Royal Gold Inc (RGLD) 2013 Q4 法說會逐字稿

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

(Operator Instructions)

I would now like to turn the call over to Karli Anderson. You may begin.

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's fourth-quarter and fiscal 2013 year-end results. This event is being webcast live and you'll be able to access a replay of this 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 Stan Dempsey, Chairman. Tony will open with a discussion of the year, followed by Stefan with a financial review, and then Bill Zisch will discuss the performance of our portfolio. After management completes their opening remarks we'll open the line for Q&A.

Before we begin, I want to remind everyone that this discussion falls under the Safe Harbor provisions 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.

Now I'll turn the call over to Tony.

Good morning, and thank you for joining us. We're using a few slides to frame our discussion, and I'll begin on slide 3. Today we are celebrating some important accomplishments, announcing a new acquisition, and shedding some light on our expectations for the future. This is Royal Gold's 12th consecutive year of record revenue. And as you can see from the chart on slide 3, our revenues have grown about 400% since 2008.

But it is also important to note that we have grown our EBITDA margin at the same time, which now stands at 90%. We have always made cost containment a priority, regardless of gold price. As a result, we've had the flexibility to invest in growth projects while increasing our dividend for 11 straight years. While most of the industry is now consumed with slashing expenses, and rightfully so, Royal Gold is focused on leveraging our unique scalability that allows us to grow our business off a low fixed-cost base.

Turning to slide 4, this morning we announced a new acquisition. We've acquired a 1.4% NSR royalty in concessions at the El Morro project in Chile that we estimate cover about one-third of the total reserve. Goldcorp holds 70% ownership in El Morro, and is the operator, with the remaining 30% held by New Gold. At December 31, 2012, proven and probable reserves totaled 9.5 million ounces of gold and 7 billion pounds of copper. Currently the Chilean authorities are working to define and implement a community consultation process with Goldcorp's support. As a result, the El Morro construction activities have been suspended pending the completion of that effort.

Our rationale for this investment is that we believe this is a good project with a good operator in a good jurisdiction. As you can see from the chart on slide 4, El Morro has one of the highest in situ metal values of undeveloped gold and copper deposits worldwide. It has a mine life that spans nearly two decades. And like so many large porphyry systems, we would expect reserves to expand over time. I know the region well, having operated a mine in Chile not far from El Morro, and we have confidence of the operator. While we recognize that it will take some time to complete the permitting process, at our price point for the acquisition, we think it is an attractive opportunity to give our shareholders exposure to this property.

Turning to slide 5, another accomplishment we're celebrating today belongs to Thompson Creek. Here you'll see a photo of the Mt. Milligan facilities in the foreground and the mine in the background. The primary pressure and the conveyor have been commissioned. The course ore stockpile has been vetted and the mine is positioned to deliver ore to the crusher. The phased start up of the concentrator is planned to commence in just a few days, with the few ore feed expected to occur in mid August. All of the concentrator grinding and flotation circuits are scheduled to be operational in September. We congratulate the Thompson Creek team for delivering Mt. Milligan on the schedule, and substantially within the budget range established 2.5 years ago and we look forward to the beginning of commercial production later this year.

On slide 6, we will have a few more pictures we'll show you over the course of this morning's call that illustrate the scale of the operation and the status of the build. This is a picture of the primary crushing facility, the mechanically stabilized earth wall, and the 60-inch overland conveyor that transports material to the course ore stockpile. Stefan will discuss how the Mt. Milligan start up is expected to positively impact our future financial results in a moment. But before I turn the call over to Stefan and Bill to discuss our financial and operating results and outlook, I would like to mention what we are currently seeing in the market for royalty and streaming opportunities.

Equity financings have plummeted as a viable means of raising capital. 2012 was the lowest year for mining equity raises in a decade and 2013 is shaping up to be even leaner. The cost of corporate debt and convertibles is increasing and companies are beginning to look forward with some concerns about working capital if weaker metal prices are sustained. Against this backdrop, Royal Gold, with over $1 billion in available liquidity, is well-positioned to provide support to the industry. But, as we have demonstrated in the past, we will remain disciplined when allocating our capital.

With that I'll turn the call over for Stefan's financial update.

Thank you, Tony, and good morning, everyone. Let's turn to slide 7. In fiscal 2013, we reported a 10% increase in revenue, driven by volume increases of 15%, somewhat offset by a gold price reduction of 4%. We had net income of $69.2 million, or $1.09 per share, down 25% from fiscal 2012. The reduction was mainly due to a non-cash impairment loss of $12.1 million related to our investment in Seabridge that we previously recorded in our third quarter. We also had an increase in interest expense associated with our 2019 notes. And earnings per share reflected the issuance of 5.25 million shares of common stock in October 2012. These impacts were partially offset by higher royalty revenue. Also in the fiscal year we paid cash dividends totaling $43.9 million, which represents a payout ratio of 25% of our operating cash flow of $172.6 million.

