Royal Gold Inc (RGLD) 2012 Q1 法說會逐字稿

Good afternoon. At this time I would like to welcome everyone to the Royal Gold fiscal 2012 first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Ms. Karen Gross, Vice President and Corporate Secretary. Ms. Gross, you may begin.

Thank you, operator. And good morning, and thank you for joining us today to discuss our first quarter 2012 results. This event is being webcast live and you will be able to access a replay of the call on our website. 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 Kirchoff, VP and General Counsel; and Stanley Dempsey, Chairman.

Tony will open with an overview of our quarterly results and then Bill Zisch will then discuss our operations and review of some of our producing and development property. After management completes their opening remarks, we will open up the lines for a Q&A session. Before we begin, I want to remind everyone that 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.

With that I will turn the call over to Tony.

Good morning, and thank you for joining us today. Royal Gold reported another record quarter of financial performance for revenue, cash flow from operations and net income. Revenue increased 42%, to $64.5 million, cash flow from operations increased 35%, to $46.2 million. Net income rose 91%, to $22.5 million, or $0.41 per share. Our net income was adversely impacted by $0.02 per share due to a restructuring at our Royalty at Relief Canyon in Nevada. 76% of revenue during the quarter came from precious metals, which is up from the June quarter of 68%. This change was driven by an increase in the percentage of the coal production, in a Gold Royalty production, as well as a change in metal prices. As compared to the June quarter, gold and silver prices increased 13% and 2%, respectively, more than offsetting declines in base metal prices of 2% to 7%.

For the quarter, approximately 47% of our relative revenue came from our 3 producing cornerstone properties, including Andacollo, Voisey's Bay and Penasquito. Andacollo was again our largest revenue source, contributing approximately $17 million. Voisey's Bay reported a solid quarter with the contribution of approximately $7 million, while Penasquito added nearly $6 million in revenue. Holt emerged during the quarter as an important contributor adding $3.6 million for revenue. I should just mention that this project is not yet up to full production and Bill Zisch will speak more to do that in just a few moments.

6 of our top 10 revenue generators increased production compared to the June quarter. Assets with lower production include Mulatos and Dolores, which were negatively impacted by insufficient supply of cyanide. Voisey's Bay, due to scheduled maintenance at smelters, and Penasquito, as it continues to work through the grinding modifications necessary to reach full production. In addition to Penasquito and Holt, we still have a number of mines that have not yet reached full production, including Andacollo, Canadian Malartic, Las Cruces and Wolverine.

With that I will turn the call over to Bill Zisch, our VP of Operations, to discuss these and other projects in more detail. Bill?

Thank you, Tony. And good morning, everyone. We currently have 37 producing properties in our portfolio. As Tony mentioned, 6 of them are in early stages of production, either working to ramp up or to establish optimal levels of production. Thus making their output a bit more variable. At Andacollo in Chile, production exceeded the June quarter by 25%. Tech continued to improve and add to the crushing and grinding circuit. Production averaged about 40,000 tons per day while their design capacity is 55,000 tons per day. Improvements in production are the result of the installation of a small crusher to feed coarse ore through the pebble crusher and by an increase in power to the side mill motor of about 10%.

They are planning to install a 20,000 ton per day pre-pressure plant which they anticipate will be completed in the first quarter of calendar 2012. In addition, tech is completing a feasibility study to expand the operation beyond 55,000 tons per day and as indicated, that the study will be finalized by calendar year-end. At Penasquito, Gold Corp reported that testing and plant modifications were completed in July and August allowing normal operating conditions in September to achieve record average throughput of 102,000 tons per day. Progress continued on the supplemental ore feed system to ensure a sufficient quantity of pebble feed to the high-pressure grinding roll circuit. They expect this system to be completed by the end of 2011.

A project to enhance the tailings dam facility is ahead of schedule. Additional water supplies have been added to eliminate current and future shortfalls from water retention issues. With the anticipated completion of these projects by the end of this year, Gold Corporate expects to achieve the design throughput of 130,000 tons per day by the end of the first quarter of 2012. In Canada, 3 of our principal properties, Holt, Wolverine and Canadian Malartic, had mixed revenue results for Royal Gold compared to the prior quarter. Holts production nearly doubled from the June quarter as development progressed to support higher daily mining rates.

