Royal Gold Inc (RGLD) 2012 Q4 法說會逐字稿

Good morning, my name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to the Royal Gold fiscal 2012 fourth quarter and year-end 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, Vice President & Corporate Secretary, you may begin your conference.

Thank you, operator, and hello everyone. Welcome to our fiscal fourth quarter and year end conference call.

This event is being webcast live. You will be able to access the replay of the call on our website, where you will also find our release detailing our financial results.

Participating on the call today are Tony Jensen, President & CEO, Stefan Wenger CFO & Treasurer, Bill Heissenbuttel, Vice President Corporate Development, Bill Zisch, Vice President & Operations, Bruce Kirchhoff, Vice President & General Counsel, and Stanley Dempsey, Chairman. Tony will open with an overview the quarter, followed by Stefan, who will give the financial highlights, and then Bill Zisch will give an operations review. After Management completes their remarks we will open up the line for Q&A session.

We will also be discussing the company's adjusted EBITDA, which is a non-GAAP financial measure, and there is a reconciliation in today's press release. Before we begin, I also 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 release, and is presented in greater detail in our filings with the SEC.

Now, I will turn the call over to Tony.

Good morning, and thank you for joining us today. I'd like to focus, at the beginning of this call, on our annual and quarterly results, but I hope you also saw our Mt. Milligan transaction this morning. We will discuss that investment after Stefan and Bill have given you financial and operational updates.

Royal Gold stood apart from general gold equities during the fiscal year due to our royalty business plan and financial results. Our investments in projects are fixed, and are not subject to raising capital in operating costs. We're not responsible for the operations of mines, which keep our expenses in check.

This business plan, coupled with growth from previous investments, and solid performance from our large portfolio of 39 producing assets, resulted in another record year of financial results for Royal Gold. Fiscal 2012 marks the 11th consecutive year of achieving record revenues and cash flow.

In addition to higher average metal prices, our revenue increase in fiscal 2012 was driven by production growth at Andacollo, Peñasquito, Voisey's Bay, Holt, Canadian Malartic, and Wolverine. Our three cornerstone properties, Peñasquito, Andacollo, & Voisey's Bay, contributed $129 million, or 49%, of total revenue for fiscal 2012, compared with $98 million, or 45%, of the previous year's revenue.

Precious metals accounted for 77% of our fourth-quarter revenue, and 75% of our annual revenue. And approximately 92% of our revenue for both the quarter and the year were derived from assets located in the US, Canada, Chile, Mexico and Australia, all very geopolitically stable countries.

During fiscal 2012, we added three at new business interests. In early December we expanded our interest at Mt. Milligan with an additional commitment of $270 million, which increased our interest in the gold production from 25% to 40%.

In mid-December we acquired an initial interest in 12.5% of the gold production, and 22.5% of the silver production, on the development staged Tulsequah Chief project, also located in British Columbia, for a total commitment of $60 million. And, in May, we acquired a 3% net smelter return royalty on Barrick's operating Ruby Hill Mine in Nevada for $38 million.

Once again we saw reserves grow in fiscal 2012. Net gold reserves attributable to Royal Gold increased 25% versus the prior year, which includes the benefit of the December Mt. Milligan transaction.

On a gold equivalent basis, using a ratio of approximately 50-to-1 silver to gold, precious metal reserves attributable to Royal Gold increased from 5.2 million ounces to 6.2 million ounces as of December 31, 2011, a 19% increase. And it is important to remember when comparing our attributable reserves to other companies, that our ounces are cost free and that we don't have to pay for the extraction costs as a royalty company.

We are uniquely positioned to enter into additional business opportunities. Gold companies anxious to develop properties are looking for alternatives to equity and debt financings. Given that gold equities are trading at historically low values, companies are not interested in financings associated with excessive equity dilution. That is also becoming limited and expensive for many.