Income tax expense for the year was $63.8 million, for an effective tax rate of 46%, compared with $54.7 million or 36% in the prior year. The increase in tax expense was associated with third-quarter events, of the write-down of the Seabridge investment, and the filing of our June 30, 2012 US income tax return. For the year we paid cash taxes of $48 million, representing a cash tax rate of approximately 35%. For the fourth fiscal quarter, our net income was $10.7 million, or $0.16 per share, compared with net income of $20.6 million, or 35% per share a year ago. Results for the fourth quarter were impacted by lower average gold price of $1,414 per ounce, which was a 12% decrease over the prior-year quarter; lower revenue at Penasquito; and lower contribution from Cortez. Results were also impacted by higher interest expense, higher DD&A, and additional shares outstanding than the prior-year quarter.

Now I would like to discuss our outlook for fiscal 2014 and the impact of expected revenue growth for Mt. Milligan. Royal Gold will take physical delivery of metal from Mt. Milligan, and handle the marketing and sales of the metals to our Swiss subsidiary. As Mt. Milligan transitions into production, the deliveries that Royal Gold will receive will be based on not just the contained gold in the concentrates, but also the delivery terms agreed upon with Thompson Creek. We expect delivered ounces to initially lag Thompson Creek's reported production by two to four months, with the time period transitioning to approximately four months after the first-year production. Unlike our royalty revenue, for which revenue accruals are made as and when our operators receive smelter payments, revenue for the Mt. Milligan stream will only be recognized upon the sale of the delivered metal into the market.

On slide 8, you'll see a picture of the Mt. Milligan concentrator, pebble crusher and admin facilities. Based on Thompson Creek's expected timing for start up at Mt. Milligan, we are forecasting an effective tax rate of between 30% and 34% for fiscal 2014, reflecting the contribution of Mt. Milligan revenue at a lower tax rate than our US tax rate. Adjusted EBITDA as a percentage of revenue is expected to move downward as the Mt. Milligan shipments commence to 80% to 85% of revenue, as our payments of $435 per ounce will be reflected on the income statement as a cash cost. DD&A is expected to be in the range of $425 to $500 per gold equivalent ounce for fiscal '14, with the rate moving from the high end in the first half to the lower end of that range in the second half of the year.

And now I'll turn the call over to Bill Zisch.

Thank you, Stefan. Good morning, everyone. Continuing with a focus on Mt. Milligan, I'd like to show a series of slides that will walk you through the concentrator. The next slide, slide number 9, is the SAG mill. That's a 40-by-20 foot SAG mill, with one 22-megawatt gearless wraparound drive. Moving to slide 10, you'll see there are two ball mills. They are 24-by-41 feet, driven by two variable-speed synchronous motors. As Thompson Creek has announced, commissioning is underway. The next picture on slide 11 is of the flotation cells. There are five cells per train, two roughers and three scavengers and each tank has a capacity of 200 cubic meters. And on slide 12, there's another view of the flotation cells in the regrind area. As you can see, Thompson Creek is set for commissioning.

Turning to slide 13, my remarks on the broader portfolio will compare to the June 2013 quarterly results with our March 2013 quarterly results, rather than the prior-year comparables, to give you a better sense of near-term performance. Revenue in the June quarter was about $17 million below the March quarter. The metal price differences account for most, about $10 million, of that difference. The balance was a result of lower grades at Andacollo, as expected; normal seasonality at Voisey's Bay; the impact of Wolverine coming off a record quarter in March; and the completion of our royalty at El Chanate. These impacts were partially offset by production increases at Cortez, Gwalia Deeps, Penasquito and Robinson.

At Andacollo, gold sales during the quarter were in line with expectations mentioned during the March quarter, as mining transitioned to lower-grade material. Teck has maintained their guidance of 63,000 ounces of gold for calendar 2013. Planned production during the next few quarters is likely to remain at levels similar to this quarter's 16,000 ounces. At Voisey's Bay, it is normal to see seasonal adjustments of copper production during the June quarter, as shipping schedules are restricted. At Yukon Zinc's Wolverine mine, production this quarter relative to the preceding quarter is down because the March quarter was a record for the mine. Additionally, in late June, Yukon Zinc announced that, owing to lower metal prices, they will reduce production rates by about 40%, with plans to reevaluate that production schedule in the fall.

