Royal Gold Inc (RGLD) 2016 Q1 法說會逐字稿

Good day, and welcome to the Royal Gold FY16 first-quarter conference call and webcast. All participants will be in listen-only mode (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Ms. Karli Anderson, Vice President of Investor Relations. Ms. Anderson, the floor is yours, ma'am.

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's first quarter FY16 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 and Operations, and Bruce Kirchhoff, Vice President, General Counsel, and Secretary.

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

After management completes their opening remarks, we'll 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'll turn the call over to Tony.

Good morning, and thank you for taking time to join us. On our last earnings call in August, we discussed our efforts to opportunistically invest in our business amid weakening metal prices.

Speaking to you just three months later, we've now closed all of those transactions and successfully integrated $1.4 billion in new business. These new investments, coupled with our existing portfolio are expected to result in industry-leading growth.

I'll begin on slide 4. As traditional debt and equity became scarcer in our industry, we seized the opportunity to grow and enhance our portfolio. Our first-quarter results reflect those efforts.

Revenue increased 7%, despite a 12% lower gold price and a buildup of gold inventory. As strong volume contributions from Mount Milligan and Penasquito were combined with new business from Golden Star and Andacollo.

We closed four new streaming transactions in the most active quarter in Royal Gold's history, including Golden Star, Andacollo, Rainy River, and Pueblo Viejo. All of those transactions have been funded with existing liquidity, which is consistent with our philosophy to maximize returns per share.

We now have over $3 billion in royalty and streaming interest on the balance sheet, up roughly 50% from a year ago.

Pro forma we estimate total precious metal reserves at 6.7 million net gold equivalent ounces, inclusive of new business, resulting in a carrying value of only $450 per ounce. This does not include any resource reserve conversion, which plays a key role in our investment theses and provides optionality for our shareholders.

Bill will speak to you in a moment about our operating results, which include some of the new transactions, then Stefan will discuss our overall financial results later on the call, including a discussion on how our earnings per share were impacted in the first quarter by a one-time tax expense we incurred on the sale of the Andacollo royalty.

On slide 5, we've updated the status of our new streaming agreements. All four transactions were closed in the September quarter, and three of the four involved currently operating mines.

Two of them, Golden Star and Andacollo, contributed to the September quarterly results, with Pueblo Viejo set to begin deliveries to Royal Gold in December, followed by Rainy River in 2017.

Collectively, these four transactions are expected to add approximately 125,000 net gold equivalent ounces per year, once all four are at full production.

You can see in slide 6, that the new business brings a step change in growth and diversity. It's notable that in the first quarter streams contributed 51% of our revenue outpacing royalty revenue for the first time.

As you can see from the pie chart on the right, our royalty business includes some of the world's highest quality, most prospective mines, such as Penasquito and Cortez.

The royalty portfolio will always be important to our Company and still comprises the bulk of the nearly 40 producing properties.

However, the catalyst for growth, future growth and diversity will likely come from our streaming business.

Turning to slide 7, we show in the new stream investments and context of Royal Gold's investment history. The bars represent the investments we made compared to the revenue generated to day. And the gold triangles represent the remaining mine lives.

I'd like to draw your attention to the Andacollo royalty on the left side of the chart. You'll see that Royal Gold paid approximately $270 million for the royalty in 2009. And about that same amount of royalty revenue was received by Royal gold from 2009 through July 2015.

Our sale of that interest back to Teck this summer generated additional gross proceeds of $345 million that were taxable both in the United States and Chile. And that discrete tax expense was reflected in our quarterly results.

In review, our Andacollo royalty investment yielded a 17% after-tax internal rate of return.

At the right of the chart, you'll see our investments in the streaming, new streaming transactions, including the Andacollo stream.

As I mentioned earlier, the potential for future resource conversion is a key component of our investment thesis. We will always seek to give our shareholders gold price and reserve optionality in our investments.

This chart shows that strategy has worked well for us in the past and supports the adage, good mines get better.

I'll now turn the call over to Bill to discuss our operating results.

Thanks Tony. On slide 8, we've summarized notable operating updates at Mount Milligan, Penasquito, and Rubicon.

At Mount Milligan, Thompson Creek reported September quarterly production of nearly 54,000 ounces of gold, a throughput of approximately 44,000 tonnes per day. This is about 74% of design capacity.

Thompson Creek announced plans to install a second SAG discharge screen deck in October, in an effort to enhance future throughput rates.

