Royal Gold Inc (RGLD) 2014 Q2 法說會逐字稿

Good day, and welcome to the Royal Gold FY14 second quarter conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Karli Anderson, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to our discussion of Royal Gold's second quarter FY14 results. This event is being webcast live, and you will 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, General Counsel and Corporate Secretary; and Stan Dempsey, Chairman.

Tony will open with an overview of the quarter, 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 will open the line for a Q&A session.

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. Now, I will turn the call over to Tony.

Good morning, and thank you for taking time to join us. We have slides to go along with today's discussion, and I will begin on slide 4.

Our second-quarter results were largely in line with expectations. On our last earnings call, I said that we expected lower production at Andacollo as Teck transitioned into Phase 3 of the pit, and that we estimated this lower production would be offset by initial revenue from Mt. Milligan, higher production at Penasquito, stronger sales at Voisey's Bay, and additional production in our royalty area, Cortez.

And the quarter played out largely as anticipated. We received our first delivery of gold from Mt. Milligan. Production at Penasquito was significantly -- was up significantly over the September quarter, and Barrick's production increased within our royalty area at Cortez. The only notable difference from our expectations was reported sales at Voisey's Bay, where higher cobalt and flat nickel sales contrasted with lower copper sales.

Overall, volume was down about 3% from the September quarter, while the price of gold was off about 4%. Compared to the year ago quarter, volume was down about 10%, and gold price was down 26%.

Our most important development during the quarter was our first delivery of gold from Mt. Milligan, which resulted in a $2.6 million revenue contribution. Having made our first investment at Mt. Milligan about 3.5 years ago, we are now beginning to see a return on that investment.

We have been busy over the last month. We've acquired a new royalty at Barrick's Gold Rush Deposit and expanded our royalty interest at Cortez. In addition, we have increased our capacity of our credit facility at more favorable rates. And Stefan will talk about our expanded facility here in just a few minutes.

Slide 5 details our latest portfolio addition. This map shows the boundaries of our new 1% royalty interest on the southern end of Barrick's Gold Rush Deposit in Nevada. We acquired this royalty just a couple of weeks ago from a private party for a purchase price of $8 million, payable over seven years.

Gold Rush is one of the most exciting discoveries in the last decade. Measured and indicated resources total over 8 million ounces of gold, grading 0.13 ounces per ton. And the deposit is within 4 miles of the Cortez mine and infrastructure. We believe this new royalty interest is an excellent foothold in the deposit, and is well-positioned as further expiration is conducted to the South.

Turning to slide 6, you will see an outline of our recently expanded royalty interest at Cortez. NVR1 covers much of the south end of the pipeline mining complex and hosts the Crossroads deposit.

We have increased our NVR1 royalty interest from 0.39% to just over 1% outside of the Crossroads claims, and from 0% to 0.62% within the Crossroads claims. Our acquisition price for the increased interest was $11.5 million. Barrick reported 4.9 million ounces of reserves for NVR1 as of December 31, 2012. Cortez was Royal Gold's first royalty, and we are pleased to have completed two transactions in an area we know very well.

Turning to slide 7, it may be helpful to quickly recap our interest at the Pipeline Mining Complex, where we hold four royalties in total. This is a consolidated map of our royalties. Let's separate them for better clarity, and for your future reference.

Slide 8 shows GSR1, a sliding scale, 5%, gross smelter return royalty at gold prices greater than $470 per ounce. As of December, 2012, Barrick reported 1.6 million ounces of reserves for GSR1.

Slide 9 shows GSR2, which, just like GSR1, is a 5% sliding scale gross smelter return royalty at gold prices greater than $470 per ounce. As of December 2012, Barrick reported 4 million ounces of reserves for GSR2.

On slide 10, you will see our GSR3 interest, which is a fixed one point -- sorry, 0.71% royalty covering substantially the same area as GSR1 and GSR2 combined. Barrick reported reserves of 2.3 million ounces at the end of 2012 for GSR3.