Given these trends over this last year, we repositioned our balance sheet during fiscal 2012 to take advantage of potential future opportunities. Our fourth-quarter revenue was about 11% less than our average quarterly rate we had been experiencing for the first three quarters of fiscal 2012. This is due to lower metal prices during the June quarter, lower production from certain assets, and a large swing in the timing of concentrate shipments at Voisey's Bay.

I'll now ask Stefan Wenger, our CFO, to review the financial highlights for the year and the quarter. And after Stefan, Bill Zisch, our Vice President of Operations, will provide an update on certain producing and development properties. Stefan?

Thank you, Tony, and good morning everyone.

For the fiscal year we had record revenue of approximately $263 million, an increase of 22% over revenue of $217 million in fiscal 2011. Net income increased 30% to $93 million, or $1.61 per basic share, compared with $71 million, or $1.59 per basic share for fiscal 2011.

Adjusted EBITDA was a record at $238 million, or 90% of revenues. This compares with $190 million, or 80% of revenues for fiscal 2011. Working capital as of June 30 was $430 million, including cash on the balance sheet totaling $375 million. We also have additional liquidity under our undrawn credit facility to fund future growth.

For fiscal 2012, our total cash operating expenses, net of production taxes, and non-cash compensation expense were approximately $13.9 million, compared with $14.6 million in the prior year. The decrease in cash expenses was associated with lower corporate accounting tax fees during the year. Our average DD&A rate for the year on a gold equivalent ounce basis was $477 per ounce, compared with $426 per ounce in the prior fiscal year. For fiscal 2013 we expect DD&A expense to again be the range of $450 to $500 per gold equivalent ounce.

In June we completed a convertible senior notes offering. Net proceeds from the offering were approximately $359 million, after deducting underwriting discounts and operating expenses. We used a portion of the proceeds to repay the term loan facility which had an outstanding balance of $110.6 million. The remaining proceeds have been reserved for general corporate purposes, including funding of the Mt. Milligan investment, and future acquisitions of royalty interests.

For accounting purposes, the $370 million convertible notes were recorded in two separate components our balance sheet. We recorded $293 million instead, the value of which will be accreted to the full $370 million principle amount by the maturity date in 2019. This component represents the fair value of the debt when it was issued. We recorded the remaining $77 million net of deferred taxes as a component stockholders equity, representing the conversion feature which confetted into convertible bonds. In addition we incurred about $11 million additional costs, which ha been allocated to the debt equity components on a relative basis.

In May we also expanded and extended our credit facility, resulting in enhanced liquidity and financial flexibility. The new credit facility has a maturity of may 2017, and a maximum availability of $350 million. The facility currently has an undrawn commitment fee of 50 basis points, and an interest cost of LIBOR plus 1.875% on drawn amounts.

Moving on to the fiscal fourth quarter, we had quarterly revenue of $60 million compared to $59 million for the comparable quarter, and as Tony mentioned, this has lowered our average run rate for the first three quarters. Net income was $20.6 million, or $0.35 per share, compared with $21.7 million, or $0.39 per share for the prior-year period. Adjusted EBITDA for the quarter totaled $54.3 million, or 90% of revenues, compared with $51.6 million, or 87% of revenues for the prior-year period.

In summary, we had another very successful year of financial growth and record performance. We're beginning fiscal 2013 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'll turn the call over to Bill Zisch. Bill?

Thank you, Stefan, and good morning everyone. I will start my review with our producing properties.

At this time last year, we were anticipating increased production from six key growth assets, Andacollo, Peñasquito, Holt, Canadian Malartic, Wolverine, & Las Cruces. Today I am pleased to report on the contributions these properties made to our 12% in gold equivalent production, which is reflected in this year's record financial results.

At Teck's Andacollo Mine, the addition of temporary crushing capacity boosted their gold production by 25% over the prior-year. Teck also constructed additional permanent crushing capacity during the year, and they now expect to achieve design capacity of 55,000 tons per day by the end of calendar 2012. They ended our fiscal year with average throughput of about 44,000 tons per day, so an increase in throughput to design levels has the potential to increase production by about 25%.