Gold recoveries averaged 67%, slightly lower than the June quarter. We received deliveries of gold within five months of shipment from Mount Milligan, so our volume from the project resembles their production from two quarters prior.

At Penasquito, Goldcorp reported that the mine remains on track for a record year due to positive model reconciliation in the heart of the deposit. Goldcorp expects to exceed the production guidance of between 700,000 and 750,000 ounces in CY15, but caution that gold rates are expected to continue to moderate into the fourth calendar quarter as they move into a new phase of the ore body.

Goldcorp also noted that the Metallurgical Enhancement Project feasibility study remains on track for completion in early 2016.

At the Phoenix gold project, Rubicon Mineral has reported that it was moving to suspend underground activities while it enhances its geological model and develops a project implementation plan which they expect to complete in the second calendar quarter of 2016.

The mill is currently operating, and Rubicon reported that it has a stockpile of approximately 11,000 tonnes of mineralized material at a grade of approximately four grams per tonne that they expect to process in November 2015. We look forward to the results of the plan.

Turning to slide 9, we have provided a quarterly waterfall comparison of our key producing properties to the prior quarter and the same quarterly period last year. There were strong contributions from Mount Milligan and Penasquito versus the year-ago quarter.

We have been guiding the lower volume at our area of interest to Cortez in the second half of 2015, and the results were in line with that expectation.

Holt, Mulatos, Malartic, and Robinson all delivered higher volume versus the same period both one quarter and one year ago, while some of our smaller royalties in the other category, such as Leeville, [Taparco,] Bald Mountain, and Gold Hill, reported lower production over the prior quarter end year.

Slide 10 illustrates the producers' guidance where it is publicly available for CY15 production versus actuals year to date. You'll see that Cortez and Penasquito have nearly achieved their entire guidance for 2015 production, subject to Royal Gold's interest, while Mount Milligan, Andacollo, Golden Star, and Pueblo Viejo have demonstrated a steady volume trend throughout the year.

Looking forward to the December quarter, expect to receive our first deliveries from Pueblo Viejo on December 15th. We expect that delivery to include approximately 8,900 ounces related to July and August production, in addition to delivery of gold from the period including September, October, and November.

Royal gold sells the physical gold within several days or weeks of receipt. So we expect the first Pueblo Viejo delivery volume to be spread across the next two quarters.

I'll now turn the call over to Stefan.

Thanks, Bill. On to slide 11. September quarter was somewhat noisy as we closed four streaming transactions, as well as the sale of the Andacollo royalty, while recording record volume and maintaining our dividend.

I'll walk you through the most salient points. First, revenue increased 7% over the year-ago quarter, despite a 12% decrease in the gold price and 117% increase in gold inventory driven by the second quarter in a row of record volume.

For the first time in Royal Gold history, stream revenue exceeded royalty revenue with streams contributing 51% compared with 49% from royalties.

As in any business, as new production lines commence, inventory builds. We held about 11,500 ounces of physical gold on our balance sheet at quarter end, versus only 5,300 ounces at the end of the June quarter.

In addition to the physical gold held at the end of September, we accrued 8,900 ounces of gold receivable associated with the Pueblo Viejo production for July and August. Combined with the physical gold, total gold inventory was just over 20,000 ounces.

As you know, we don't record revenue until the gold is actually sold, and, prior to that point, we hold it as an asset valued at cost. We currently expect to sell the 8,900 ounces related to July and August Pueblo Viejo production in the December quarter.

And further, we expect inventory to build significantly during the December quarter to around 25,000 ounces.

As Tony discussed in his opening remarks, we sold our Andacollo royalty to Teck in the September quarter for gross proceeds of approximately $345 million. When we announced the transaction in July, we noted that the sale was taxable in the U.S. and Chile. We incurred a one-time tax expense of $56 million, or $0.86 per share, related to the sale and restructuring of her Chilean business.

There is not a corresponding gain recorded for financial reporting purposes under U.S. GAAP.

Cash taxes associated with the sale were approximately $48 million.

Absent this one-time tax expense, we would have reported EPS of approximately $0.17 per share, operating cash flow of approximately $50 million, and an effective tax rate of about 22%.

