Royal Gold Inc (RGLD) 2013 Q1 法說會逐字稿

Good morning, my name is Laurel, and I will be your conference operator today. At this time I would like to welcome everyone to the Royal Gold fiscal 2013 first 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)

Ms. Karen Gross, you may begin.

Thank you, operator and good morning everyone and thank you for joining us today to discuss Royal Gold's fiscal 2013 first quarter 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, Vice President Corporate Development; Bill Zisch, Vice President Operations; Bruce Kirchhoff, Vice President and General Counsel; and Stanley Dempsey, Chairman.

Tony will open with an overview of the quarter, followed by Stefan, who will provide a financial update, and then Bill Zisch will discuss our operations and review some of our producing and development properties. After management completes their opening remarks, we'll 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. I'm pleased to report strong results for our first quarter of fiscal 2013, in which we achieved record revenue and cash flow primarily driven by increased production volume. Relative revenue increased 21% to $78 million, while operating cash flow increased 16% to $53.5 million. In addition, net income was $25 million, or $0.42 per share. For the quarter just over 50% of our revenue came from our three cornerstone producing properties, including Andacollo, Voisey's Bay, and Penasquito.

Each of these assets reported year-over-year improvements in metal sales and revenues. Andacollo, was again our largest revenue source contributing approximately $20 million, followed by Penasquito at $11 million, and Voisey's Bay contributed about $9 million. Our top 12 producing assets contributed 82% of our revenue, and compared to prior year period, the volume expansion at nine of our top 12 assets more than offset lower production at Cortez, Leeville, and Dolores.

Our percentage of revenue from precious metals was 75%. The majority of our revenue was derived from Chile, Canada and Mexico, with each country contributing in the range of 22% to 26%, while the United States operations contributed 17%.

Also during the quarter we were pleased to have an opportunity to increase our investment at Mt. Milligan in August. We will now receive 52.25% of the gold from Mt. Milligan in exchange for total preproduction commitment of $781.5 million, and a payment of $435 per ounce upon delivery of the gold. We understand construction is on schedule and we look forward to production next year at this time.

This is also a very interesting time in our business and we are continuing to identify new investment opportunities. To have the ability to pursue these royalty and streaming opportunities, we completed an equity offering in mid-October, which Stefan will speak to in just a minute. With that, let me turn to Stefan Wenger, our CFO, for a brief financial report followed by a report from Bill Zisch, our VP of Operations, with an update on some of our producing and development properties.

Thank you, Tony, and good morning, everyone. For the first quarter of fiscal 2013 we had revenue of $77.9 million, compared to $64.5 million for the prior-year period. Adjusted EBITDA of $71 million, or 91% of revenues, record highs, compared with $57.6 million, or 89% of revenue, for the comparable quarter. Net income was $24.8 million, or $0.42 per share, compared with $22.5 million, or $0.41 per share, for the prior-year period. Cash flow from operations was $53.5 million, or $0.90 per share, compared with $46.2 million, or $0.84 per share, for the comparable quarter.

In looking at our costs and expenses, G&A decreased 4% compared with the comparable quarter, while we experienced an increase of 15% for production taxes, which was directly related to higher revenue at Voisey's Bay. DD&A increased to $21.5 million, compared with $17.2 million in the prior-year period. However, the DD&A rate per gold-equivalent ounce was $456, consistent with the $455 per ounce rate that we experienced in the prior-year period. For fiscal 2013 we continue to expect DD&A of between $450 and $500 per ounce, compared with the rate of $475 per ounce we had in all of fiscal '12.

As expected, interest expense increased as a result of recording the first full quarter of expense associated with our $370 million convertible notes. For the period total interest expense is $6.1 million, which included $5.1 million of expense associated with the convertible notes. Of that $5.1 million, about $2.7 million related to cash interest on the notes, while the remaining $2.4 million was related to non-cash accretion of the debt discount and amortization of debt issuance costs.

Our income tax expense increased to $16.4 million, or 39%, for the quarter, compared with $12.4 million, or 32%, in the prior-year period. The increase in our effective tax rate was primarily a result of an increase in deferred tax expense on foreign earnings, as well as changes in estimates of uncertain tax positions. We continue to recognize deferred tax expense in certain foreign subsidiaries, due to nonoperating loss utilization, without a corresponding US foreign tax credit benefit. For fiscal 2013, based upon our current forecasts, we expect our effective tax rate to be approximately 39%. Our current, or cash tax rate for the quarter was approximately 34%, which is consistent with prior-year periods. As we look ahead we expect that are global effective tax rate will decrease once Mt. Milligan begins production.