Head grades increased steadily as the higher grade reserves and the remainder of the C-103 Zone were mined. And better development grade was obtained in Zone 4. The mill averaged over 700 tons per day of Holt ore for the quarter and St. Andrews anticipates reaching full mine capacity of 1,000 tons per day by the end of the March 2012 quarter. In addition to mine improvements, a new SAG mill motor coupled with other operational improvements resulted in throughput increases of about 6% at the Holt mill.

We recently visited Yukon's Zinc. Wolverine Mine in the Yukon. There initial ramp-up schedule has been impacted by a fatal accident that resulted in the cessation of mining from April 2010 to February of this year. Recent mine production has been approximately 500 to 600 tons per day and the project continues to gradually increase production. The mill is designed for a capacity of 1,700 tons per day.

At Canadian Malartic, our royalty interest covers approximately 50% of the Malartic reserves. While Cisco declared commercial production as of May 19, about 45 days after first introduction of ore to the mill. During their third quarter throughput averaged almost 37,000 tons per operating day resulting in more than a 50% increase in royalty revenue versus the June quarter. And moving them into the top third of our revenue generators. While Cisco is installing 2 cone crushers to achieve an overall mill throughput of 55,000 to 60,000 tons per day, the first cone crusher is expected to be operational in the first calendar quarter of 2012 and a second cone crusher is expected to arrive on-site in the early part of the second calendar quarter of 2012.

At Inmet's Las Cruces mine in Spain, the many ongoing improvements installed and implemented during the last year continue to increase their production resulting in a 26% improvement over the prior quarter. Production in August was a record 4,500 tons of copper cathode as plant modifications during a June shutdown had a positive impact. Reactor performance and reliability continue to improve in the quarter and by the end of September all 8 reactors had operated reliably for 30 consecutive days. Major modifications to the plant have now been installed and are been commissioned. Plant is currently being tested at up to 100% throughput levels to assess its overall stability and identify any remaining bottlenecks. Inmet continues to target a ramp-up to impression-designed capacity by year-end.

Moving onto other assets that are in steady stage production. At Voisey's Bay in Canada our revenue was less than the prior quarter for a couple of reasons. First, nickel sales for the June quarter were notably stronger than prior quarters. In addition, planned maintenance during the second and third calendar quarter of this year resulted in a lower revenue during this September quarter. At Mine Finders Dolores Mine, in addition to the cyanide supply shortage, there was an additional impact on production as the west side of the Phase 2 leach pad suffered a crushed collection pipe. Heap leaching on the east side of the pad was advanced to maintain production.

Mine Finders expects calendar fourth quarter production to improve once the crushed pipe is repaired, the irrigation of freshwater is expanded and the optimum cyanide concentration levels are restored. Alamos has also experienced a cyanide shortages at their Mulatos Mine. However, resumption of normal shipments along with an additional shipment from an alternate supplier, will allow for increase in cyanide concentration levels required to extract the gold ounces deferred from prior months. Construction of the new mill to process high-grade ore remains on-schedule with planned production in the first quarter of 2012. Both Alamos and Mine Finders have maintained their full-year production guidance.

In Nevada, our principal properties at the Leeville, Cortez and Robinson all exceeded production levels from the prior quarter. Leeville was up by approximately 30% due primarily to a scheduled month-long outage in the previous quarter. And Cortez was up by 13% as more stockpiled refractory pipeline ore was processed at Gold Strike. Both Leeville and Cortez remain on course to meet their production guidance for calendar 2011. At Robinson, Quadra put 5 trucks transferred from their [Carlota] mine into operation during the quarter. In addition, they completed removal of mud from the bottom of the pit and finalized access to higher-grade material in the bottom of the Ruth Pit. Also during the quarter, a single-day of mine production record was achieved and a record monthly average milling rate of approximately 48,500 short tons per day was realized.

Royalty production was about 2% higher in the June quarter levels. Quadra did report that operations were impacted by localized slope stability issues that resulted in a re-sequencing of the mine plant and delays in accessing portion of the higher-grade material that was originally expected to be mined in the fourth quarter of calendar 2011. As a result, Quadra reduced the 2011 calendar year guidance to between 95 million and 100 million pounds of payable copper.

