Royal Gold Inc (RGLD) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to the Royal Gold Fiscal 2015 First Quarter Earnings Conference Call. (Operator instructions) Please note, this event is being recorded. I would now like to turn the conference over to Karli Anderson, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's Fiscal First Quarter 2015 results. This event is being webcast live and you will be able to access a replay of this call at 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; and Bruce Kirchoff, Vice President, General Counsel, and Secretary.

Tony will open with an overview of the quarter followed by Bill Zisch with an operational review, and then Bill Heissenbuttel will provide a corporate development update. 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.

Today's presentation refers to indicated and inferred resources at Contango Ore's Tetlin exploration project in Alaska. We caution investors that these terms do not represent reserves, and discussion of them is not permitted in SEC filings. In addition, inferred resources have a great amount of uncertainty as to their existence and their ability to be mined economically and legally.

Please review our cautionary language on slides 2 and 11.

Now, I will turn the call over to Tony.

Good morning, and thank you for joining us today. We're using some slides to guide our discussion, and I'll begin on slide 4.

We had another solid performance from our portfolio of assets that translate into strong financials. In the first quarter, net income was up 23% from a year ago, despite a 3% decline in gold price. This was largely driven by Mt. Milligan production, as we recorded the fourth straight quarter of higher revenue from that project.

Adjusted EBITDA was $0.86 per share, or 81% of revenue, and we paid out $13.7 million in dividends to our shareholders.

Our Q1 revenue was $69 million, an increase of 22% compared to the prior year quarter. Strong performance at Mr. Milligan, Penasquito and Cortez was partially offset by lower production at Andacollo, which was expected, and at Voisey's Bay, which was impacted by lower nickel grades and planned maintenance carried out in July.

Bill Zisch will discuss our operating results momentarily.

On the business development front, we added the Tetlin exploration project in Tok, Alaska, to our portfolio, in the form of a unique structure which included two royalties and entry into a master agreement to advance exploration through a joint venture.

The royalty purchases were completed at the end of September, and we expect the joint venture to close after our counterparties' shareholder approval.

And last week, we entered into a gold stream transaction with Euromax Resources for 25% of the gold at the Ilovitza gold/copper project in Macedonia. This was another unique structure where we are staging our investment commensurate with the risk of an early stage, but very prospective, project.

These two transactions give us options on attractive assets at low up-front costs, leaving our balance sheet robust to pursue additional opportunities for growth. Bill Heissenbuttel will tell you more about these two deals towards the end of our call.

Turning to slide 5, you'll see that production from Mt. Milligan continues to increase steadily. Gold production to us are based on a combination of provisional and final payments for the first 12 concentrate shipments, and only on final settlements thereafter. In the beginning of October, Mt. Milligan completed its 10th shipment, so we will soon be transitioning entirely to final settlements.

As we make that transition, I thought it'd be helpful to graph on slide 5 the production reported by Thompson Creek, which is the blue line, versus our, Royal Gold's share of production which is the red line, and the amount of that gold that we've actually received to date, and that's the green line.

There are about 39,000 ounces of gold between the red and green lines at September 30, an increase of about 18,000 ounces from the prior quarter. The difference between those two lines represents work-in-progress inventory, gold in transit, and gold pending settlement.

As with any operation, gold in the system will continue to build as production increases. However, we expect our sales to increase steadily as production increases and as we transition into deliveries based only on final settlements.

We sold 15,300 ounces of gold from Mt. Milligan in the first quarter, and retained 6,100 ounces of inventory on the balance sheet over quarter end. Operationally, we continue to see progress towards increased production. Calendar year-to-date production has been 137,000 ounces of gold, putting Mt. Milligan well on their way to achieving their annual guidance of 185,000 to 195,000 ounces.

Thompson Creek continues to target 80% of mill throughput design capacity by year-end. They are making good progress towards that goal, averaging mill throughput of about 40,500 tonnes per day in the September quarter.

On slide 6, you will see some new construction photos of Rubicon Minerals' Phoenix project in Red Lake, Ontario. In early September, Rubicon reported that project construction was over half complete, with approximately CAD130 million required to complete the build. Specifically, they noted that the mill construction was on schedule and that 24% of the lateral and vertical development was complete, which was slightly below plan. However, they continue to project an on-budget and on-schedule startup of production in mid-2015.

