The KSM project has proven and probable reserves of 2.2 billion tonnes, containing 38.5 million ounces of gold, 10 billion pounds of copper and 214 million ounces of silver. Once built, the economies of scale are expected to provide for low production costs and a robust production schedule for a long life. Seabridge's preliminary feasibility study envisions an annual precious metal production averaging 546,000 ounces of gold and 2.7 million ounces of silver over a 52 year mine life. These features and the advantages of being located in British Columbia, fit well into our development portfolio as we layer in the next generation of growth.

One more development to highlight during the recent quarter was the settlement of the Holt mine litigation. As you know, this dispute has been ongoing since November 2008, and I am pleased to report that a final judgment has been made in a manner satisfactory to Royal Gold. We have now received all of the royalty revenue due to us since Holt restarted last year.

In closing, fiscal 2007 was a milestone year as we transitioned from a revenue base from prior key assets to our new cornerstone royalties. Looking ahead, we anticipate further revenue growth as Andacollo, Penasquito, Holt, Canadian Malartic, Wolverine and Las Cruces all work to achieve full design capacities.

We also look forward to significant construction progress at Pascua-Lama and Mount Milligan, which are scheduled to commence production in the second half of calendar 2013. We are proud to have delivered a decade of strong growth for our Company and we are eager to build on that success. Operator, that concludes our prepared remarks. We would be happy to take any calls -- any questions on the call if there were some.

(Operator Instructions) Your first question comes from the line of Imaru Casanova from McNicoll, Lewis, Vlak. Your line is open.

Hello, this is Imaru Casanova at MLV. Congratulations on what was a solid quarter. I have just a couple questions on what we might expect in the next couple quarters at some of these key operations. In particular, at Voisey's Bay, do you guys have some guidelines for us as to what expect in production there? We are seeing some variability there. I understand some of that has to do with the strike earlier and shipments, et cetera. But do you have any type of sort of sustained level of guidance for both nickel and copper for us?

Good morning Imaru, I'm just going to ask Bill Zisch to respond to that question.

Hi Imaru. What we have seen over the last 2 quarters is about what we expect for them to be running at on a steady state basis. As you said, they did settle the strike. What they're doing now is operating at the level that they expect they will run through the 2013 period when their Long Harbor project starts up. So, what we're seeing now is about what you'll see, and as you mentioned and as we mentioned in the past, our shipping schedule will be a bit lumpy because of the constraints that they have. This last quarter was very representative.

Okay. Now, copper was a lot lower this quarter compared to the previous quarter. Is it going to be somewhere in between, then?

Again, what you'll see is based on the shipping schedule, production last quarter was about 14 million pounds and then they didn't ship any this quarter because they're constrained from that. So, copper in particular you will see go up and down based on that shipping schedule.

Okay. All right. And then Andacollo, they're trying to get to the 55,000-tonnes per day target and there's been a bit of delay there because of some of the issues with the ore. Have they given you an idea of when they think they're going to be able to get to the signed rates. I know they're also talking about a further expansion, but as far as the original plan, when do you guys think they're going to be there?

Imaru, this is Bill again. They do have a plan they talked about several things they're going to do including adding a small crusher to feed the pebble crusher. They're going to increase power to the sag mill, and they're going to install a 20,000-tonne per day crusher and they expect that crusher will be in by the end of the first quarter 2012. That's when they would be targeting -- their getting back up into their design levels when they get those 3 things done.

Just to add to that, the small crusher to feed the pebbles is actually being installed this month in August. And the power is coming I think in next month. So, there should be a little bit of incremental improvements I would imagine ahead of the larger crusher that Bill mentioned is going to come into production in the first quarter of 2012.

Got you. Okay. That's helpful. And let's see. I take it you did report some revenue at Canadian Malartic for this quarter that you just reported, and I'm assuming they were part of the other category. Can you give us what the production actually was there that you recognized from Canadian Malartic?