With regard to a couple of our development properties construction of Thompson Creek's Mount Milligan project continued during the quarter and the overall project remains on-schedule for completion in the fourth quarter of calendar 2013. Subsequent to the quarter end, we contributed $13.7 million of our $85 million commitment to fund construction. At Pasqua-Lama, Barrick continued to report that initial production is expected in mid-2013 with a contribution of 800,000 to 850,000 ounces expected in the first full 5-years of operation. At the end of the September quarter, earthworks on the Chilean side of the project were about 80% complete, while on the Argentinian, or Lama side of the project where the plant is located, earthworks were about 60% complete.

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

Thanks for the update, Bill. Turning to our financials, our balance sheet is growing stronger by the day. With the decrease in net debt from approximately $112 million at September 30, 2010, to the current level of $69 million. We have working capital of about $150 million. This coupled with strong and growing cash flow and an availability of $155 million of undrawn capacity on our credit line gives us the resources to pursue additional opportunities. We are continuing to look for creative structures with appropriate risk mitigation to gain entry into earlier stage projects while actively pursuing near-term production opportunities.

So as we wrap-up our call here today, let me just summarize and say that this was yet another solid quarter of growth for the Company. We are pleased to see important revenue contributions now coming from Holt and Canadian Malartic. Looking forward we expect to see continued volume expansion from Andacollo, Penasquito, Canadian Malartic, Holt, Wolverine, Mulatos and Las Cruces over the next few quarters as these projects work towards expanded and full production.

Operator, that concludes our remarks today, and we would be happy to take any calls if there are some for us.

(Operator Instructions Your first question comes from the line of Cosmos Chiu from CIBC. Your line is open.

Good morning, guys. Congrats on a good quarter. Got a few questions here. Maybe first off on Andacollo. We've heard quite a few times about the expansion that is going on there. And we look at techs guidance, they always talk about tonnage increases and also how that could impact copper production increases. On the gold side, would it be safe to assume that the percentage increase that we see, for example, for copper would be sort of the same percentage increase that we could see for gold?

Cosmos, we would guide you that direction. When we did the due diligence on the project, we take a careful look at the homogeneity of the gold and how it occurs with the copper. And it is pretty homogeneous. In a rough sense, I think that is a pretty safe assumption.

Okay. And then, Tony, on this $0.02 per share loss based on the restructuring of a non-principle royalty. Just want to get maybe a little bit more detail. Trying to get a little bit more comfort that this is indeed a one-time item.

What had happened there, the operator of the project, First Gold, had filed for bankruptcy on the Relief Canyon, and their principal asset was the Relief Canyon property. And so in order to help that whole thing move forward and out of bankruptcy we thought it was wise to reduce our royalty rate from 4% to 2%. So it is quite an anomaly, of course we stress test all of our assets on a quarterly basis for any impairment and we don't have any other concerns in our portfolio.

And maybe one last question. As we have seen with a big cap gold companies reporting this past weekend we saw a lot of dividend increases coming through. Many would argue that the royalty companies, including Royal Gold, could be in a pretty good position to increase your dividend. Any kind of thoughts on that at this point in time?

Well, I've said a number of times that is an issue that we usually take up in our November board meeting. And so, I certainly am not going to get out in front of the Board on that issue. Let me say that we have been very, very pleased to increase our dividend, I think in the last 10 or 11 years. I think last year we went up about 22%, we're at $0.44 currently, and we will take that issue up with the Board in just a few more weeks.

Great. That's all I have, Tony.

Your next question comes from the line of Shane Nagel from National Bank Financial.

Just a couple questions, guys. I'm not sure if you have any sense of the payment schedule for Mt. Milligan? With the remaining $70 million or so that has to be paid. Safe to assume that is evenly distributed over the next 1.5 years, or I guess 7 quarters, or so?

Shane, let me introduce you to Stefan Wenger, our CFO, to answer that question.

Hi, Shane. Thanks for the question. You did know we have got just over $70 million left in the payment schedule there. We would expect that those payments would occur sort of in line with the construction schedule. So to the extent we are looking at a mid-2013 startup at Mt. Milligan. You would see that - - the payment to sort of go out rapidly over that time. I would say that we've probably got a little bit of catch-up during the next quarter, to catch-up for some of the activity that has occurred up to this point. So you might see heavier payments in the next two quarters, versus the remainder of that construction life.