Barrick's production guidance for calendar 2013 included 64,000 ounces within the area covered by GSR1 and GSR2. The same 64,000 ounces are also subject to GSR3. Barrick's guidance for NVR1 was 53,000 ounces. And for calendar 2013, Royal Gold recorded revenue of about $5.6 million from Cortez.

As mining equipment continues to return to the pipeline complex from Cortez Hills, we expect stronger contributions from Cortez in calendar 2014. Now I will turn the call over to Stefan for a financial review of the quarter, followed by Bill Zisch, who will discuss our portfolio highlights. Stefan?

Thank you, Tony, and good morning, everyone.

Moving on to slide 11, I will briefly go over our second quarter financial highlights. In Q2, we generated revenue of $52.8 million, compared with $79.9 million in the prior-year quarter, which by the way was our strongest quarter ever in terms of average price and volume. The impact of lower gold prices and reduced production at Andacollo was partially offset by the first gold delivery from Mt. Milligan and by higher royalty volume at Penasquito.

Net income totaled $10.7 million, or $0.16 per share, compared with $27.2 million, or $0.42 per share, a year ago. Our adjusted EBITDA was $45.6 million, or 86% of revenue, as our Mt. Milligan shipments commenced. Long term, we expect that adjusted EBITDA will range from 80% to 85% of revenue, as our payments of $435 per ounce to Thompson Creek will be reflected as cash costs.

We paid cash dividends in the second quarter of $13.7 million, which is a payout ratio of 39% of our operating cash flow of $34.7 million. For the second quarter, income tax expense was $6.3 million, or 37%, compared with $16.3 million, or 37%, for the prior year period. Our effective tax rate for the six months ended December 31 was 30%.

For the full fiscal year, based upon Royal Gold's current forecasts, we continue to expect our effective tax rate to be between 30% and 34%. The tax rate will fluctuate within that range depending on the volume of production received from Mt. Milligan, which is taxed at a lower rate than the rest of our portfolio.

DD&A for the quarter was $22.7 million, or $548 per GEO. The rate per GEO was above our forecast for the full year of between $425 and $500 per GEO, due to the lower contribution from Andacollo and higher contribution by some of our higher carrying value non-principal properties. We now expect our full-year DD&A rate to be at the higher end of the range. We will update our DD&A forecast with our Q3 earnings, as we also update for year-end reserves estimates at that time.

I would also like to take a chance to provide more color on our first revenue from Mt. Milligan. There were 5,655 contained ounces shipped, resulting in delivery of 2,149 ounces to Royal Gold by Thompson Creek. The ounces are a function of our 52.25% interest, our 75% provisional factor and a 97% payable factor.

We will be paid the remaining 25% upon final settlement. We paid $435 per ounce at Thompson Creek, as specified in our agreement with them, and we sold the 2,149 ounces that were delivered to us at an average price of $1,228 during the December period.

I will now turn to slide 12. Yesterday, we amended our revolving credit facility to increase our available capacity to $450 million from $350 million, and to lower our cost of capital by reducing the undrawn fee on the revolver to 25 basis points from 37.5 basis points, and the drawn interest rate to LIBOR plus 1.25% from LIBOR plus 1.75%.

The maturity was extended from May 2017 to January 2019. I'd like to thank our banking partners at HSBC, Scotia Bank, Goldman Sachs, Bank of America Merrill Lynch and CIBC for their commitment to Royal Gold as part of our credit facility. We feel fortunate that we have great partners standing behind us. The amendment to our credit facility provides Royal Gold excellent access to capital at a very low cost.

Slide 13 shows our growing balance sheet. With working capital of $705 million, our expanded available credit line of $450 million, and over $175 million in operating cash flow over the past 12 months, we are pleased to be in this strong financial position at a time when the market conditions are favorable for new opportunities. Now I will turn the call over to Bill Zisch to provide a property update.

Thank you, Stefan, and good morning, everyone.

On slide 14, we have provided a production and revenue waterfall comparing the December quarter to the September quarter. I will focus my comments on operational performance from our 10 principal properties.

On a GEO basis, gold volumes were down 11% year over year and down 3% from the preceding quarter. The principal properties that realized lower production versus the September quarter included Andacollo, Holt, Voisey's Bay, Mulatos and Las Cruces.