We are encouraged by the results of the 38,000 meter infill drilling program, which is slightly over half complete. Rubicon noted that the drilling has confirmed continuity and grade in the F2 deposit, and as you know, that was critically important for us, and they also encountered potential economic intercepts outside the currently-planned mine design.

Expiration upside at Phoenix was a big part of our investment thesis, and we are obviously pleased to see these initial results. Now, I'll turn the call over to Bill Zisch.

Thank you, Tony. On slide 7 you'll see a waterfall chart that summarizes notable changes in production and revenues in the September quarter versus the June quarter. Today, we are reporting higher production and revenue from Mt. Milligan, Cortez, Andacollo, and Robinson, offset by lower production and revenue at Penasquito, Holt and Mulatos.

At Voisey's Bay, we saw lower nickel production as a result of lower grades during the quarter, and mill downtime in July. Currently, Vale is commissioning its new Long Harbour Processing Plant, and they intend to begin introducing nickel concentrates from Voisey's Bay in the coming quarters. As I stated last quarter, Vale will transition the processing of Voisey's Bay nickel concentrates from their Sudbury and Thompson smelters to Long Harbour. We have discussed with Vale how the royalty will be calculated going forward. If we cannot reach agreement on the proper calculation, we will pursue all legal remedies to enforce the terms of our royalty through this litigation.

Turning to slide 8, we provided a comparison of the operator's full-year guidance versus actual production to date. You'll see that based on production through September 30, Andacollo, Mt. Milligan and Penasquito appear well on their way to achieving their full-year guidance.

At Cortez, we understand that year-to-date reported production in the areas of our interest have been slower than expected due to a delay in permitting the area 30 leach pad. We have been told that Barrick received these permissions in September and expects higher production in December. That said, they will still have a long way to go to meet their full-year volume guidance on the areas of our interest, and we anticipate that some of that production may be realized in the subsequent quarter.

At Mulatos, Alamos reported sharply lower recoveries in the quarter as they experienced a severe rainy season, culminating with record rainfall in September. This resulted in dilution of the heat leach solutions and delayed the recovery of a significant portion of those ounces. Alamos reported that they expect to achieve the lower end of their full-year production guidance of 150,000 ounces in calendar 2014 as they expect to realize the benefit of those stacked ounces, and as they begin ramping up higher grade mill production from San Carlos.

At Holt, tonnage milled and the grade processed were both slightly down during the current quarter.

Moving on to slide 9, we have updated a chart showing the cost, the cash operating cost of our properties for the first half of 2014. The width of each bench corresponds to the amount of volume from that operating property. You'll see that our operators reported average gross margins of 57%, meaning that the majority of our properties continue to reflect healthy unit economics.

I will now turn the call over to Bill Heissenbuttel to discuss corporate development.

Thanks, Bill. On to slide 10. Last week, we announced a $175 million gold stream transaction with Euromax Resources, which will be used to finance completion of the definitive feasibility study for the Ilovitza project in Macedonia, and also provide a strong basis for the ultimate financing of project construction.

The transaction involves two separate $7.5-million investments to be made over the course of the next year, and a $160 million option for Royal Gold to participate in the project development funding. Both the second payment and the construction financing are subject to conditions precedent that include among other things, our satisfaction with the results of the feasibility study work, and the timeliness and likelihood of a production decision.

The project has a number of attributes to which we are attracted -- the lower grade ore body benefits from a low strip ratio, straight-forward metallurgy, attractive cost inputs, European infrastructure, and proximity to a potential smelter-offtaker.

We found Macedonia to be very supportive of foreign investment, and well aware of the legal and regulatory development necessary to attract that investment and support its candidacy for inclusion in the EU.

Finally, as is the case with all projects, we are pleased to support the management team, a group that achieved good success at European gold fields and comes with obvious experience in the Balkan region.

Slide 11 shows an overview of the Tetlin exploration property in Alaska. In a move that is reminiscent of the original focus of Royal Gold, we also announced an agreement with Contango Ore that provides us with an incremental investment option on an attractive exploration opportunity. The Tetlin project has a number of unique attributes including near-surface mineralization at an attractive grade, numerous other untested targets on the property, good access to road and port infrastructure in Alaska, and the support of local community. We will make an initial $5 million investment and have the option to invest an additional $25 million for which we can earn a progressively-higher ownership interest in the project of up to 40%.

Now, while we will direct the joint venture activities, we will use the current drilling contractor for much of this work, and this will allow us to remain focused on our core business. Our joint venture agreement is structured to facilitate an exit when it comes time for project development, construction, and operation to occur.