Adjusted EBITDA was $52.5 million for the quarter, or 71% of revenue. Adjusted EBITDA as a percentage of revenue was lower in the first quarter relative to a year ago due to the inclusion of ongoing stream payments to Mount Milligan, Andacollo, and Golden Star, which are recorded as cost of sales, and totaled $11.5 million during the first quarter.

Adjusted EBITDA was also reduced by $3.2 million of exploration expenses associated with the Peak Gold joint venture. We expect exploration expenses to decline in our second and third fiscal quarters, before increasing again in the June quarter.

G&A expenses increased during the quarter to $9.5 million, from $7.1 million in the prior-year quarter, primarily driven by higher non-cash compensation costs.

We paid dividends of $14.3 million during the September quarter, continuing our 14th straight year of paying an increasing dividend.

Looking forward to the rest of FY16, we expect DD&A to be in the range of $475 to $525 per GEO, and our effective tax rate to be between 20% and 25% for the next three quarters, assuming consistent metal prices and foreign exchange rates for the remainder of the fiscal year.

You'll see on slide 12 that our available liquidity is about $425 million as of September 30. We have funded $1.3 billion in transactions already from our existing liquidity, and we have less than $75 million in remaining commitments for the rest of FY16.

We expect to experience growing operating cash flow as FY16 progresses, with strong contributions from our recently completed streaming transactions.

Tony, I'll turn the call back over to you.

Thanks, Stefan. Now to wrap up on slide 13 with a few closing thoughts.

First, looking beyond the accounting and tax treatment related to the Andacollo royalty sale, we had a very solid quarter financially and operationally and expanded our business significantly.

The top line was impacted by gold inventory build as our business expands. But that value is on the balance sheet and will be converted to cash according to our sales policy.

Second, the stream at Pueblo Viejo will further enhance the quality of our portfolio beginning in the December quarter. Pueblo Viejo is one of the largest operating gold assets in the industry with an all-in sustaining cost of less than $700 per ounce and significant resource [to reserve] potential.

Stefan has outlined guidance regarding the expected sale, timing of our sale, and we look forward to the magnitude of that contribution.

Third, Mount Milligan is on target to meet its annual gold production guidance. The mine is one of the world's lowest cost copper mines, even at rates lower than design throughput.

We expect incremental production increases from the installation of an additional SAG discharge screen. As production increases, unit cost should continue to fall.

Fourth, we expect to see incremental and new contributions from Golden Star and Rainy River in 2016 and 2017, as these projects, now under construction, commence production.

And finally, we continue to seek opportunities to create value for our shareholders. But as you can see, our recent investments fill the growth pipeline nicely.

You can expect Royal Gold to continue to be characteristically selective and opportunistic about investing our shareholders' money.

Operator, we'll turn the call over to questions at this time.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) At this time, we will just pause momentarily to assemble our roster. Garrett Nelson of BB&T Capital Markets.

One of the factors you cited for the quarterly drop in EBITDA was the $3.2 million of exploration expenses related to the Peak Gold JV.

Stefan, I think you said you expect exploration costs to be lower this quarter and next, but then to be higher in the April to June quarter. Why is that? And will that exploration expense be related to Peak Gold as well?

Garrett, thanks for the question. This is Tony. That gold joint venture relates to a project in Alaska. And so we are much more active in the summertime than we are in the wintertime.

We've completed a couple of rounds of drilling during the course of this last summer. And so some of those invoices are continuing to trickle in here during the second fiscal quarter.

And then it will pick up activity, obviously, as the weather abates there. But we still have some expectation of doing some work through the wintertime as well, but not to the magnitude as what we've seen it in this last quarter.

We haven't yet defined our budget for the next summer activities. So I just want to hedge that response just a bit. So we'll provide more guidance as we do have clarity on that budget.

Okay. And then you guided to $72.5 million of payments in the last three quarters of the fiscal year. In addition to the $60 million you'll pay as part of the Golden Star deal, could you remind us of what comprises the remaining $12.5 million and when those payments will be made?

Sure. You hit it right. The $60 million is the remaining Golden Star commitment. We also have about $7.5 million committed to the Euromax deal on Ilovitza. And then we've budgeted in that number about $5 million of additional funding to the Peak Gold joint venture throughout the fiscal year.

As Tony mentioned, we haven't fully defined that budget, but that's our expectation today.

All right, great. And congrats on closing the four new deals.

Thanks for the questions, Garrett.

Thanks, Garrett.

(Operator Instructions) Mike Jalonen of Bank of America.

