Royal Gold Inc (RGLD) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Aaron and I will be your operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal 2013 second quarter conference call. All lines have been placed on mute to prevent any background noise. After our speakers remarks, we will have a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Ms. Karen Gross. Ms. Gross, you may begin your conference.

Thank you, Operator. Good morning. Thank you for joining us today to discuss Royal Gold's fiscal 2013 second 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 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 Stan Dempsey, Chairman. Tony will open with an overview of the quarter and then Bill Zisch will discuss our operations and review our producing and development properties. 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.

Thank you, Karen and good morning, everybody. Thank you for joining us today. Royal Gold had strong second quarter results for fiscal 2013 in which we achieved record revenue and EBITDA through increased production volume, as well as higher metal prices. Royalty revenue increased 16% to $80 million, compared to $69 million for the prior-year period. Adjusted EBITDA totaled $73 million, or 92% of revenues, compared to $62 million, or 90% of revenues for the comparable quarter.

Operating cash flow totaling $11 million was negatively impacted by provisional income tax payments of $23 million, and the timing of a withholding tax payment of $17 million, which is expected to be recovered prior to fiscal year end. I should just mention that in our calendar year, our fiscal year, we have two tax payments that both come due in our second fiscal quarter so that is always a consumption of cash in that particular period. Net income was $27 million, compared with $23 million for the prior-year period. Although net income increased, both periods resulted in $0.42 per share due to the equity offering we completed in October to strengthen our balance sheet.

For the quarter, just over 46% of our revenue came from our three producing cornerstone properties including Andacollo, Voisey's Bay and Penasquito. Andacollo was our largest revenue source, contributing approximately $23 million, followed by Penasquito and Voisey's Bay, both at about $7 million. Compared with the prior-year period, we saw volume expansion at 8 of our 12 top paying properties. Most notably at Andacollo. Our percentage of revenue from precious metals was 79%, of which 73% was from gold. Approximately 30% of the revenue was derived from Chile, with Canada, Mexico and the United States each contributing around 20%.

During the quarter, we increased our net smelter return option at the KSM property for a net cost of $3.6 million. This now gives us the right to purchase either a 1.25% NSR royalty for CAD100 million, or a 2% NSR royalty for CAD160 million on all of the gold and silver production from the projects. We do not expect to exercise our option until all material approvals and permits are received, construction funding is in place, and a construction decision has been made.

With that, I will turn the call over to Bill Zisch for a detailed review of our operations. Bill?

Thank you, Tony. And good morning everyone. To give you a more timely review of operational performance, I will compare December 2012 quarterly results with September 2012 quarterly results rather than prior-year comparables.

We saw continued improvement from many of our principal properties including Andacollo, Mulatos, Canadian Malartic, Dolores, Holt, Robinson and Wolverine. Solid performance from the core properties in our portfolio was offset by lower production at Voisey's Bay, Cortez, Las Cruces and Penasquito. Across the portfolio, our production, stated in terms of net gold equivalent ounces paid to our account, was about 1% below the September quarter. A 4% increase in metal prices with relatively flat production resulted in another quarter of record revenue.

At Teck's Andacollo mine, production once again exceeded the preceding quarter as the benefits of the recently installed crushing circuit were realized and as planned, slightly higher grade ore was mind. Teck has reported they will continue the optimization and debottlenecking process. Production to our account at Andacollo was up 12% over the September quarter.

Alamos Gold's Mulatos mine produced a record 67,800 ounces of gold, exceeding the preceding quarter by 41%. The Company reported that production in the fourth quarter benefited from higher than budgeted throughput and grade from the gravity mill, which is processing ore from the Escondido high grade zone. In addition, quarterly crusher throughput achieved record levels, averaging 17,900 tons of ore per day and ore stacked in the leach pad exceeded four-year budgeted grades by 20%. Alamos' 2013 annual guidance builds on these successes as they anticipate producing between 180,000, and 200,000 ounces of gold.

During the first six months of Pan American Silver's ownership of the Dolores mine, they produced about 1.7 million ounces of silver and 29,000 ounces of gold. Production during the fourth quarter of calendar 2012 approached about 1 million ounces of silver, and 15,000 ounces of gold, slightly ahead of the first six months quarterly rate. Pan American's 2013 production guidance of 3.25 million to 3.45 million ounces of silver and 63,500 to 68,000 ounces of gold, will be supported by capital projects that include construction of the first phase of leach pad three, significant pre-stripping, and the systematic rehabilitation of the mining [complete].

Osisko continued to improve operations at there Canadian Malartic mine during the quarter with sales to Royal Gold's account exceeding the preceding quarter by 5%. They took a six day shut down to complete installation and integration of the second pebble crusher and to make modifications to various conveying systems in the crushing and grinding circuit. Prior to the shutdown, production in October through November averaged about 49,000 tons per operating day, a 13% increase from the preceding quarter. During the fourth quarter, mine production was affected by delays in access to the north sector of the pit, thus limiting production. These delays affected the mine sequencing and will have an impact on early 2013 production. With mill throughput expected to stabilize, Osisko estimates that 2013 gold production will be between 485,000 and 510,000 ounces.