During the first three quarters of calendar 2013, Andacollo completed the initial phase of its hypogene project and realized record gold production for the full year. However, the fourth quarter of calendar 2013 marked a shift to a lower grade phase of mining, which resulted in 29% lower gold production in the September quarter. 2014 production guidance is forthcoming, but with the shift to lower grade ore underway, it is expected that the average grade of ore mined in calendar 2014 will be similar to the fourth calendar quarter of 2013.

Within that lower 2014 grade profile, gold production for the year at Andacollo is expected to be weighted toward the second half of the calendar year. After calendar 2014, we anticipate Andacollo will move into better grade ore.

At Holt, production was delayed as scheduled hoist motor and hoist drive upgrades were completed during the quarter. Total revenue during the quarter was down about 30%, which includes 6% associated with the lower gold price and 24% due to our production volume. The Holt royalty is levered to the price of gold due to its sliding scale structure. For all of 2013, Holt met the upper end of St. Andrew Goldfields' full year guidance, with production totaling over 58,000 ounces.

At Voisey's Bay, nickel production in the December quarter was virtually the same as the September quarter. For copper, unusually high shipments in the September quarter resulted in lower than normal shipments during this period. For the full year, nickel shipments were about 5% below the prior year and copper shipments were 3% lower as the mine plan sequenced into slightly lower grades.

Production at Mulatos was about 5% below the September quarter, as the grade of material stacked on the heap was down 3% and the grade of the Escondida high grade material processed was down by about 50%. After record production in the September quarter, Las Cruces maintained stable operations that were 6% below these record levels, but at designed capacity. For all of 2013, Las Cruces production was about 2% above the prior year.

Along with the addition of Mt. Milligan, several other principal properties ended this quarter with production that was above the September quarter, including Robinson, Penasquito, Canadian Malartic, and Cortez. At Robinson, production exceeded the September quarter more than 25%. Mining continued in the Liberty pit, but grades were higher than realized in the September quarter and copper recoveries were well above modeled levels for this area of the pit.

In February, mining is expected to be completed in the Liberty pit and production will move to the Kimberly pit. For the year, Robinson milled over 16 million tons of -- as throughput, along with recoveries benefited from earlier improvements.

As expected, Penasquito had strong production in the second half of calendar year, and their gold production exceeded the top end of the revised guidance by 4%. Gold Corp expects 2014 gold protection at Penasquito to exceed 2013 levels, driven by plant throughput of 110,000 tons per day and higher grade material.

Production at Canadian Malartic was up by 8%, as access to the North pit wall provided higher grade feed to the mill. In December, in spite of a six-day scheduled mill shut down, the mine had a near record, producing almost 45,000 ounces of gold. Cortez continued to shift mining equipment to the Pipeline Mining Complex, and production reporting to our account more than doubled from the September to the December quarter.

Although we await guidance from Barrick, we do anticipate stronger calendar 2014 production from pipeline as compared to the calendar 2013. As I mentioned at the outset of my comments, our portfolio's production was down about 3% from the September quarter. With the five increases from our principal properties just about matching the five decreases, our collection of assets continues to perform well, and we welcome the addition of Mt. Milligan as a producing property.

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

Thank you, Bill. Before closing, I'd like to talk a bit more about Mt. Milligan on slide 15. Thompson Creek reported that concentrate production through the end of December contained about 21,000 ounces of gold. Roughly 25% of that production, or about 5,500 payable ounces, shipped before the end of 2013. And just yesterday, they announced another shipment of about 10,500 ounces.

Thus, we expect deliveries on the balance of the 2013 production here in the current quarter, along with new production during the March quarter. We may even see a final settlement associated with the first shipment back in November.

I had the opportunity to visit Mt. Milligan last week, and was impressed with the new operating team in place. They are methodically working through issues that are common to startup activities. Overall, the ramp-up appears to be progressing well, and within our expectations for their first few months of production.