At Peñasquito, operated by Goldcorp, our fiscal 2012 gold equivalent production was 29% higher than fiscal 2011. Goldcorp successfully commissioned a new high-pressure grinding roll line during the March and June quarters, but throughput was limited due to reduced water supply in June. Goldcorp's revised guidance, predicated on limitations associated with process water, expects production to rebound to design capacity 130,000 tons per day by the end of calendar 2013. Sustaining design capacity would add an additional 20% to expected production.

At St. Andrew Goldfield's Holt Mine, production has ramped up to design levels of 1000 tons per day, and has sustained that level. Production in fiscal 2012 increased threefold over the prior partial year of production, ending the year at an annualized rate of about 80,000 ounces per year. With the gold price of over $1600 per ounce, our royalty interest amounted to over 20% of this production.

Osisko focused on commissioning their Canadian Malartic Mine during fiscal 2012, ramping up from the declaration of commercial production during the second calendar quarter of 2011, to a throughput of about 35,000 ounces per day during the June quarter. Osisko determined that it would be necessary to install additional crushing capacity at Canadian Malartic to achieve the design capacity of about 55,000 tons per day, and completed the installation of one secondary cone crusher during the fiscal year, and the second crusher was just commissioned in July. Osisko expects the installation of the secondary crushers to allow for more than a 50% increase in throughput to achieve the design mill capacity.

The operation was also hampered during the June quarter with a fire that broke out in the mill in May. We complement Osisko and the management of the situation and their quick response to reestablish normal operations less than two weeks after the fire. Even with these challenges, production to our account increased more than seven times over the prior fiscal year, and for July, a fiscal recently announced record money in production and throughput.

At Yukon Zinc's Wolverine Mine, another of our precious metals growth assets, gold equivalent production to our account increased fourfold from fiscal 2011 to fiscal 2012. They continue to ramp up for their design capacity of 1700 tons per day of mill throughput, and work improve precious metals recovery.

The final growth asset in this group is Inmet's Las Cruces Mine in Spain. Having overcome technical and operating process issues during the last year, Las Cruces produced -- Las Cruces production exceeded design capacity in the June quarter. As a result production in our recently completed fiscal year was 60% above fiscal 2011.

While not identified as a growth asset for fiscal 2012, we did realize significant increases at Voisey's Bay, as production intern to meet or exceed historical levels following the extended strike during calendar 2010.

While seasonal shipping constraints created quarterly variability that was seen throughout the year, annual nickel production was up 25%, and copper production was up by more than 80% in fiscal 2011. Assets that did not report increased production for fiscal 2012 included Barrick's Cortéz and Goldstrike Mines, along with Newmont's Leeville Mine. Mining sequence called for less protection from our areas of interest than in previous year, resulting in decreased production at these properties. Also, at our Taparko security operations, we did not see production growth as these two royalties both reached their caps in fiscal 2011, with Taparko converting from a 25% royalty to a perpetual 2% tail royalty.

For the fiscal year, these reductions were more than offset by the growth in the assets I reviewed earlier, and the addition of production from Marigold at mining extent on the ground that included our area of interest. The acquisition of an interest in Barrick's Ruby Hill Mine that immediately became a paying contributor, as well as production increases at Gwalia Deeps, King of the Hills, Mulatos and Wharf.

Revenue was about $9 million lower in fourth fiscal quarter versus the third quarter. While consolidated gold production associated with our royalty interest was up slightly in the fourth quarter, the average price of gold was lower, accounting for about 20% of the revenue decline.

At Voisey's Bay, while mine production was slightly higher than the prior quarter, we saw a reduction in concentrate shipments in payments, which was just the opposite of the March quarter, when nickel concentrate shipments were significantly greater than mine production. This reduced concentrate shipping Voisey's Bay, coupled with a 13% decrease in nickel prices, accounted for more than half of our revenue decrease over the preceding quarter. The final portion of the revenue decrease relates to lower silver production at Peñasquito, associated with their drought conditions and a 10% decline in silver price, which had an impact at both Peñasquito and Dolores.