Last month, we announced a 5.25 million share common stock offering, resulting in proceeds of $472.5 million. We look to use the proceeds of this offering to acquire additional royalty or streaming interests. Our current liquidity position includes approximately $750 million in cash, and $350 million in availability under our revolving line of credit. We are starting off fiscal 2013 with the strongest liquidity position in the history of the Company, giving us the financial strength to pursue future growth. Now I would like to turn the call over to Bill Zisch.

I'll start my review of our producing properties by comparing our current quarter production and revenue with the June 30, 2012 quarter. This analysis provides an alternative to our year-over-year financial comparisons and helps to evaluate production trends and factors in the ramp-up status at a number of our properties. Our portfolio of producing properties continues to deliver favorable result with record gold equivalent production during the quarter, as our three cornerstone producing properties, Andacollo, Penasquito and Voisey's Bay, exceeded the preceding quarter's level of production. Major producers like Leeville, Goldstrike, Holt, and Las Cruces also continue to perform well, with increases that more than offset shortfalls at other properties within the portfolio. Realization of a record quarterly revenue was the product of a 3% quarter-over-quarter increase in gold price, and a 25% increase in gold-equivalent production.

At Teck's Andacollo mine, installation of a 20,000 ton-per-day crushing circuit was completed, allowing throughput to increase by 10% to an average of 49,000 tons per day for the quarter. In September, production average 54,000 tons per day, close to the design capacity of 55,000 tons per day. Gold grades that were 13% above the preceding quarter also contributed to the mine's favorable results. Teck expects to achieve design capacity by continuing to de-bottleneck and optimize plant performance, while evaluating potential resource expansions and possible production increases.

At Penasquito, Goldcorp reported record production of gold and other metals, despite the continued impact of water shortages that have affected mill throughput. Increased gold and silver production was driven by strong grades. Additionally, the timing of concentrate shipments resulted in payments to our account that were higher than the previous quarter. Goldcorp stated that work continues on drilling of additional wells and the pit dewatering area and the Cedros basin well field. A water and tailing study to address potential longer-term water constraints, and optimize tailing operations, is underway and expected to be completed in the first half of calendar 2013. Goldcorp expects that water availability will be sufficient to achieve their guidance of between 370,000 and 390,000 ounces of gold for calendar 2012.

At Vale's Voisey's Bay mine, production was more than 20% above Q4 fiscal 2012, as sales from seasonal shipments of copper concentrates reported to our account at favorable levels. Additionally, nickel concentrates previously shipped for processing in Europe, reported to our account during the quarter. Seasonally strong copper concentrate shipments are anticipated to continue during the December quarter.

Production from these three producing cornerstone properties provided almost 75% of the increase over the preceding period, ended June 30. Six other properties, which include four located in Nevada, accounted for almost all of the remaining increase. These Nevada properties include Leeville, Goldstrike and Robinson, where production levels increased over the preceding quarter by 90%, 40% and 10% respectively, while Marigold had a two-fold increase in production from our area of interest.

At St. Andrew Goldfields' Holt mine, production increased about 12% over the preceding period. Production was sustained at design levels for the entire quarter. Our royalty rate was 21.5% benefiting from the 3% increase in gold price. Inmet's Las Cruces mine also improved from the previous period, where they reached record levels of production by establishing solid operating conditions in the plant. These results, associated with sustained recovery and throughput improvements, led to high capital sales in September, and contributed to the quarter's 19% production increase.

With commissioning of the second cone crusher and record monthly throughput in production reported in July, Osisko's Canadian Malartic mine began an outstanding quarter that ended with record production of over 103,000 ounces of gold. They also reported another month of record mill throughput of over 43,000 tons per calendar day in August, and a record one-day mill throughput in September of over 53,000 tons. With mill throughput in the first eight days of October averaging over 50,000 tons per day, Osisko continues to move the operation closer to design rates of 55,000 tons per day.