We have guided that, in our experience, the ramp-up stage could take between 12 and 18 months for a project of this size. But we expect substantial Mt. Milligan contributions to begin during this March quarter and continue to grow along with the startup program.

Moving to our final slide, we have begun 2014 with good momentum. We added two new royalty interests to our portfolio in the first few weeks of the year. We started to receive deliveries from Mt. Milligan, and we expanded our access to capital on improved terms. We have over $1 billion in liquidity to invest, and only $57 million in future commitments. And in the current market environment, royalty and streaming transactions continue to be attractive sources of capital for the industry.

And with that, Operator, we will turn the call over to questions, if there are any. Thank you.

(Operator Instructions)

Andrew Quail, Goldman Sachs.

Good morning, Tony, Stefan, Bill, and Karli. Thank you very much for the update this morning.

I have got a few questions. First one is on depreciation. I know you did highlight what is going to happen with guidance at the third quarter. I just want to highlight, what do you see -- or what trends would you see in Mt. Milligan?

Obviously, is it going to start off low and then sort of increase as you move through the ore body? And would that offset any, I suppose, higher charge from other properties?

Go ahead, Stefan.

Sure, Andrew. This is Stefan. I will take the question.

Mt. Milligan -- what goes through our depreciation there is our upfront deposit, and we will amortize that over the life-of-mine ounces. And if you take the payable ounces to Royal Gold on Mt. Milligan, our rate there is about $350 an ounce.

So to the extent that Mt. Milligan production comes in stronger in the second half of our year, we will actually see our overall per GEO DD&A rate come down, as well as that higher contribution from Mt. Milligan ensues.

The same story for Andacollo. Andacollo has a very low DD&A rate; and the stronger Andacollo is, the lower our overall corporate rate is as well. This quarter, the lower rate there at Andacollo did impact the overall rate, as I noted.

What is Andacollo per ounce?

It's about $320 per ounce.

Thank you. Second question is on Mt. Milligan. It looks like it is going along well.

And maybe this is a little bit early, but do you guys -- are you -- obviously, with Thomson Creek -- are you guys looking at any feasibility to expand production? Especially after maybe the first few years when production starts to come off a little bit?

Andrew, I think right now, Mt. -- or Thompson Creek, I should say, is completely focused just on getting the design capacity that was built into the plant. So that is their complete focus.

I think your point is well taken. After a bit of time, I'm sure any good operator will go in and continue to optimize that circuit, look for bottlenecks, take them away, and look for inexpensive capital to increase throughput on a leverage basis. So that is just the normal part of operations, so I would expect that to happen.

And then, of course, we look forward to them conducting more exploration on the property once they get a few years down the road. We've always liked the exploration targets in the area, and all of that, I think, will come in due course as the mine normally matures.

Thanks, Tony. And last one, another one for you, Tony, I think, just on opportunities going forward.

Obviously, you cashed up now, and cash generation for the next few years looks very solid. Americas versus other regions in the world is one question. And then, obviously, in 2 E's, can you comment on streaming versus royalties?

Sure, so we continue to see a level of deal flow that is consistent over the last two or three quarters. There are many folks that need capital; it is no surprise to anybody on this call.

And we are continuing to look through and find areas where we think are quality in nature so that we can invest with confidence, not only in this gold price environment, but maybe even in lower gold price environments. And then if gold price goes up, then we certainly have a good play on that leverage.

So overall, I would just continue to send the message that we're seeing a lot of things; but we are continuing to be patient and looking for quality.

With regard to royalties versus streams, in general, I think you will see us move more and more toward streams. They seem to be a preferred product for our partners, and they can be a little more efficient for us and our partners. So we are very fluent in royalties or streams.

We are happy to talk about the benefits, pros and cons of each. And as we look at the specific needs of our counterparties, we will figure out which one make sense for both parties. So fluent in both, but I expect that we will do more streams than royalties in the future.

Kevin Chiu (sic), CIBC.

It's actually Cosmos here. Congrats on getting your first payment from Mt. Milligan.

Got a question around Mt. Milligan, as well. As you've mentioned, the payment here is based on 75% today and 25% based on final settlement. Could you walk me through in terms of how that works? When would you be expecting final settlement?

