Royal Gold Inc (RGLD) 2012 Q2 法說會逐字稿

Good morning. My name is Jessica, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Royal Gold fiscal 2012 second-quarter 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. Karen Gross, you may begin your conference.

Thank you, operator. Good morning, everyone, and thank you for joining us today.

This event is being webcast live. You will be able to access a replay of the call on our website at www.royalgold.com.

Participating on the call today are Tony Jensen, President and CEO; Stefan Wenger, CFO and Treasurer; Bill Heissenbuttel, Vice President, Corporate Development; Bill Zisch, Vice President, Operations; Bruce Kirchoff, Vice President and General Counsel; and Stan Dempsey, Chairman.

After management completes their opening remarks, we will open the line 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.

We had a very busy and successful quarter. And I wanted to take some time to highlight those, and particularly to highlight some of the management teams. So today, I would like to ask Stefan Wenger and Bill Heissenbuttel and Bill Zisch all to have a part in the call this morning.

But before I turn the call over to Stefan, I would like to provide some introductory comments about the quarter. Today, Royal Gold reported record quarterly revenue of $69 million, a 22% increase. And net income, also a record, rose 28% to $23 million, or $0.42 per share. Operating cash flow totaled $29 million, up 8% from the comparable year-over-year period.

In looking at our first-half performance, Royal Gold achieved record financial results in revenue, net income, and operating cash flow. Six-month royalty revenue was $133 million. Operating cash flow was $75 million. And net income was $46 million, or $0.83 per basic share.

In reviewing the composition of our quarterly revenue, Andacollo was again our largest revenue source, contributing approximately $16 million. Voisey's Bay reported strong production in associated revenue for the quarter, contributing approximately $12 million, while Penasquito added just over $6 million.

Total revenue from these three producing cornerstone properties was approximately half of our revenue for the quarter. Holt was our next-biggest contributor, adding over $4 million of revenue.

Compared to the September 2011 quarter, we saw volume expansion within the portfolio at Penasquito, Voisey's Bay, Holt, Mulatos, Dolores and Las Cruces. These increased production -- this increased production more than offset lower silver and copper prices, a flat gold price, and lower production at Cortez and Robinson. Our percentage of revenue from precious metals was 72%.

Now I would like to briefly talk about our current financial status. As you know, we have been very busy during the December quarter with acquisitions involving Mt. Milligan and Tulsequah Chief projects, both in British Columbia. Combined, we committed $330 million to these transactions, subject to certain conditions. In early December, we drew down an additional $100 million on a revolver to fund the Mt. Milligan II transaction. And to restructure our balance sheet and position the Company for additional opportunities, we sold 4 million shares of common stock in January, resulting in proceeds of approximately $268 million.

Now I would like to turn the call over to Stefan Wenger, our Chief Financial Officer, to give you a bit more detail on DD&A and tax expense during the quarter, as well as some of the financial activities after quarter-end.

Stefan?

Thank you, Tony, and good morning, everyone.

DD&A for the second quarter was $21.4 million compared to $16 million for the comparable quarter of fiscal 2011. The increase was due to higher production at Andacollo, Voisey's Bay, as well as new production from Canadian Malartic and Holt.

DD&A for the quarter was $525 per gold-equivalent ounce, compared with $388 per ounce in the prior year. This increase per gold-equivalent ounce is attributable to higher revenues at Voisey's Bay, and a corresponding decrease in revenue from Cortez -- where Voisey's Bay has a higher cost per ounce, versus Cortez, which has a very low cost per ounce. For fiscal 2012 as a whole, we expect our DD&A rate for gold-equivalent-ounce to be in a range of $450 to $500.

Moving on to taxes, income tax expense increased to $14.1 million or 36.7% for the quarter, compared with $11.4 million or 35.4% in the prior-year period. The increase in our effective tax rate was the result of an increase in tax expense on foreign earnings.

For the six-month period, our effective tax rate was 34.4%, compared with 35.2% for the comparable period in fiscal 2011. For fiscal 2012, we expect our effective tax rate to be at or slightly higher than 35%.

As of December 31, we had $170 million outstanding under our revolving credit facility, and about $118 million outstanding under our term loan, for total debt of approximately $288 million. After the end of the quarter, we paid the debt outstanding on the revolving credit facility. Adjusted for the offering and the repayment of the debt, our December 31 cash balance would have been $194 million. And when coupled with our now-undrawn credit facility of $225 million, our current liquidity is over $400 million. Our term loan of $118 million remains in place, and we continue to view this as an attractive, low-cost component of our capital structure.

Our new capital, coupled with our strong and growing cash flows, and the undrawn credit line, gives us additional flexibility as we consider our financial needs going forward. Now, to add more detail of our recent (technical difficulty) development activities, Bill Heissenbuttel, our Vice President of Corporate Development will give you an overview of these transactions.