We're just looking whether we have that dollar figure or the production figure in front of us right now. Stefan, do you have that?

I don't have it right now but we can follow up on that.

Happy to provide that. You're right, it's in the other category for right now because it was just a partial ramp-up in that.

Right.

Prior quarter.

Yes. Got it. And then last thing, and then I'll let others ask some questions, is do you guys have your own -- I know it would be speculative right now, but as far as a time line for KSM regarding that last transaction that you've done. How do you guys see the time line of this project towards potential production in the future?

Yes, this is -- this certainly is the next generation of asset for us, Imaru. We're just at the -- I should say Seabridge is at the pre-feasibility stage at present. They're continuing to do some drilling to refine and improve the knowledge and potentially the rate of the deposit. They're also seeking a major partner and I think that's one of the critical path items. They recognize this is a very, very large project and they're going to need some help to put it forward. Having said all that, then one needs to consider that the construction schedule. I'm looking at Bill Heissenbuttel, is a 5 year -- 4 year construction schedule as it's originally envisioned. So, this is a project that's a ways out on the horizon but the way we structured the deal I think it gives us a chance not to put a whole bunch of cash up front and still have exposure to a huge deposit if and when it does come into production.

Indeed. Okay. Thank you very much, guys.

Thanks, Imaru.

Your next question comes from the line of Andy Shopick, a private investor. Your line is open.

Thank you very much. Tony, you just addressed at least part of my question about Seabridge because this is something that I've had some familiarity with and I've certainly had discussions with Rudy Fronk going back several years. He's always communicated to investors that the intention was to basically find a partner to sell the Company and that the Company had no desire or interest in commercializing the mine, and my understanding is that the costs associated with bringing this project into commercialization have gone up fairly significantly. We're talking a multi-billion dollar type of project here. I was wondering, the shares that you have purchased, those shares are registered free to be sold, or if the Company were to be acquired and you cashed out. I mean, I'm not sure what provision, if any, is in your agreement should they in fact decide to just sell the Company at some negotiated price.

Thanks for the clarification, Andy. We have those 1 million shares, approximately 1 million shares that we own today; we have a commitment to hold those for 9 months, to perfect our option. If we were to liquidate those earlier than that then we would not be able to exercise the option at a later date. After the 9 months, we're free to do what we want with those shares. The same is true for the subsequent option. If we were to invest another CAD18 million into Seabridge we would have to hold those shares for a 9-month period as well after we acquire them. But after that we're free to do what we want with them. Of course, the options then will last for a very significant period of time. They last, I think, for 60 days after the production announcement's been made on -- the construction decision's been made, that financing is in place and that permits have been received.

Tony, let me follow up. If the Company were to be sold prior to the 9 month period would your hand basically be forced to sell the shares and you would have no potential royalty participation?

Bill, do you have the answer to that question?

I don't have it right with me. I can tell you that if the Company is acquired a second tranche, in fact the Company acquiring Seabridge would have to give us the chance to do a private placement in their shares.

I think that's a response to your question, isn't it, Andy?

I want to follow up briefly with Karen and Stefan. I think there's a page missing from the press release unless this was done deliberately. I was looking for the fourth quarter consolidated statement of operations and income, and I only see the full year presentation. Normally, you do provide that quarterly data and year-to-date figures.

Andy, this is Stefan, at the year end we only provide the annual figures. When our 10-K comes out there will be a breakout of the quarterly information and that will be out within the next week or so.

So, then we have to -- I didn't notice this before. But basically I'd have to go back and back in or back out the fourth quarter numbers from the 9 months. Okay. Thank you.

Yes.

Thanks for the questions, Andy.

(Operator Instructions) There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you, Jennifer. And thank you all for joining us today. We very much appreciate your interest and continued support of Royal Gold and we look forward to providing the K that Stefan just mentioned in the next few days and updating the progress in our next quarterly conference call. Thanks very much.

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