And when the final settlement comes, is that based on the spot price at that date? And would it be retroactive to the entire 100%?

Wow, lots of questions in there. And let me try to peel them apart, and I will look for Bill and Stefan to support me if I go wrong.

But we generally would expect final settlement to happen somewhere between three and four months after delivery, after it goes across the rails. So that is why I said in my prepared remarks, we might even be able to get a final settlement from that November shipment.

If you add three or four months onto that, that would come close to our March quarter, and so that could well happen.

And so the provisional payment is 75% on the first four lots, and then it drops down over time. And eventually, we move just to final settlement on the -- or we eventually move to payment just on the final settlement.

So we've always guided that. Just about on average over the first year, we will receive about 75% of the production. But the final settlement is delayed by that three to four months.

So your other piece of the question in there, if I remember all the bits and components, is it based -- is the final settlement based on the price at that time? And we get paid ounces here, so --

Yes, that's true.

So it is based on whatever production is finally determined with the smelter.

And so we will get paid on the ultimate ounces that were returned, less the provisional payment that was made. That is what the final settlement would be made up of.

Okay, yes. It is actually getting -- you are right, it is a complicated question. (laughter)

Very, very hard to explain over the telephone; so I hope I didn't confuse more than help.

No, I think I got most of it.

Maybe moving on to Cortez. Tony, from the beginning, this has been a very important royalty for Royal Gold, and I see that you have made further investments into the property as of this past quarter.

How should we look at it? Because I know for a while, it was Cortez. It was a key royalty. It generated pretty much the substantial part of the royalty for Royal Gold.

And then they have moved onto Cortez Hill, and Royal Gold doesn't really have the royalty on Cortez Hill. But how should we look at it in terms of timing, in terms of -- we've seen the royalty come back on, increased a little bit in the last quarter. How should we look at it from now onwards?

And it certainly seems like you are preparing for something -- a substantial leverage to Cortez itself.

Yes, Cosmos, I don't anticipate that we will return to our large production years that we had. I'm looking at Stan Dempsey here, who is certainly instrumental in creating that royalty.

When I was operating there in the late 1990s, early 2000s, the mine was producing 1.3 million ounces of gold from the Pipeline Mining Complex. And we had grades of about 0.3 ounces per ton. It was just a fabulous deposit.

We don't expect those kinds of grades as they move back from Cortez Hills into the Pipeline Mining Complex. Probably grades that are half of that or less, I would anticipate.

And you can look at what that is just based on the reserve grades that we've made available to you in our disclosures. But the open pit at Cortez Hills is becoming very, very mature.

I think there is one more stage that they are working on at Cortez Hills, and a significant amount of the fleet has already moved back into the Pipeline Mining Complex. So within a couple of years, I would imagine that most of the surface fleet will be on the pipeline side.

Now, there are a few different deposits there: Pipeline, South Pipeline, Gap, and Crossroads. And we have a nice royalty position on all of that except Gap, where we have a partial royalty position.

So I suffer from the standpoint that, having been the mine manager there for four years, I probably gave you more detail than you want (laughter). But we are very passionate about the area.

We just think this is the greatest place in the world to own royalties, and we would pick up anything that we could find in the area.

Yes, any updates on Crossroads? I understand that, for a long time, it was encumbered with a pretty high royalty being paid back to Royal Gold; but that has been restructured. And so I think the timing was about to get pushed up at that point in time, but any updates on Crossroads? Because as you said, you have a pretty substantial royalty on that as well.

We do. And it's -- there is not an update. It is more just a reiteration of a generic statement that we made in the past.

Crossroads does have about 600 feet of stripping on top of it. So in 2008, when we bought the entire royalty package from Barrick, part of our compensation was to reduce that GSR2 royalty that I introduced to you today from 9% down to 5%, just to make that deposit more and more attractive to the operator.

And so that certainly has helped. But it is the lower grade deposit in the area. And so naturally, it will find its way at the end of the mine life, as you consider all of the different deposits that are available to them today.

So that one probably would come in after Pipeline, South Pipeline are pretty well complete.