Bill?

Thank you, Stefan.

I will start with Mt. Milligan, a long-lived copper-gold project located in British Columbia. In December, we acquired an additional 15% of the payable gold to be produced from this project, for $270 million; and cash payments equal to the lesser of $435 per ounce, or the prevailing market price for each payable ounce of gold delivered to us. Combined with our original transaction, this gives us the right to purchase 40% of the payable gold for a total consideration of $581.5 million and the ongoing $435 per ounce payment.

To date, we paid approximately $365 million to Thompson Creek, with the remaining $217 million to be paid in scheduled quarterly payments starting on March 1 of this quarter. We will make four payments of $45 million in calendar 2012; payments of $12 million in the first two quarters of calendar 2013; and the remainder will be paid in the third quarter of calendar 2013. We are very pleased about increasing our investment at Mt. Milligan and assisting Thompson Creek with its construction financing needs.

In terms of the actual project itself, construction continued during the quarter, and the overall project remains on schedule for completion in the fourth quarter of calendar 2013. As of the end of December, engineering was 85% complete, and construction had progressed to 31%. 50% of the major concrete pours are complete. Construction of the concentrator has commenced, with 80% of the steel at-site, and the power line to site is complete.

Spending as of September 30, 2011, totaled CAD383 million, with another CAD336 million committed. Once in production, the mine is projected to produce 194,000 ounces of gold per year on average, over a 22-year mine life. Our other transaction during the quarter was the Tulsequah Chief project, a high-grade polymetallic deposit located in northwestern British Columbia, approximately 40 miles southeast of Juneau, Alaska. This transaction was attractive to us, given the deposit grades, the precious-metal-focused streams, the stable political jurisdiction, and the potential exploration upside.

We agreed to acquire 12.5% of the payable gold and 22.5% of the payable silver from Chieftain Metals. Consideration for the transaction will be $60 million in total. And when production is reached, Royal Gold will make cash payments equal to $450 per payable ounce of gold until 48,000 ounces have been delivered to us, and $500 per ounce thereafter.

With respect to silver, cash payments of $5 per payable ounce of silver, delivered, until about 2.8 million ounces have been delivered to us, and $7.50 per ounce thereafter. Once 48,000 ounces of payable gold and about 2.8 million ounces of payable silver have been delivered to us, our interest will convert to 7.5% and 9.75% of the payable gold and silver, respectively, for the remainder of the mine life.

As mentioned, the upfront consideration is $60 million, consisting of an initial $10 million payment, which was made after the transaction closed, and the remaining $50 million to be paid over the project's development period. These payments are conditioned on, among other things, the securing of sufficient financing and permitting for the project. We also received a right of first refusal on any future gold or silver production-based interests.

The Chieftain is in the process of completing a feasibility study. Following a June 2011 preliminary economic assessment, it anticipates that the project will be operational in 2015. VMS deposits like Tulsequah Chief are typically lower-tonnage and higher-grade in nature. Chieftain has reported mineralization consisting of indicated resources totaling 6 million tonnes, grading 1.42% copper, 1.23% lead, 6.44% zinc, 2.63 grams per tonne gold, and 96 grams per tonne silver.

However, I'd like to remind you that our transaction applies only to gold and silver production. In addition to zinc, copper and lead, Chieftain estimates the average annual precious metal production to be 45,000 ounces of gold and 1.4 million ounces of silver, over an initial nine-year mine life.

Now I will turn the call over to Bill Zisch for an overview of our operations.

Thank you, Bill, and good morning, everyone.

Our portfolio of producing assets performed well this quarter. Compared with the prior quarter, we had a 9% increase in royalty gold equivalent ounces resulting in record production. Our explanation of performance this quarter is straightforward, with most operations delivering as expected, several significant positive contributions, and only a few shortfalls when compared to the prior quarter.

Production from operations in Mexico exceeded the prior quarter, as cyanide concentrations recovered to plan levels, allowing for strong fourth-quarter performance. Mulatos recaptured prior-quarter shortfalls, as output increased by 46%. Crusher throughput during the fourth quarter averaged a record 16,000 tonnes of ore per day.

Ore that had been modeled as waste was encountered while developing the Escondido zone. And the zone's average grade during the quarter exceeded the average grade mining during the year. Cyanide concentration levels returned to normal, allowing production to improve.

Alamos is forecasting 2012 production at between 200,000 and 220,000 ounces of gold. Included in this total is about 67,000 ounces of additional production from the new gravity mill.

Dolores also recouped deferred production, as the quarter's total increased by 21%. Repairs of a crushed collection pipe on the west pad, and irrigation of fresh ore on the east pad, provided for their positive results.