With regard to our development properties, on July 26 Barrick announced that, due to lower-than-expected productivity, and persistent inflationary and other cost pressures, they initiated a detailed review of Poscua-Lama's schedule and cost estimate in the second quarter of calendar 2012. Barrick indicated that initial gold production is now expected in mid-2014, with an approximate 50% to 60% increase in capital costs from the top end of the previously announced estimate of $4.7 billion to $5 billion, suggesting capital of $7.5 billion to $8 billion. I should remind you that as a royalty company, we are not required to contribute to Pascua-Lama capital.

We are disappointed that the construction schedule has been extended, but we continue to believe that Pascua-Lama is a world-class gold project, and expect that upon completion of mine construction, Pascua-Lama will become one of our cornerstone producing assets for the next couple of decades. Annual gold production in the first full LEAP five years of the 25 year mine life is expected to average 800,000 ounces to 850,000 ounces.

At our other cornerstone development project, Mt. Milligan, we just announced an additional investment. Tony will discuss the details of the transaction and just a moment, but I will give you an update on their construction progress. As of end of June, Thompson Creek reported that progress on Mt. MIlligan reflected engineering that was 99% complete, procurement 94% complete, construction at 51% completion, and that overall progress was 69% complete.

Thompson Creek also reiterated that Mt. Milligan remains on schedule, with startup scheduled for the third quarter of calendar 2013, and commencement of commercial production of copper and gold expected in the fourth quarter of 2013. At Mt. Milligan, as part of our asset monitoring program, we used the services of an independent project engineer who periodically visits the site and provides us with regular updates. Our most recent report in early June indicates that Thompson Creek's schedule and completion timeframe is still achievable.

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

Thanks for the update, Bill.

I also wanted to give you a few more details on the Ruby Hill royalty that we acquired in May. Ruby Hill is a producing mine located in Nevada and operated by Barrick. Barrick reported proven and probable reserves as of December 31, 2011 of 16.8 million tons of ore at an averaged rate of 0.058 ounces per ton, containing approximately 1 million ounces of gold.

In addition to reserves, additional mineralization is estimated by Barrick to be 108 million tons at an averaged rate of 0.02 ounces per ton. We now have royalty interests in nine operating mines in Nevada, and are always eager to build our portfolio in a state where we started our royalty business.

Turning to the Mt. Milligan transaction. We were interested in increasing our interest in the property, and that opportunity came up when Thompson Creek decided to increase liquidity to ensure project completion following a challenging operating quarter for them. Today we announced a $200 million increase in our investment in Mt. Milligan, in exchange for an additional 12.25% of the payable gold. Combined with our prior transactions, we now are entitled to a cumulative 52.25% of the payable gold, for a total investment of $781.5 million plus the per ounce payment of $435. To date, we have paid about $455 million to Thompson Creek, and we will pay them $75 million following the closing of the new transaction, and the remaining $252 million in five scheduled quarterly payments commencing on September 1, 2012, and ending on September 1, 2013.

Our investment thesis remains the same as our first investment in Mt. Milligan in June 2010. We view this as a quality asset with attractive cash costs due to a low strip ratio and lower -- low power costs, located in safe property jurisdiction with a long life and exploration upside. We have analyzed the impact of our investment -- our investment will have on the operation, and we believe cash costs will remain in the third quartile world wide copper production, even after deducting the gold revenue dedicated to us.

As Bill reported, the Mt. Milligan project is in the advanced stage of construction, which reduces some of the risk of this additional investment. Since early 2011, Thompson Creek has maintained guidance of commercial production commencing in late calendar 2013. The recent Mt. Milligan technical report states that proven and probable reserves contain 2.1 billion pounds of copper, and 6 million ounces of gold. Our interest is only on the gold production, which is estimated to be approximately 262,000 ounces of gold annually during the first six years of operations, and 194,000 ounces of gold annually over the life of the mine.