At First Quantum's Robinson mine, favorable gold production for the year is a result of the mining sequence that had them operating in gold-rich areas during the first half of the year. Copper production was also up during the quarter, exceeding the preceding quarter by 75%. Sustained productive mining and plant throughput have allowed Robinson to report consistently strong quarters during this year. Production from Barrick's Cortez mine attributable to our account increased in the fourth quarter, as the mine sequence called for a resumption of mining at the pipeline and gas pits where we hold royalty interests, as surface mining equipment is being returned from the Cortez (inaudible).

At Gualia Deeps, St. Barbara reported strong production during the month of June, contributing to the quarter's production that was more than twice the level realized in the March quarter. At Goldcorp's Penasquito mine, production was about 5% above the March quarter. Their reported production aligns with the back-end-weighted guidance provided by Goldcorp. The sulfide plant achieved throughput of 105,000 tons per day during the quarter, following the completion of crusher maintenance, blasting improvements, and the addition of new freshwater wells. Significant improvement was realized in the month of June, with the sulfide plant achieving average throughput of over 120,000 tons per day during the month.

Goldcorp also announced that their recently completed water study has defined an additional water source, referred to as the Northern Well field, that is within the permitted Cedros Basin. Goldcorp plans on beginning construction to develop this water source during the fourth quarter of calendar year 2013, with completion of the project expected during the second half of calendar year 2014. In mid-July Barrick announced that they must complete Pascua-Lama's water management system to the satisfaction of Chile's environmental superintendent before resuming construction activities in Chile. Barrick has also stated that they intend to resequence construction of a process plant and other facilities in Argentina, in order to target first production by mid 2016.

I'll conclude by saying that our portfolio generally performed well and we look forward to the addition of the Mt. Milligan mine as a producing property in the coming months. With that, I will turn the call back over to Tony.

Thanks for the update, Bill. And I'll conclude on slide 14. I'd like to take this opportunity to welcome Karli Anderson and Jason Hynes to our Royal Gold team. Karli is our new VP of Investor Relations, and you heard her just on the front end of this call and she joins us following the retirement of Karen Gross. And Jason will be looking after our subsidiary that owns the Mt. Milligan interest, and working closely with Bill Heissenbuttel on corporate development opportunities. Both of these individuals have already begun to contribute meaningfully to the Company and we look forward to even greater things in the future.

In closing, fiscal 2013 was a solid year for Royal Gold. On an aggregate basis the production volume increase of 15% was partially offset by 4% reduction in average gold price, resulting in a 10% higher revenue. We maintained our cost and capital allocation discipline. We strengthened our balance sheet and now, with $1 billion in available liquidity, we are well-positioned for this period of unique opportunities. We added to our interest at Mt. Milligan early in the year and now control 52.25% of the gold from that project and just today we announced the acquisition of the El Morro royalty. While we experienced some headwinds related to Pascua-Lama, construction did advance notably during the year, with Barrick investing an additional $1 billion, bringing the total spend to date to $5.4 billion. We remain confident in the long-term value of this deposit. And, most importantly, Mt. Milligan construction advanced on schedule and on budget, with mill commissioning now underway.

Operator, that concludes our prepared remarks, and we'd be happy to answer any questions, if there were some on the line.

(Operator Instructions)

Patrick Chidley, HSBC.

I just wanted to ask a question that is really aimed at some of the downside that people may be concerned about with Thompson Creek and Mt. Milligan. And I'm wondering if you could maybe just flesh out what happens if Thompson Creek does get into financial difficulties. What are your rights there, if they go, for example, into administration at any stage?

Let me start out on the positive side of that topic. Thompson Creek announced today that they anticipate having about $100 million of free-board over the next coming months, as they work towards commissioning the property. So they don't have any expectations of having problems. And certainly we like the build to this date, and we don't expect any startup type problems. But answering specifically to your point, if, in the event that it did go into administration, we do have a limitation on how much debt, obviously, that can stand in front of us. And that limitation is $350 million. And, so, we would be second in any kind of liquidation event behind that.

But, really, what we want to do, Patrick, is maintain our business interest. We think this is a quality property that is going to attract another buyer, if that were to happen. We're fully supportive of Thompson Creek. We want to see them be successful here. But I think we were quite comprehensive when we put the deal together originally, now three years ago, to plan for a situation like you outlined.

Yes, thanks. I understand that, and that's good to know. But I'd imagine, for example, if the company did go under but the mine were still going, then it wouldn't be such a great idea to close the mine. So as I would presume that Mt. Milligan would just continue producing. And it is the source of cash flow. And I'm wondering if going into administration changes your rights on the metal stream or not.