Yes.

But we will get plenty of advance notice on that, Cosmos, because it will take a year or two to strip the Cortez -- sorry, the Crossroads deposit. And that will be -- we will be able to signal that really, really clearly to the market when they start moving equipment back in there for the stripping.

Yes, great. Thank you. I just wanted to ask all my questions. I guess I won't be calling you over the weekend. I'm pretty sure you're going to be pretty busy on Sunday afternoon. So I'm pretty sure I know what team you guys are cheering for.

Thank you, Cosmos. I don't know if you saw that John Elway rang the bell this morning.

Did he? Okay.

We're really excited about what's coming this weekend. Hopefully, we will have a good result.

Alex Terentiew, Raymond James.

Just a couple of follow-up questions on Mt. Milligan.

You know in your MD&A that you're getting -- or you guys talked about a lot here -- getting paid 75% of the gold in the con, and Thompson Creek is getting 90% right now. Is your lower payment just to help them in their working capital needs during startup? Is that the rationale for that?

Alex, that is a good question, and no. It really wasn't structured that way three and a half years ago when we did the transaction.

It was just a function of what made sense for the operator and what was the easiest thing to document. We realized when this production started that we would be very hungry for revenue, and we wanted to see revenue immediately.

And of course, there's always a negotiation as to when the payment occurs, whether it is on provisional or final settlement. So that was just a negotiated term.

We would obviously like to get our money as early as possible. And the operator in all types of transactions will like to push that out as long as possible. So we just took a look at that and made that payment rationale in our valuation that we put forward. And again, it is just a negotiated item.

Okay, great. I'll say -- 75% for 12 shipments. The first shipment was 5,500 tons. Second shipment was 10,000 tons.

Is that 12 shipment based on a standard amount of tons going out? Or basically, I'm trying to ask, when do you expect that 13th shipment to happen? So what was -- to start getting paid at 90%? Or did you actually say you would -- after the 75%, you would go to 100% immediately? Is that how it works?

No, Alex, I'm going to be at risk of losing you, but I'm going to try. So our first four shipments, we get 75% based on a provisional; and obviously, the 25% then would be on the final.

Yes.

The next four shipments, we get 50% of the payment on a provisional basis and 50% on final. The following four shipments, we get 25% on provisional, 75% on final. And then we go 100% on final for the last -- for that point forward.

So if you were to plot those out on a chart, and then going back to Andrew's question earlier -- I think it was Andrew that was asking when do we expect to get payment from the final settlement -- and add three to four months on to each one of those provisional payments, you would see that once we start getting into the 50% range, we start expecting to get the 25% final from the first four lots.

And then, as you get into the 25% range, we would expect to start getting the 50% final from the second four lots. So it is complex. Happy to have Karli walk you through that if there was -- if I have really confused you; but --

No, I think I get it.

It's pretty simplistic once you understand. So that is why we say, just on average for the first year, we would expect about 75% payment. And then go to the final settlement at that time, and we will be 100%. And of course, we will have some catch-up from the prior payments as well.

And, Alex, I might just add that the first shipment was about 5,000 tons. Thereafter, they are expecting about 10,000 ton shipments. So on a go-forward basis, that is about the sizing.

Okay, that makes sense. Okay. The next question, just on Wolverine, actually. I know you guys used to disclose numbers there a little bit more. And obviously, that one now is a little bit smaller part of your portfolio.

But the mine cut back on production a little bit mid or late last year. Can you give us an update there? Have they ramped things back up? I know zinc prices have recovered a little bit, so I'm just curious as to the status of that operation.

Bill was just on-site two weeks ago. So perhaps you can just give an estimate or update where they are at?

Yes, Alex, they are about where they had been. You're right. Originally, they had put back to 60% of capacity; now they are running about 75% of capacity.

They are running the plant on a three-week-on, one-week-off basis, and running the mine on a four-week basis. So that is about what they are doing right now.

Haven't seen anything on a forecast from them. And I would expect that that is about where they're going to operate. I don't think the metal prices have changed enough to have them changing that as of right now.