From a project potential standpoint, at an average production level for the first six years and assuming current gold prices, Mt. Milligan will provide over $150 million in revenue annually to Royal Gold. Combined with Pascua-Lama, which we expect would initially contribute about $70 million annually, assuming Barrick's traction schedule and current gold prices, you can see why we are eager for these projects to advance into operations.

In closing, 2012 was another year of excellent growth for Royal Gold. We expanded our portfolio, strengthened our balance sheet, and saw major growth in many of our key assets. As we look ahead to fiscal 2013, we expect to see further growth from Andacollo, Peñasquito, Canadian Malartic, Wolverine, & Las Cruces, as those projects work towards achieving full production capacity. And, we also look forward to significant construction progress at Mt. Milligan and Pascua-Lama.

We are pleased with the strong inherent growth in our portfolio, and will continue to enhance the portfolio as opportunities become available. Operator, that concludes our prepared remarks, we would be happy to take any questions at this time.

Certainly.

(Operator Instructions)

Tom [Muller] Advent Capital.

Hi, good morning. You have an extremely strong balance sheet. Thompson Creek clearly does not. Thompson Creek's bonds are trading in the mid-to high 70s for a yield of 13% as spread over treasures of over 1200 basis points, so the market is telling you that Thompson Creek, there is a material risk of bankruptcy with this name. Can you address putting additional money into them? And, it seems like you see the role of lender of last resort for Thompson Creek, so how much further are you willing to go? And how much do monitor the overall financial health of the corporation beyond just the project integrity?

Thanks Tom. Let me first start by saying we first looked at the asset, and we continue to believe the asset is a quality asset, as I mentioned in my prepared remarks. And we think the asset will continue to produce in all reasonable price levels. So that is the first thing. But we also took a good strong look at where Thompson Creek is as an entity. And before we made this investment were comfortable with the additional financing that they have on a credit facility at $300 million that should get them well over the required capital spend at Mt. Milligan. And we've also looked at the serviceability on the other end of this debt, and we feel comfortable in the first years after production for Thomas Creek to be able to service that. So we do take a look at it, we have some clauses in our agreement where we will continue to monitor that rather closely.

I did not get a chance to listen to the Thompson Creek call, was their credit facility signs is going to be reduced the result of this?

Say again, Tom?

I did not get a chance to listen to the Thompson Creek call. Is their credit facility going to be reduced?

No we don't believe it will be.

What are the amendments that they need to achieve with the lenders?

Well we have been knowledgeable about that, but that is really an agreement between Thompson Creek and their lenders. And I'd very much prefer --

So your claim on the Mt. Milligan gold production, where is that priority claim within the Thompson Creek capital structure?

Let me turn to Bill Heissenbuttel for that question.

Yes we do have a security interest. That security interest for the most part is subordinated, but it is subordinated solely to the existing banks. So at this point --

Is it senior to the 12.5% bonds?

Yes. Those bonds are unsecured, they have a guarantee from the entity that owns Mt. Milligan. But that is an unsecured guarantee, and ranks behind us.

He means to say, Tom, that we installed a cap at any additional debt that might come to Mt. Milligan cannot exceed $350 million. Which we would subordinate to, but we would not subordinate anything more than that.

Okay great. Thanks a lot.

(Operator Instructions)

Shane Nagle, National Bank Finance.

Thanks, operator. Just wondering on the payment schedule, that remaining $252 million, is that going to be equal installments here? Previously it ratcheted down a bit with the construction schedule. But has that been revised equal -- five equal payments?

Good morning Shane. Let me turn it into Bill Heissenbuttel for the question.

No, unfortunately, it is a little all over the place, I can give it to you. It's $75 million when the amendment is effective, which I would expect would probably be next week. $45 million on September 1st, $95 million on December 1st, $62 million on March 1st, $37 million on June 1st, and $12.9 million September 1st of next year.

Okay that's great, thanks. That's all I had to confirm. Thank you.

And there are no further questions. At this time, I will turn the call back over to the presenters.

Thank you for joining us today. We appreciate your interest in Royal Gold, and your continued support, and we look forward to updating you on our progress during the next quarterly call. Thanks very much.

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