Those are events that we can't really comment or predict on. We just don't know what eventuality might happen there. But I would expect if the mine produces, we have the right to receive a percentage of the gold, and that would be honored through that administrative process until something else was decided by a court of competent jurisdiction.

Right. Okay. Good, thanks. And then just a follow-up question, if I may, with respect to El Morro. That transaction, obviously, long term looking forward, can you comment on the situation there in terms of where you perceive Goldcorp to be on ability to move forward on that project? And what timing you'd expect into getting into cash flows?

Let me, Patrick, introduce you to Bill Heissenbuttel, our Business Development Vice President, and he'll comment on that.

Patrick, Goldcorp has not identified a firm time line with respect to the build of El Morro. They clearly have some work to do on the indigenous issues there. I think one of the good things about this acquisition is we were able to see the delay in front of us. And, as Tony said in his prepared comments, we were able to reflect a delay in the valuation methodology we used with respect to the acquisition.

Good. Okay. Thanks very much.

(Operator Instructions)

Kevin (sic -- Cosmos) Chiu, CIBC.

It's actually Cosmos here. (laughter) I got a few questions. Maybe, first off, again on Mt. Milligan. Tony, judging from your answer to Patrick's questions, you have full confidence in Thompson Creek. Reading over Thompson Creek's financial reporting last night, they've talked about a small increase, only a small increase, in terms of, I think, about $40 million to about $50 million in the CapEx, remaining CapEx for Mt. Milligan. Are you comfortable with that? Are you okay with it? What's your perspective on it?

Let me go back to essentially the range they established in February of 2011, both on schedule and on budget. And they're surely up on the higher end of the budget range that they established. And having heard from Thompson Creek, I understand these latest cost increases are somewhat related to how the startup expenses, whether they are capitalized or expensed. And I guess some had been moved into the capitalization rather than expensed. So I don't know that there's any cost that has been unexpected on their part. It's just what bucket it's been put into. And, again, we understand they have about $100 million of projected surplus on their cash basis as they go through startup. So I'm not able to really comment on anything further than that, but that's the situation as we understand it.

Okay, great. And Tony, or maybe Bill, in terms of El Morro, would you be able to give us -- your royalty at this point in time is only one-third of the reserve base. Would you be able to give us a bit more description in terms of which parts of the deposit would that be on? And in terms of the current mine plan or the current plan at this point in time, would it be at the front or at the end of the life of mine production?

Cosmos, we would expect that, certainly that the production on our royalty ground there would be heavier at times than others. But if you were to think of El Morro, the La Fortuna pit as a circle, and if you were to draw a diagonal from the upper left to the lower right on that circle, there's a swath of claims that run through, just a little bit below the center point, that would not be subject to our royalty interests. So, we would have all the interests outside of that. At times, I'm sure the mine plan would be certain phases, certain years, lighter on the ground that we have an interest on. But I think perhaps we can give you some visual guidance on what we think the pit and the property position look like as we present future PowerPoint type presentations in the future.

Great. That would be great. Thank you. That's all I have.

Shane Nagle, National Bank.

Just a couple quick questions around Wolverine. Obviously, touching on them being down 40% in terms of production. Is this the run rate we expect to see? This is one of the assets that you guys have that we just don't have really good access to the information on.

Bill Zisch, do you want to take that?

Yes, Shane. The run rate that you referenced, if you take their current run rate, which is about what they saw last month, and then reduce that by the 40% that they're suggesting, that's about what we would expect to see until they reevaluate that.

Okay. And then you mentioned that are going to reevaluate sometime in the fall or early next year?

Right. That's what they've stated. Correct.

Okay. And then with Mt. Milligan you mentioned the delay of the two to four months in terms of the payment. So if they're in commissioning now, obviously the ounces produced by the commissioning phase, you're entitled to, as well. So you're thinking maybe early next year you start seeing some cash flow from this operation?

We probably would expect to see some cash from the operation in our second fiscal quarter. So in the December quarter. Probably not substantial. And we would expect the first concentrate lots or shipments to be of lower quality as they continue to work through the system. So we do expect some revenue, just over probably a 12-month build coming into full production power for our interests.

Okay, that's great. Thank you very much, guys.

We have no further questions on the line. I turn the call back over to the presenters.

Thank you, operator. And thank you for your questions and taking time to join us today. As always, we appreciate your interest and continued support of Royal Gold. And we look forward to updating you on the progress during our next quarterly call. Particularly in regards to the status of the Mt. Milligan commissioning efforts. Thank you, everybody.

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