At St. Andrew Goldfields mine, lateral development advance that was above expectations for the quarter and the year was one of the enablers for production of 1,000 tons per day. Commissioning of a new ore pass was scheduled in mid-January to provide for a further increase in production. With a 4% increase in royalty rate associated with the higher gold price and strong production results, Holt exceeded its previous quarter's revenue contribution by over 20%.

As reported by Inmet, production at Las Cruces in 2012 increased by more than 60% to 67,700 tons of copper, up from 42,100 tons in 2011. Over the past nine months ended December 2012, Las Cruces averaged design capacity output. As this operation settles into steady-state production, the sales that report to Royal Gold's account will fluctuate with normal shipping variations. This was the case during the fourth quarter -- fourth calendar quarter as the Las Cruces contribution was lower than the preceding quarter when higher levels of sales were realized. Inmet estimates that 2013 production will be between 68,500 and 72,000 tons of copper.

As we have stated in the past, Royal Gold's results from Vale's Voisey's Bay operation are tied to variability in the shipping schedule. Copper concentrate sales that reported to Royal Gold's account during the September quarter represented about 60% of the years production, or about three times the expected level. As a result, sales in this quarter were significantly lower. In December, Vale reported that construction of the long harbor hydrometallurgical facility continued on schedule with an estimated start up during the second half of this year.

At Goldcorp's Penasquito mine, production for 2012 totaled 411,300 gold ounces, exceeding their guidance of 370,000 to 390,000 ounces. During the quarter, mill throughput of 98,000 tons per day was constrained by the availability of water. Goldcorp has stated that a water and tailing study to develop a comprehensive long-term water strategy for the Penasquito district is underway and is expected to be completed during the first half of calendar 2013.

Goldcorp will continue to bring additional water wells into production within the state of those basin in addition to new dewatering wells within the Chile Colorado pit. The additional water wells to be added in calendar 2013 are expected to increase mill throughput to 105,000 tons per day. Mining in the lower grade portion of the pit over the first half of calendar 2013 is also expected to impact overall production, which Goldcorp forecasts at between 360,000 and 400,000 ounces of gold with an associated silver production of between 20 million and 21 million ounces.

Yukon Zinc's Wolverine mine increased its contribution to our account by over 80% as they continue to ramp-up to design capacity and to improve metallurgical performance and recoveries in the mill. Three Nevada-based operations realized increases in production versus the preceding quarter. These include Goldcorp's Marigold mine and Barrick's Bald Mountain mine where, in both cases, sequencing resulted in increased production within our area of interest, and at KGHM's Robinson mine, where operating improvements were sustained resulting in a particularly strong December.

As we see several projects continue to ramp-up towards full capacity during this year, we will also experience a few projects that will be stopping production to our account. Those declines will be offset by the addition of new production that is scheduled to begin during this calendar year. Properties where we expect reductions in calendar 2013 include AuRico's El Chanate mine where our interest is capped, Xstrata's Mount Good mine that has been put on care and maintenance, and Coeur's Martha and St. Barbara's Southern Cross mine that have exhausted reserves. These four projects totaled about 4,200 net equivalent ounces in calendar 2012.

Offsetting these decreases are four projects expected to add approximately 4,200 net gold equivalent ounces during 2013. These new producing properties include Reed Resources, Meekatharra gold project in Western Australia, Amara Mining's, previously Cluff Gold's Sega property in Burkina Faso, West Africa, the Kinross operated gold mine in Nevada, and Atna Resources Pinson mine, also in Nevada. While none of these projects are major contributors, it is a good demonstration of how the portfolio effect works to balance our results.

With regard to our development properties, Eric has stated that at Pascua-Lama, they have reset and strengthened the project management by hiring Fluor to execute the EPCM of the project. Eric has received and is currently reviewing the definitive estimate of cost and schedule for the project provided by Fluor. They have also stated that they will release the results of the estimate with their year end 2012 financial results on February 14. They report that essential work to be completed this summer in preparation for the winter season is progressing well.

As of the end of September, Thompson Creek reported that progress on Mt. Milligan reflected that engineering and procurement are essentially complete and overall completion of the project is estimated at 75%. Of course, this information is already four months old and Thompson Creek will be publicly reporting the project status as of the end of December on February 25. Milestones achieved through the third quarter of 2012 included the completion of the tailings storage facility core construction, enclosure of the concentrator building, and the installation and assembly of the SAG and ball mills which remain in progress and on schedule.

Actual project spending as of September 30, 2012 was CAD935 million, or about 64% of the anticipated total, with commitments including these actual expenditures, totaling CAD1.3 billion, or 85% of the total. Again, these numbers are also now about four months dated.

The Company reported that on January 14, 2013, they received notification from the Department of Fisheries and Oceans approving its fish habitat compensation plan as required by environment Canada's metal mining effluent regulations. This approval was the step to authorize deposition of tailings material in the zero discharge tailings storage facility, and the final authorization required to operate the Mt. Milligan copper gold mine. Thompson Creek reiterates that the Mt. Milligan project remains on schedule with commissioning and start up expected in the third quarter of 2013 and commercial production expected in the fourth quarter of 2013.