The transaction remains subject to Contango Ore shareholder approval, although we have the support of 39% of their shareholders at this time. In addition to the joint venture, and in keeping with our core focus, we purchased two royalties on the project for $6 million, and we would obviously retain those interests even if our joint venture ownership changes.

Turning to slide 12, you will see that in light of the two recent deals we have completed, we still have approximately $900 million in uncommitted liquidity to invest. We had nearly $1.2 billion of liquidity as of September 30, a figure which includes our working capital and undrawn credit line. If we then deduct approximately $64 million in post-quarter-end funding advances and commitments at Phoenix, Goldrush, and the initial investments at Tetlin and Ilovitza, we have $1.1 billion in available liquidity. Then deducting another $200 million in conditional commitments to Tulsequah Chief, Ilovitza and Tetlin, we end with a pro forma liquidity balance of about $900 million. However, this figure does not consider the fact that these investments will be made over time, and might be financed by our ongoing cash flow from operations.

We believe we have one of the strongest uncommitted balance sheets in the royalty streaming business, and it positions us favorably to pursue new opportunities. With that, I'll turn the call back over to Tony.

Thank you, Bill. We have been very selective with regard to expiration properties, but we are attracted to the Tetlin project due to its grade, location and easy access. And I don't know if you saw on that slide, because it was a bit small, but that property really sits at the intersection of Highway 1 and Highway 2 in Alaska, right next to the town of Tok. So, it's very hard to find better infrastructure in that state or any state.

The other attributes that attracted us to the project include the rapid exploration success experience to date, the wealth of exploration targets, and the expiration infrastructure that Bill spoke of is already in place.

Our investment is properly staged and will be based on incremental success. We are honored and welcome the opportunity to work with the Tetlin community and Contango Ore on this exciting project.

Likewise, our investment in Ilovitza is properly-staged, and will be based on success. Interestingly, I think this project is similar to Mt. Milligan in some respects, like a very low strip ratio, and a [tenor] of copper and gold. But, the Ilovitza reserve is about half the size at this point, just to put that into perspective.

An early-stage advantage of Ilovitza is that the recoveries appear higher, so the metal values per tonne are expected to be a bit greater. And here, too, we are pleased to be a strategic partner with Euromax on this project.

As you can see, we remain opportunistic, and are continually looking for ways to increase margin in our business, and find new and favorable entry points. We will pursue several strategies that allow us to grow our business in an accretive and efficient manner, seeking to avoid undue risk or complication, and we will always make an investment that allows us to exit to or promotes our core royalty and streaming business.

Let me just conclude on a personal note. With mixed emotions, we will soon see Bill Zisch pursue other opportunities. While his presence and contribution at Royal Gold will be missed, it is always great to see our people do well, and we are pleased to see him continue to advance his career. Bill will be taking on the reins at Midway Gold as CEO, and Bill, we wish you well. You also can be assured that we'll be coming to talk to you about the merits of royalty financing very soon.

Operator, with that we'll conclude our prepared remarks, and be happy to speak to any questions if there are some.

(Operator instructions) The first question comes from Andrew Quail of Goldman Sachs. Please go ahead.

Good morning, Tony and team, or it's afternoon on the East Coast. Just wanted to talk about Mt. Milligan. When we were there, we talked about sort of initiatives to try to get the throughput up to the nameplate capacity. Can you guys just go through any sort of developments, there?

Bill, do you want to take that? Bill Zisch, that is?

Yes Andrew, thanks for the question. They have continued to work on some of the items that were talked about back when we were on site, which includes the -- they have run some tests on a pre-crusher. They're assessing those results to determine whether it does make sense, and if it makes sense, how or what size, perhaps. And I know they're continuing to work on their blasting and fragmentation, as well as de-bottlenecking and kind of optimizing their crushing circuits.

Just to add to that, Andrew, I think what Thompson Creek is advising the market is that they intend to know whether they desire to put in a secondary crusher by the end of this year, so.

Yes, exactly, okay.

Be patient just a bit more, we'll get some more color on that shortly.

And obviously you guys are well-placed there, with not having to contribute any capital. If there was sort of a shortfall, if something needed to be done there and you guys could add some financing to that project if it was needed, would you be evaluating that to take some more ounces out of there?