Okay, great. Thank you.

Thanks, Alex.

Botir Sharipov, HSBC.

A couple of questions, one being on Mt. Milligan.

I believe the plan to concentrate grades were 54 grams per ton for the first six years and 45 grams per ton over the life of the mine. And we've seen 33 grams per ton right now. Is this something we should get used to? Or the concentrate grades are expected to come up a little bit?

So, Botir, it's probably way too early to tell. I wouldn't worry so much about that 33 grams per ton at this point.

This time in the startup, you've got a lot of unbalancing in the circuit --starts and stops and upset flotation tanks and things like that when start and stops happen. So once you get into steady state, I think we will get a much better feel for the overall recovery. And of course, the overall recovery translates into your point about the grade of the gold and the cons.

But we really don't see any issues that we are concerned about right now. At the present time, it is a matter focusing on the throughput and then continuing to balance the recovery and the flotation circuit accordingly. But the flotation circuit seems to be quite robust.

Okay. My other question is, obviously, on royalty acquisition, with the -- you increasing your royalty at Barrick and acquiring a new one.

Does this imply a bit of a shift in your strategy of increasing your royalties at existing deposits, existing assets and partner, so to speak, versus going out and acquiring a brand new royalty that could make an impact down the road?

No, it doesn't account for a shift, Botir; and I don't think I've ever seen a royalty in the state of Nevada that I didn't like. (laughter) And so we will continue to pick those up when they are available. And we just look for those opportunities whenever they present themselves.

But our bigger -- we can't grow the Company on smaller deals like that. We are going to have to continue look for ways to provide financing, which really are material to our business going forward. And so we are very active in that side of the business as well.

Okay. Thank you. That's it for me.

Garrett Nelson, BB&T Capital Markets.

Has the Board given any thought to a more sizable dividend increase, a special dividend, or share repurchases? Or does the Company want to keep their strong liquidity position for opportunities that might present themselves?

Garrett, we look at that at the Board level at least once a year, and we think about that quite seriously. And to date, what we have been able to do is to provide more growth -- more return to our shareholders via growth.

And we still think this is a great opportunity for us to layer on additional pieces of business. And that is the very reason why we did build the balance sheet the way we built it, so that we would be strong in this particular position.

I would say this, though; if we don't find quality assets over a period of time, then there are all kinds of options open to us. Because it is very, very efficient business model, and it can be a very powerful return -- a yield return, if we decided to turn it into that position.

But I think that would signal that we just cannot find good quality assets out there to invest our money in, and we do think that there is a great opportunity in front of us now to continue to build the portfolio. So in general, not at this time, but we always are looking at the best ways to provide return to our shareholders.

Okay, and then I also wanted to confirm a number. Did you say your future commitments total $59 million?

$57 million. Let me break that apart for you.

$50 million is for on schedule commitments at Tulsequah Chief in British Columbia. That's British Columbia, isn't it? Yes, okay.

And the other is the $7 million that we owe over the next seven years on our new acquisition in Nevada. We paid $1 million of the $8 million.

Okay. The $50 million, will that hit in the final two quarters of your fiscal 2014? Or is that beyond this year?

So our business deal there is that we aren't required to put in the other $50 million until Chieftain Metals has all their permits in place, which I think they do. They have to have all of the rest of the financing in place to build the project, which they don't at this point.

And then they have to have a construction decision, I think, from their Board of Directors. And that hasn't, to my knowledge, occurred either.

So at this point, they are looking for additional financing to put the project forward, as well as optimizing the project. So we haven't -- they haven't met all the conditions for us to have to begin funding.

So we can't give you specific guidance when that might occur, but the point that we are making on that discussion item -- prepared discussion item -- is that we have a powerful amount of liquidity available in front of us and very little requirements on our money at this point.

Sure. Well, thanks very much.

John Tumazos, John Tumazos Very Independent Research.

I want to compliment the Company on being debt-free, having surplus cash, and doing deals. And I wanted to encourage you, if necessary, to omit the dividend in order to buy more royalties.