At Yukon Zinc's Wolverine mine, precious metal grades and recoveries increased from the preceding quarter, with average mine production of 1,300 tons per day. Wolverine is continuing a ramp-up towards their design capacity of 1,700 tons per day. Their September quarter production to our account increased by about 65% over the preceding quarter. In August, Yukon Zinc stated that work continues on integrating new mining equipment, increasing mill concentrate grade and recoveries, and completing current construction of the tailings dam to reach its ultimate height.

With regard to our development properties, this morning Barrick provided an update for their Pascua-Lama project, and stated that since the report in July, they have been working with Fluor on a more comprehensive top-to-bottom review. They expect the review will be completed by the time they discuss their 2012 year-end results. However, Barrick did report that work to date suggests capital costs will be closer to $8 billion to $8.5 billion, with first production in the second half of 2014. Barrick also reported that to-date approximately $3.7 billion has been spent on the project. The tunnel is approximately 60% complete, and 90% of the required material and equipment for the process plant has been committed. In Barrick's release today, they explained the reasons for the capital cost increase and the delay in production. Pascua-Lama is expected to be one of the world's largest, lowest-cost mines, and once in production, is expected to contribute significant free cash flow to the company for many years to come.

As of the end of September, Thompson Creek reported that progress on Mt. Milligan reflected that engineering and procurement are essentially complete, construction is 65% complete, and that the overall project is 79% complete. Owner mining of waste being used in the construction of the tailings storage facility embankment, previously mined by contractors, began in August with commissioning of the electric shovel and the rest of the mobile fleet. A key objective of having the concentrator building enclosed prior to winter is essentially complete, and will allow for efficient project execution during the upcoming months. Thompson Creek also reiterated that Mt. Milligan remains on schedule with commencement of commercial production of copper and gold expected in the fourth quarter of 2013. Actual project spending as of June 30, 2012 stands at CAD757 million, or 52% of the anticipated total, with commitments, including these actual expenditures totaling [CAD1.2 billion], or 83% of the total. With that, I will turn the call back over to Tony.

Thanks for the update, Bill. So, in summary this was a very solid quarter of operational and financial results. We achieved record financial performance even though several operations are not yet at design production capacities. We look forward to the continued ramp-up from Andacollo, Penasquito, Canadian Malartic, Wolverine, and Mulatos, as these projects work towards achieving full production capacity. With over $1 billion of liquidity, we are now well positioned to take advantage of new business opportunities. And with that, operator we'd be happy to take some questions, if there were some.

(Operator Instructions)

Michael Peterson, MLV and Co.

I have a question on the A&D markets. In light of the news from Barrick this morning, and I think, more broadly, cost pressure by the operators, any perspective you might be able to share how this industry circumstance might be improving, or decreasing, your relative negotiating power as you go and look for new additions to the portfolio?

So, Mike let me just make sure I understand your question. Your question revolves around if there is some expanding capital costs, is there opportunity in those situations for us? Is that the nature of your question?

Yes, the basis of the question is as there our cost pressures and likely corresponding pressures to the balance sheet of operators, they may be in a position, uniquely at this point in the cycle, to seek incremental capital in a way that they might otherwise not be motivated to consider a royalty stream?

You've made the point very, very clearly and succinct and we would echo that these are some very interesting times for Royal Gold, and we are seeing a tremendous amount of deal flow. And that really was the premise for us to strengthen our balance sheet that Stefan spoke to. So now we stand with $1 billion in liquidity, and very much interested in doing business, as you mentioned, with folks that otherwise may not be motivated to look to royalty financing otherwise.

In terms of being -- I agree with you, very well positioned in terms of opportunities that may unfold -- in terms of framing our expectations should we think about that on a multi-quarter basis? Should it -- certainly I think by year-end it's kind off the table, but should we think of it in terms of a handful of quarters, or more on a rolling 12 months in terms of how you positioned yourself opportunistically?

Mike, I just can't simply comment on those kinds of details, that we may be looking forward to our project, or predict, or handicap the kind of success we might have in corporate activity. So, please be patient with us, we do have that liquidity there for a reason and we are surely looking for good accretive returns for our shareholders with that.

Understood, it was worth a try. Thank you for your perspective.

Stephen Walker, RBC Capital Markets.

Just want to follow-up on a couple of things, and I apologize if I missed this in the first five minutes of the call. But the lower tax rate associated with Mt. Milligan, my understanding is that a streaming agreement will be structured through an offshore arrangement, Switzerland if I'm not mistaken, at a lower tax rate. If you could remind us again, first of all, what that tax rate is likely going to be on that offshore structure?