Well you know Andrew, a couple things come to mind there. Appreciate the question, it gives me a chance to talk about the cash cost profile of the project. It's coming in, I think they're guiding somewhere between $1.00 and $1.50 per pound of copper for this year, and of course the project's not yet up to full production, and that includes after our take on the project. So, we're very, very pleased to see that it has a very robust cash cost profile, and that's part of the reason why I kind of contrast it to Ilovitza. We're very familiar with that, and it gives us some confidence on entering into a similar-type deposit.

With regard to Mt. Milligan alone, I think the number that Mt. Milligan -- or sorry, Thompson Creek ended at the June quarter was about $260 million on their balance sheet for cash, so I think they're in a reasonably good position to do things themselves. And obviously, we want to continue to protect our key asset there, but I really don't anticipate the need to do something there. And of course, if that opportunity came up we'd have to look and see if adding additional concentration was appropriate.

I'm not answering your question directly, but I'm hopefully giving you enough of a feel as to what our thinking process is.

No, that's fair, Tony. And my final question's more of a high level one for you, mate. I mean, look, obviously the sell-off and it's pretty brutal today, but what we've seen recently with the stronger US dollar, you guys always have some very large cap partners so it doesn't -- it's not as relevant for other guys in the space, and these mines look low on the cost curve. How much of your portfolio can you tell us you sort of would be at risk if we did see lower gold prices, under sort of $1,200? You know, that -- I suppose it'd be of the other, it'd be of the other segment?

Yes, Andrew, let me turn you back. I don't know who has control of the slides, but if you look back at slide 9, you can get a really good feel that we've got a very high quality, high-margin business, and this is the -- as Bill explained, this is the margin, the cast cost margin for the individual operators. So, I really don't think we have a tremendous amount of properties that would be significantly in stress, but for those of you that do have access to looking at slide 9, you can see that those properties way out on the right hand side would be the ones that we'd be most concerned about, and they just don't have a significant amount of volume contribution to us.

So, that reads at -- okay, so the average is 57, so say under 10%.

Yes. There's very few properties that are under a 40% margin on that slide.

Okay.

You with me?

Yes, no, I'm just looking at the slide now. Okay, that's all I had, guys. Thanks very much.

Thank you.

The next question comes from Cosmos Chiu, of CIBC. Please go ahead.

Morning, Cosmos.

Thanks. Hi, hi Tony and team. Thanks for taking the call, and congrats on a good quarter. I've got a few questions, here. Maybe first off on Voisey's Bay, I'm not sure how much more you can tell us in terms of the negotiations that are currently going on, but if I remember correctly back in 2009, now this is before Royal Gold bought International Royalty Corp., there seemed to have been a situation back then as well. Is the nature of what's happening today similar to what happened back then in 2009? I seem to recall that back in 2009 it was a matter of deduction of income taxes, and also transfer pricing. How would you compare what's happening today to what happened back in 2009?

Cosmos, you have a very good memory, and let me just be clear that there is ongoing litigation with Vale right now, and we did -- you're correct, we inherited that when we purchased International Royalties. But we've looked at that, and we felt that it had merit. We continue to pursue that litigation. It has two claims on it today -- one is a transfer pricing issue, and the other is deduction of taxes that we don't think is appropriate. So, that's in front of the -- that's in the process right now.

The item that we're talking about with regard to Long Harbour is something new. It's something that we're concerned about, because as you know, the concentrate heretofore has been processed over in Sudbury, and now they're going to be processing in-province at Long Harbour. And you know, there's always a conversation that needs to be had about what appropriate deductions are from a net smelt to return royalty.

And so, that's the nature of what Bill Zisch was alluding to in his prepared remarks. We have been in conversation with Vale for some time on this subject, and we have not been able to come to an agreement on what we think is a fair treatment. And we'll continue to pursue that, but at the same time we're going to pursue our legal remedies as well. That's about all I can say at this point, that's the nature of where we're at.

Okay great, thanks. And then, maybe an easier question here -- in terms of taxes, maybe a question for Stefan. We saw that the taxes were 17.3%, and you mention in the MDNA that it was, resulted from a one-time Chilean tax benefit. So, should we expect tax rates to increase next quarter, and on an ongoing basis as well, back to quote-unquote, a more normal level, Stefan?

Sure Cosmos, thanks for the question. And you know, without that one-time Chilean item, our tax rate would have been 28% for the quarter. I think we had initially guided for the year somewhere between 28% and 32%, so we were coming in at the lower end of our guidance if we normalized that. So, as I look at the rest of the year, we will have higher tax rates and I would expect our full year now to come in somewhere between 26% and 30%.