There have been M&A transactions where gold companies have been taken under rather than taken over, and it is a spectacular market to go out and acquire new streams, new royalties, et cetera. And I don't think at all you should be too worried about raising dividends and buying back stock.

I'm thinking of Wits Gold being bought out for under $50 million with 150 million or 170 million ounce resource in South Africa, High Desert Gold getting bought out for $7 million in Nevada, and a copper company and a gold company in production that were just bought out for the debt or less than 100 cents on the dollar of the debt. So go out and go hunting.

John, thank you as always for your perspective. And that is very consistent with where we are at today as a management team. Thanks for the comments.

Thank you.

Adam Graf, Cowen and Company.

This is a question maybe for Tony or Stefan.

Senior management at Barrick have recently talked about using $1,100 gold for their end-of-year 2013 reserve calculations, and suggested that their mine plans might also change based on lower gold price assumptions and higher cutoff grades. And based on that, how do you guys look at your book values and do your impairment tests?

So let me just speak generally, Stefan, for a moment to Adam's question; and then you can actually get into the details.

Sure.

But, Adam, the first thing that I'd like to make a point of is that our quality of our book is very, very good. We have a slide in our most recent presentation materials that talks about cash margins; and so we think we are very, very well-positioned.

Second, I think there will be more companies looking at the most economical way to bring these projects forward. Not only forward, but also the ones that are in production to maximize the margin. That is a clear sense of urgency that all of the operators have.

And so the kind of movement that we saw at Penasquito, where Gold Corp took a look at the economics at a lower gold price environment and reduced the mine life, reduced the reserves, but bumped the near-term grade in the margin. That does the same thing for us; it really does bump our near-term production as well.

So we can have a real benefit in the near term from that kind of item. And then of course, I'm not particularly worried about those resources that have fallen off because they are still there, and they are good option value if the gold price moves back a couple hundred dollars.

So those are just some general comments, that we would expect more of that as the producers start to take a good close look at this. And then, of course, we will look at our DD&A when the new reserves come out. We have very little, if any, of those in yet at the present time.

But, Stefan, maybe you can add just how we do our DD&A?

Yes. Adam, there are two components.

So to the extent that reserves are updated or changed, as I noted, we will update our DD&A rates. And our DD&A rates are based just on what's an improvement in probable reserves at each of the properties, our carrying value divided by those proved and probable reserves that would be payable to us.

So we could expect changes in our DD&A rates as we go forward, and we will update that in the third quarter.

To the extent -- we do look at our portfolio for impairment. We do it every quarter, and we will certainly do it to the extent there are mine plan or reserve changes in the third quarter.

As Tony mentioned, we have a very high-quality portfolio; and carrying costs are relatively low. And when we look at an impairment calculation, we also get to consider future cash flows for many resources, as well as the reserves. And we do that on an un-discounted basis.

So from that perspective, I have a high confidence in our portfolio from an impairment perspective. But it is something that we watch closely and we will continue to monitor as we go forward.

And so I guess the greatest impact would be, perhaps, of a significant shortening of the mine life that offset any benefit to near-term production? Is that what I'm hearing?

I would think so, but I don't know if we would get one without the other. I would expect that as they increase the quality of the resource or the reserve that you would also see higher grades. Of course, it might take a little bit time to mine through that new mine. But generally, I think you are right on the mark.

And then generally, because most of your assets were acquired many years ago, the carrying -- the book values are still low versus current NAV that you are not so worried?

Adam, for our core portfolio, our cornerstone properties, we have very low carrying costs relative to the current market price. Certainly, we have other assets that were acquired at somewhat higher prices, but none that are significant, really, to our portfolio as a whole. We continue to monitor that each quarter.

And we just can't give much more guidance than that at this time, Adam. We will just have to see how those reserves play out, but it is a prudent thing to be monitoring over the next three months.

All right. Thank you very much, guys.

This concludes our question and answer session. I would like to turn the conference back over to Tony Jensen for any closing remarks.

Thank you very much, everybody, for joining us today. And we very much appreciate your interest and continued support of Royal Gold, and we will look forward to updating you on any progress on our next conference call. Thanks very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.