Production from AuRico's El Chanate mine was 5% above the prior quarter. The first phase of a five-phase expansion program was completed during the quarter. The second phase of the program has a design stacking and crushing rate of 21,000 tonnes per day. It is expected to be operational in the first quarter of this year. AuRico has provided production guidance in the range of 78,000 to 88,000 ounces of gold for 2012.

At Penasquito, quarterly production increased by 14%, as both 50,000-tonne-per-day SAG lines routinely ran at capacity. During December, throughput reached an average of 107,000 tonnes per day and attained a new one-day record of 145,000 tonnes. According to Goldcorp, the supplemental ore feed system to supply pebble feed to the 30,000-tonne-per-day high-pressure grinding roll circuit, is expected to be completed shortly, and hauling of material to the tailings dam wall is now complete.

Goldcorp has reiterated its expectation that Penasquito will establish steady-state throughput at the design capacity of 130,000 tonnes per day by the end of the first quarter of 2012. Mining in the heart of the sulfide ore body will provide higher grades in 2012. Coupled with increased throughput rates, Goldcorp expects 2012 production of 425,000 ounces of gold, an increase of almost 70% from 2011 levels. Silver production is expected to be 26 million ounces.

In Canada, St. Andrew Goldfields' Holt mine continued to realize the benefits of their mine development program. Access to higher-grade material and increased throughput resulted in a 20% increase in gold sales versus the prior quarter. The [head grade realized] out of zone four was higher than the reserve grade, and recoveries were at the expected level of 94%.

St. Andrew anticipates reaching full mine capacity of 1000 tonnes per day during this first calendar quarter of 2012. They estimate 2012 production of between 90,000 and 100,000 ounces of gold, of which approximately 50% is expected to come from the Holt mine.

Yukon Zinc's Wolverine mine continued progress towards its goal of 1700 tonnes per day. Concentrate shipments exceeded the prior quarter by a significant amount, primarily due to a variable shipping schedule during this initial ramp-up period.

The steady-state operating property that exceeded the prior quarter by the largest amount was Vale's Voisey's Bay. This has typically been a strong quarter for sales from the mine, as concentrate shipments are completed before December 7, which is the start of a two-month restriction on shipments. Significant copper concentrate shipments during the December quarter, along with strong nickel sales, allowed Voisey to exceed its prior-quarter sales attributable to our account by about 75%, contributing to almost half of our overall portfolio's positive increase from the prior quarter.

Production from other key assets like Leeville, Las Cruces, Goldstrike, Inata, Gwalia, and Taparko all exceeded the prior quarter. In particular, at Inmet's Las Cruces mine, full-year production in 2011 was more than twice the 2010 level, ending the year at 42,000 tonnes of copper cathode. In the three months ended December 2011, Las Cruces produced 14,000 tonnes of copper cathode, and sustained recoveries above 88%, at throughput levels approaching design capacity. For 2012, Inmet has set their production objective at a range of between 62,000 and 69,000 tonnes of copper cathode, which is about 90% of designed capacity.

Andacollo was within 1% of their prior-quarter levels, as production stabilized with the temporary addition of a small jar crusher, increased power to the SAG mill, and a few other modifications to the circuit. These modifications have allowed them to maintain production at about 40,000 tonnes per day. Meanwhile, they continued the installation of a 20,000-tonne-per-day crushing plant that should be in production in the second calendar quarter of this year. They also continued to finalize an expansion feasibility study, which is expected to be completed in the near future.

At Canadian Malartic, Osisko continues progress to install two cone crushers that will allow them to achieve an overall mill throughput of 55,000 to 60,000 tonnes per day. Commissioning of the first of these two crushers is still anticipated during this first calendar quarter, and Osisko anticipates achievement of full ramp-up to 55,000 tonnes per day in the second quarter of 2012.

With the second crusher scheduled to arrive in the early part of the second quarter of this year, Osisko anticipates increasing throughput to 60,000 tonnes per day in the third quarter. Osisko has provided guidance that 2012 production will be between 610,000 and 670,000 ounces. Not all of these ounces are attributable to our royalty interest.

In Nevada, production from Barrick's Cortez and Bald Mountain operations was below the prior quarter's level because of planned changes in the sequencing of ore sources. At Cortez, Barrick continues to prioritize production from their higher-grade Cortez Hills operation that is not covered by our royalty interest. Production from our royalty interest at the pipeline complex during this calendar year will be derived from oxide heaps and shipping of previously stockpiled refractory ore that is periodically shipped to the Goldstrike mine for processing. As a result, we will continue to see variability in production from Cortez until they return to steady-state mining at the pipeline complex.

At Robinson, Quadra reported that December copper production performance was impacted by planned and unplanned mill maintenance issues, and that a localized pit wall failure resulted in delaying access to high-grade ore at the bottom in the Ruth Pit.