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

Thank you, Bill, for that comprehensive review. As many you have seen in your other gold investments, mining companies are experiencing notable year-over-year operating cost increases. In addition, you all likely heard that the industry is moving to a more transparent cost reporting structure to better communicate the total cost of gold production. Previous convention has not included cost such as corporate and expiration expenses and total cash costs. In these respects, Royal Gold will continue to look very attractive due to our business model that provides us expiration upside at no cost as well as insulation from inflation and high corporate overhead.

In summary, this was a very solid quarter of operational and fiscal results. Once again, we achieved record financial performance due to the strength and diversity of our portfolio. We anticipate continued improvement in Andacollo, Penasquito, Canadian Malartic and Wolverine as these projects work towards achieving full production capacity. More importantly, we look forward to the start up of production at Mt. Milligan in the second half of this calendar year. Our first investment at Mt. Milligan was in mid-2010 so it is exciting to see that we are now only months away from project commissioning.

With that, Operator, we would be happy to take any questions.

Certainly.

(Operator Instructions)

Michael Peterson, MLV and Company.

Good morning, everyone. My question regards to the expansion of your portfolio, it was more than $1 billion in liquidity, you are poised to take advantage of what is widely regarded as a buyers market and I think Tony's comments just a few moments ago detailed that in particular. Now I know you cannot speak to any specifics regarding a future transaction; however, any insight you could share with regard to this issue would be helpful. I think it has been an modest overhang on share performance and I think additional clarity would certainly help us on this end.

Thank you for the question, Michael. You are absolutely right, this is a very good market for royalty companies. The equity performance of many of the operators are not in a situation where they can issue equity at a reasonable cost to the Company. And of course, debt is available and sometimes expensive for others. But the point is, I think that the royalty business model and financing is very much appropriate in this particular time and space. So we did take a lot of time during the course of the calendar 2012 to restructure our balance sheet and get us prepared for opportunities as they may come up. We have seen a lot of the things, we are continuing to sort through and make sure that we invest in properties that we have a lot of confidence in and management teams that we have a lot of confidence in. You are quite correct, I cannot comment in any detail but we do feel very good about where the royalty financing is at, at this appropriate time.

Thank you, Tony, I appreciate the detail and just a little bit more of your perspective. Before I hand the call off to other analysts, I would like to take a moment and thank Karen for all of her help. Karen, we wish you well in the next stages of your life and really appreciate all of your efforts.

Thank you, I appreciate that.

Michael, you stole part of my closing remarks.

I think we all share sentiment here, so well deserved, for sure. That is all I have this morning, thank you.

Shane Nagle, National Bank Financial.

Thank you, Operator. Just one quick question on the Voisey's Bay, as you mentioned the hydromet facility coming online back end of the year, I just want to see if you know how that impact will be with the NSR. I know you have had some issues with how that was calculated in the past obviously. Is that going to be -- are we going to see a similar structure with the smelting refining fees that they charge you internally a similar spread or would you see an impact on your revenue at all?

Yes, Shane, thank you for the question. I think it is probably premature to see that or to be able to respond to that question. We will continue to work through collaboratively with Vale on the payments of that royalty and we will just have to see, once the calculation happens, if it meets our expectations.

Okay, and then what do you expect with the taxation? Obviously the sales should smooth out as they start selling the cathode, does that impact this tax issue that you currently have where you are charged more in your fiscal Q2?

Okay, I think we are probably confusing some tax issues here. Are you speaking specifically to Voisey's Bay?

Yes, just to the Labrador tax and specifically Voisey's Bay, yes.

The Labrador tax, I think as 20% in province, right Stefan?

Yes, that is correct.

And that will not have any impact whether it is at the hydromet facility or if the concentrates ship to Sudbury. I might be missing your question, have I hit on it or not?

No, I think that is fine. I think the issue would be with the revenue, the concentrate shipments, obviously you have a lot coming in, in this quarter with the shipping season but that revenue should smooth out which would smooth out some of the top line with no impact on the taxes, right?

I think you are correct there. This has been the last two quarters, I'm looking to Bill Zisch here, usually the stronger shipping quarters and they have been stronger payment quarters for us, and so obviously that would be higher tax in province taxes in time as well.

Okay, that is great. Thanks and congratulations again to Karen as well. Thanks, guys.

(Operator Instructions)

We are showing no further questions at this time. I will turn the call back over to the presenters.

Thank you, Operator. It has been a very solid quarter for us. I do not think there is any real surprises in the overall portfolio and we continue to look for strong performance going forward.

As Michael and Shane both alluded to, Karen Gross has elected to retire from Royal Gold and she has been with us, Karen, since the 1980s, probably our longest serving employee now, certainly our longest serving employee and she will be dearly missed by the entire management team here at Royal Gold. But we wish her well in her retirement and she plans to get out to golf clubs and enjoy a lot of courses around Colorado and the United States. With that, we will conclude the call and conclude it by saying thank you very much, Karen.

Thank you.

We look forward to updating you at our next conference call if not sooner, bye for now.

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