I thought I crossed the Rubicon there to the Phoenix project.

Always clever, Mike.

Yes. So now, I took a look at the press release Rubicon put out. They talk about how much money they have to spend. And my experience, when companies say project implementation plans, it means a lot more money to kind of maybe reinvent the mine. And I don't know how much money Rubicon will have by second quarter of next year that'll cover it. But it may not be very much.

So I was wondering, what are the options here for them and, I guess yourselves, with a, I guess a $75 million investment? Is that correct? And then is there a write-down coming on this investment for Royal Gold?

Well, first of all, we don't have any idea exactly what the redefined implementation plan might say. We'll stand by and see what that looks like.

But it could be entirely -- the existing mine plan could be entirely appropriate, we just don't know that at this time.

So we don't expect any write-down until we see some kind of catalyst for that. At the present time, we expect the mine to produce, as we felt it would in our due diligence activities.

So you talked about the kind of capital they might need. I think that will only be known once we see the results of the implementation plan.

And I would just emphasize that the surface facilities are constructed and operating well and recovery is doing well on the project. The tailings is now in place.

So I think the additional capital would largely be around the underground development that would be needed if there was some kind of different mine methodology that would be recommended out of this new plan.

Those are the comments I would offer, Mike, in response to your question.

Thanks for that. But I guess other than the stockpiles, you guys will receive, I guess, no production through until, I guess whatever [plan] they come up with. Is that correct?

That's correct.

Okay. Well, hopefully it works out. Thanks.

John Doody with Gold Stock Analysts.

My question also revolves around Rubicon and what kind of security you have, as you usually take on regarding your streams.

So we do have security on the project, John. We stand behind up to $100 million we've allowed to be put in front of us. And then we're next in line there. But there's only $50 million that are in front of us today.

So we have a very standard approach to this project, as we do in other projects with regard to the security we take.

We also have an inner creditor agreement with the debt that is in place. So I think we're in a very good position on this particular asset.

So, and as I recall, they can increase the debt on the site to $100 million, but it changes the terms between -- of the stream. Is that right?

Yes, it does. But I'm going to look to Bill and see if Bill can give you a little more color on that.

Yes, our cash price goes down as they incrementally add leverage above $50 million to $100 million.

John I can remember exactly what the lowest is, but it's 18% or 19%, I think of spot is where it could end up if they were to use the full $100 million.

Okay. So that whatever the number is that they're going to need for additional funds, if there are any funds needed, could be handled by a debt facility. Certainly they wouldn't want to do it on a share sale. And would you be interested in increasing your stream the way that you did several times at Mount Milligan?

John, I just would have to say a standard response to that is we would just have to look at the opportunity at the time and see whether it made sense for us to do that. But we sure will be paying attention closely to the implementation plan.

Okay. And a last question. In the analysis that Royal did prior to doing the stream purchase, is there something that you missed? I'm sure you've seen reports by other analysts out on the Street that indicate that there was some fallacy in that PEA. And is there something that the Royal Gold analysis missed?

You know, we ask that same question two ourselves. And we're not sure that we missed anything at this point. And we'll have to just see how the more detailed engineering comes in and see if there's any material change in the geologic model.

But at this point, we have not identified anything in our due diligence, John, that we wish we had done differently.

Okay, great. Thank you.

Cosmos Chiu with CIBC.

It's actually Kevin here. Most of my questions have been answered. I just have a quick question with regards to the debt balances. Just wondering how aggressively you guys plan to pay that down.

Stefan, can you take that?

Yes, sure. So today we have the $370 million convertible bonds that are due in June of 2019. And then we've also drawn $350 million on our revolver.

Our policy really is to keep at least $100 million of cash on hand. We like to have that level of working capital just to be responsive to opportunities (inaudible) our business.

So what you would expect is that as we generate cash flow and growing cash flow over the next several quarters, we would start to attack the revolver first while maintaining that hundred million dollars of liquidity.

Great. Okay. Thank you.

At this time we have no further questions. We'll go ahead and conclude today's question-and-answer session.

I would now like to turn the conference back over to Mr. Tony Jensen, President and CEO, for any closing remarks. Sir?

Well, thank you once again for joining us today. We appreciate your interest in the Company and continued support of Royal Gold, and we look forward to updating you as we progress through the quarter and, certainly, on the next quarterly conference call. Thanks very much.

And we thank you, sir, and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, take care, and have a great day everyone.