The operating flexibility continuing to be the key to Robinson production, recent mine operating improvements resulted in a 40% increase in total tonnes mined. During the quarter, Robinson delivered record ex-pit mining and continuing grade of improvement, as mining transitioned to the higher-grade benches at the bottom of the Ruth Pit. Royalty production was about 30% below the prior quarter.

With regard to a couple of our development properties, Bill Heissenbuttel has already given you an update on the Mt. Milligan project, so I will move on to Pascua-Lama. At Pascua-Lama, Barrick continues to report that initial production is expected in mid-2013. Approximately 55% of the projected capital has been committed to date.

In Nevada, Kinross has progressed construction of the Goldfield project, where we hold a 2% sliding scale royalty at current gold prices. We anticipate production to commence in the third quarter of this year. The project has a reserve of 365,000 gold ounces, with a planned mine life of four years.

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

Thank you for the update, gentlemen.

In summary, this was another quarter of solid operational performance in a period of important business development activity. We look forward to substantial, long-term revenue from our interest at Mt. Milligan, and are pleased to have added another precious metal interest to our development portfolio with the Tulsequah Chief project.

In the second half of fiscal 2012, we expect to see continued production expansion at Andacollo, Penasquito, Canadian Malartic, Holt, Wolverine, Mulatos, and Las Cruces, as these projects work toward achieving design capacity. And with a restructured balance sheet and strong cash flow, we believe Royal Gold is well-positioned to continue executing on our business strategy.

With that, operator, that concludes our prepared remarks. And we would be happy to entertain any questions if there were some.

(Operator Instructions) Lawson Winder, Bank of America Merrill Lynch.

Hello. Just a question -- we've seen with prior gold and silver streaming transactions, where the operator pays taxes for the streaming company. So with respect to Mt. Milligan gold stream, where you guys are buying 40% and paying $435 an ounce, who in that situation will be paying the difference or the variance between the $435 and spot gold? Is it Royal Gold, or Thompson Creek?

Yes, there's about three of us that I think could answer this question, but I think I will turn it to Stefan. Can you explain that to Lawson?

Sure. The way the taxes work there, we put a deposit up front on the property, and during the period where we are paying $435 an ounce, we'll also be amortizing that deposit. So actually, during the first, say the first half of the mine's life, all of that deposit is being amortized. We won't be paying. We will be amortizing that whole value up to fair market value, and therefore paying no taxes.

At the same time the operator -- the operator would be getting a deduction for that, that piece of the deposit. At some point that flips, and we will be paying taxes on the difference between the $435 and fair market value as we go forward.

Okay, so when Mt. Milligan first starts up -- or assuming it were to be running today -- what would that do to your tax rate? Would it then decline slightly?

Yes, with respect to Royal Gold, there are several factors to consider, including our structure. And we've done this Mt. Milligan transaction and the Tulsequah transaction through a foreign Swiss tax structure. To answer your question, when Mt. Milligan comes into production, you'll see our overall effective tax rate decline for Royal Gold.

Okay, and then just one final question. Could you repeat, please, what the DD&A guidance was for 2012?

The DD&A guidance, looking forward for 2012, is between $450 and $500 on a gold-equivalent-ounce basis.

So, for the remaining two quarters?

Yes, and I say that, taken for the whole year as a whole.

Okay, got you.

So, during the first quarter it was sort of just less than $500, second quarter it was $525. I expect us to see higher contribution from Penasquito, and perhaps less of a contribution, on a relative basis, from Voisey's Bay in the second half. You'll see that rate come back down.

And then average $400 to $450 per GEO for the whole year?

Yes, for the full year, $450 up to $500. My original guidance was $400 to $450, and because of the stronger relative contribution from Voisey's Bay we are revising that to $450 to $500.

Great, thank you.

(Operator Instructions) [Andy Shopic], Private Investor.

Just want to be sure -- the pending deal between Pan-American and Minefinders, that will be -- that will not have any impact on your current royalty arrangement with the Delores mine, will it?

No, we don't have any anticipation of any impact. Our rights will continue to burden the property just as they do now, Andy.

Okay and lastly I would just like to ask a question about them other non-principal producing properties. That's a group that comprises a material amount of current revenue. Are you anticipating any changes, any material changes in the balance of this fiscal year, in terms of contributions from any of those properties?

Well, there is a number of assets in the non-principal producing properties, and they move up and down all the time. I don't think -- to answer your question directly on a comprehensive basis -- I don't think there's going to be any significant movements in there that would -- that we would call out and advise that they have a significant impact on our overall financials.

And we have no further questions at this time. I will turn the call back over to the presenters.

Well, thank you very much for joining us today. We appreciate, as always, your continued interest in Royal Gold. And we look forward to keeping you informed on our next conference call, if not sooner. Thanks again.

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