How does it work, do they just kind of let you know what they are contributing next quarter and then ask up-front for the money. Or they have paid a certain amount and then they ask you for a check at the end of every month or so?

We have a process where they make a formal request to us and outline the spending that they have done to date, and also look forward to the spending in the next quarter. We have an independent engineer that helps us just look at those numbers and make sure that we are satisfied and then we go ahead and make the payment. So there is a very formal process in place and it does give us an idea of where we are headed into the next quarter.

Great. And just one more if I could. I know Cisco didn't provide any guidance on what part of the production is going to be coming from your royalty. But with the first quarter underway, do you have anymore color on what percentage of their production is going to be attributable to the - - or subjected to the royalty that you have?

Bill, can you answer that question?

Right now Cisco is in the process of updating some of their mine plans and when they get that we will have a better idea of what that distribution is. The shape of the pit and the location of our interest does make some of that production variable. It is not a steady 50% necessarily. But we will get more information as they finalize and revise those plans.

Is it safe to assume roughly that 50% until we see those plans, going forward?

I think that is probably a reasonable assumption until we see the plans.

That's great. Thank you very much.

Next question comes from the line of Patrick Chidley from HSBC.

Hi, good afternoon. I want to ask a couple of small questions. Just a bit of housekeeping really on your interest and other income. I'm wondering if you could break that down? What kind of other income came in there?

Stefan.

Patrick, it's Stefan here. The interest and other income as you might imagine, we are making next to nothing on our cash investments. That sum actually relates to gold sales that are made by the non controlling interests that we have out there, so we have a partnership called CBP. Those holders hold gold, they sell it from quarter-to-quarter. That all relates to those sales. And the gain they have on those sales come out in the non controlling interests line that you see below our net income.

Okay. All right.

The other piece of the non controlling interest relates to actual operating income that relates to outside partners on both Voisey Bay and that NPR one royalty.

Also that comes into the income and interest, right?

It comes into the interest and other income.

And also, can you comment on any likelihood that there may be a strike at Andacollo, I understand they are going through wage agreement suit, or wage negotiations. And is there going to be an agreement soon or is there a process by which they would reach agreement without having to necessarily go on strike?

Patrick, we surely couldn't comment on that. That is probably something best placed to Tech to comment on. We're not involved in that level of labor discussions.

Right. Okay. Thanks very much.

(Operator Instructions) Your next question comes from Andy Shopik. Your line is open.

Good morning, everyone. A couple of questions for Stefan. The Seabridge investment, how is that carried on the balance sheet? Is that available for sale securities?

Yes, Andy, that is held as available for sale on the balance sheet, so we market-to-market through other comprehensive income each quarter. Year end income we reported a loss through the equity portion there.

How many shares of Seabridge does the Company currently hold now?

Just a little over 1 million, Andy.

Also, I had a quick question for you on the tax rate stuff and I noticed that is around 32% effective, versus around 34.5% a year ago. Are there any tax strategies or factors that will help to bring the overall effective tax rate down over the year ahead?

Let me answer that in two parts. For this quarter we did have a - - sort of a huge item for the quarter where we did release some provision for uncertain tax positions that ran out on the statutory timing. So that reduced the rate from what is our effective rate about 35% down to about 32%. I would expect the full rate for our fiscal 2012 to be in that 34% to 35% range. Similar to what you noted from last year.

The second part of that question really is on our tax planning. We're very active in tax planning strategies with each deal we do and with our overall corporate structure. You've probably heard us talk before about our strategy with respect to the streaming deals which more tax efficient for us. I wouldn't suggest that during the next year any strategies would bring down our rate, but over the long-term we are heavily focused on reducing our tax rate so we can be competitive.

Finally, will the 10-Q be available tomorrow or the next day?

Yes. We expect to have that on file as early as today but no later than tomorrow.

Great. Thank you very much.

There are no further questions in queue.

Well, thank you very much for joining us. We were very proud of the quarter that we just completed and we look forward to working hard towards a very good quarter next as well and reporting that to you in due course. Thank you for joining us today.

And this concludes today's conference call. You may now disconnect.