Okay great, and then maybe one more question, here. In terms of Canadian Malartic, I saw that you know, not a huge decrease but it came down a bit quarter-over-quarter in terms of revenue. Is that just a function of lower production at Canadian Malartic, or is that production moving away from your royalty grounds?

Cosmos, Bill Zisch, here. Thanks for the question. With regard to Malartic, actually that decrease is somewhat what they had anticipated in their plan, so versus the preceding quarter we're down kind of as expected, as planned, as they moved into some lower-grade material. They also did have an outage during the quarter, about five-day maintenance outage again, I believe that was planned. Their throughput was up, their fragmentation was up, but it's lower grade basically that impacted the quarter.

Okay, because I seem to recall that Royal Gold doesn't -- Royal Gold's royalty doesn't encompass the entire property, am I correct?

Correct.

Yes, but that's not the impact, that wasn't the reason why it decreased.

Right. Right.

Okay. Great, that's all I have. And, congrats Bill, and I'm sure we'll talk in the future as well.

Thanks, Cosmos.

Thanks, Cosmos.

(Operator instructions) The next question is from Tanya Jakusconek of Scotiabank, please go ahead.

Great, good morning, everybody.

Good morning, Tanya.

Just again, congratulations Bill, on your new role.

Thanks, Tanya.

You're welcome. I have a couple of questions. The first one has got to do with Andacollo, and we're just trying to get a better handle on what the gold production's going to look like from Andacollo over the next few years. And we understand that Teck's increased the throughput. We're just wondering, next year, I think production is supposed to be higher. And then how long do we stay at this higher level before grades start to come off? And I know when you first acquired it, I think in 2009 we had talked about this 50,000 ounce level, and then it sort of falling off in the next few years. So, that's my first question.

Yes, Tanya, you've got a very good memory. Andacollo was front-end loaded with regard to grade on gold, and we're really through that higher-grade material. We had last year significantly higher production, as you well know, and then we did this year and we expected this to be a little bit lower as planned, as they mine through their current stage. We're now very close, maybe a little bit below the average reserve grade for the project. Next year we'd expect that to increase slightly but not significantly.

I think the best guidance that we could give you is that reserve grade, maybe a little bit higher than reserve grade, was what normal miners would try to do. But I think that's more applicable going forward, rather than any large return back to where we were a year ago.

Okay, all right. And then -- thank you for that -- just on Macedonia. Sorry, I'm not really up to speed with the mining laws there, and the code and the permitting, so maybe someone can just review that with us? What other gold operations are there, and just some of the processes that we should look forward to?

This is Bill, I'll handle that one. There are a couple of existing operations, they're a bit older, in the country. You certainly would not classify the country as having a long mining culture. They do fully understand -- they actually have a very easy permitting process, and in fact, Euromax currently has a permit that would allow them to proceed, but Euromax wants to take a step back and do work in accordance with all international standards. So, it's a country that is very, very welcoming of foreign investment, very supportive of this project. So, we're very pleased with what we saw.

So is there a mining law in the country, like are there royalties? Just to understand what, exactly?

Yes, I mean, there is a permitting process, there is a -- laws with regard to the ownership of concessions, so it's -- at this point, it's well-developed to allow the project to proceed.

All right. Okay, thank you.

Tanya, to the extent you have more detailed questions, Karli would be happy -- Karli Anderson would be happy to entertain those, so make sure we answer your questions appropriately.

Yes, I just have never had a project permitted there before, and so I'm just trying to see and understand some of the challenges that -- and some of the hurdles that we'd have to go through on permitting. You know, each country has its own issues.

They do. Here, we were very, very impressed with the -- as Bill said, the willingness for the government to attract foreign investment, and I think the permitting issues here are very much manageable, and I just want to make a point and emphasize that we would stress that all of this development be done to international standards and so we'll continue to make that point with Euromax, and I know that they're thinking the same way.

Okay. Thank you.

Thanks, Tanya.

That is all the time we have. This concludes our question-and-answer session. I would like to turn the conference back over to Tony Jensen for any closing remarks.

Well thank you, operator, and thank you all for joining us today. We appreciate the opportunity to update you and your interest and continued support of Royal Gold, and we look forward to talking with you again on the next quarterly call. Bye for now.

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