Then secondly, just if you could give us a sense on what the -- I guess, is that a common tax structure, I guess is what my question is, given that similar structures in Canada are being questioned by the Canadian tax authorities?

Sure, Stephen, thanks for the question. I'll just turn to Stefan Wenger to answer it directly.

Sure, Stephen, happy to discuss that. I think we've stated in the past that the streaming structure that we use for Mt. Milligan is more tax efficient to Royal Gold, and we've structured that through a Swiss holding company. Essentially, it's more than just the Swiss offshore benefits, it's really the active nature of the streaming transaction, where we're purchasing and selling fiscal metal under that transaction. Effectively that will give us an effective tax rate on that transaction, or the income from transaction, of 9% in Switzerland. And we intend to keep those funds domiciled in Switzerland, and reinvested from Switzerland, as opposed to bringing those back to the US, which should drive down our overall effective global tax rate.

This is not an unusual structure for a US company. We're very similarly structured as a lot of high tech companies you see, such as Apple and Google and others. So, we are not unique in the structure, which I think was the second part of your question.

Perfect, and just as a follow-up, and again, I know this has been discussed in the past, but this kind of more to refresh my understanding. Should there be a creditor claim on Mt. Milligan? How does the streaming agreement that Royal Gold has fit within the creditor claim, and the status of potential creditor claims, should it kind of deteriorate to that level?

Stephen, we have security on the assets and the property of Mt. Milligan, and we are allowing a subordination of that security to a maximum of $350 million for third-party debt my come into the project. There is a very, very small bit that's actually drawn, I think I'm looking at Bill Heissenbuttel, maybe $50 million, even less than that, he says, that's drawn, that would stand in front of our security interest on the project, so we are very well protected there.

Great. Thank you for that, Tony, and thank you, Stefan.

(Operator Instructions)

Tanya Jakusconek, Scotiabank

Just have a question for Stefan, and again, I apologize, I think I got on the call late, and I was listening to you talk about the effective tax rate for fiscal 2013, and I think you mentioned a 39% effective tax rate? Is that correct?

That's correct, Tanya.

Okay, and would be staying in that sort of rate, Stephan until Mt. Milligan comes in? And with that 9% blend, obviously, then that coming down?

Yes. We expect that will continue through fiscal 2014, and then as Mt. Milligan production becomes a large -- a component of our income stream that effective tax rate would go down.

Okay.

That's the accounting tax rate, or cash tax rate's currently at 34%, we continue to see that tax rate at that level through Mt. Milligan, and then that -- the cash taxes also go down once that begins.

Okay. And then just maybe on the M&A front, I just wanted to ask if the focus, Tony, for you is still gold, or precious metals? Or are you looking at other commodities?

Very much focused on gold, Tanya, that's where we spend all our time. We have seen some other things we really haven't shown a lot of interest in that. Silver would be of interest it to us, if there's a good gold story associated with it, but very much dedicating our resources to gold.

Okay. And would diamonds not be of interest?

You know, I just think there's too many good opportunities in the precious metal, particularly in the gold sector, to really stray very far from what we know best.

Okay. Great, thank you.

Shane Nagle, National Bank Financial

Just a quick question, obviously you guys are in a strong position financially, just looking at your dividend and dividend policy going forward, obviously you've steadily increased it here over the past few years. Just wondering what you'd be targeting, kind of internally, obviously, as the cash flow increases with Milligan and Pascua-Lama coming on line, the free cash flows have to jump quite substantially in the next couple years here. Just wondering, internally, what you guy's target rate is?

Historically you would note that we take that up at our November Board meeting, and this November we'll look at that again with our Board. So, we'll have to defer until they have had a chance to consider that issue.

But we are in a growth position, we very much see good things in front of us. We're not into a maturation part of our company cycle, where we expect significantly high dividends, but nonetheless, we are very proud of how we've been able to step the dividend up every year since 2001. So, give us few more weeks here, and then we'll certainly make that known.

Will do. That's all for me, guys, all the rest of my questions have been answered, thanks.

Since we have no further questions at this time, I will turn the call back over to Mr. Tony Jensen.

Well, thank you very much for joining us today. We're very, very pleased with the quarter, obviously, and we look forward to updating you, hopefully, on a very strong quarter in just a few more months ahead.

We appreciate your interest and your support of Royal Gold. Bye for now.

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