Royal Gold Inc (RGLD) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Royal Gold fiscal 2016 second quarter 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 of Investor Relations. Please go ahead.

Thank you, Gary. Good morning, and welcome to our discussion of Royal Gold's second quarter fiscal 2016 results. This event is being webcast live, and you will be able to access a replay of this call on our website.

Participating on this 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 with 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 and cautionary statement in today's press release and slide presentation, 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 today. On our last earnings call in November, we told you we successfully integrated $1.4 billion in new interests into our portfolio. Three of those new interests have proven immediately accretive.

And just one quarter later, we are reporting record revenue and strong financial results. I'll begin on slide 4. Looking back over the second quarter, these strong results reflect our key themes of growth, quality, and opportunity.

From a growth standpoint, record results were driven by our streaming business. Higher volume more than offset lower gold price. Existing working capital and strong operating cash flow position us comfortably to fund our remaining stream transaction commitments, which should contribute to further volume improvements in calendar 2017.

With respect to quality, we are delighted to see our first contributions from Pueblo Viejo during the December quarter and we look forward to a multi-decade partnership with Barrick and Goldcorp on this world-class asset. In addition, Mount Milligan continues to perform well within the first quartile of cash costs, and slightly exceeded design capacity of 60,000 tonnes per day, during the last week in December.

With respect to opportunity, we deployed capital over the last nine months, during a period of gold price weakness, with a focus on asset quality and current and near-term production. While our portfolio continues to grow and diversify, our valuation does not yet reflect our strong performance. In my opinion, our valuation has never been more compelling, as we trade at levels not seen since the financial crisis.

On slide 5, we summarized the new records that we set in the December quarter: record revenue, volume, and dividends. Our recent streaming transactions have been the catalyst for this impressive growth. The chart at the bottom of the page details relative contributions to our streaming segment, from each of our current streaming properties: Andacollo, Wassa, Prestea, Mount Milligan and Pueblo Viejo.

I'll point out that the deliveries from Pueblo Viejo reflect our initial sales only. We ended 2015 with nearly 12,000 Pueblo Viejo ounces of gold in inventory, and we will receive our first silver deliveries in the current quarter. We expect to see another step change in 2017, when Rainy River starts to contribute to our streaming portfolio.

We continue to pay out nearly one-third of our operating cash flow in dividends. Our yield is about 3%, and is competitive with dividends paid in any industry, as evidenced by the S&P average yield of 2.3%.

You can see on slide 6 that a weaker gold price experienced in late 2015 did not keep us from delivering record revenue and excellent operating cash flow per share. We continue to measure our financials on a per-share basis, and have considered our capital raises and deployments carefully. We only have 65 million shares outstanding and last issued equity in October of 2012, when gold price was at $1,750 per ounce.

We are pleased with our recent decision to deploy capital when gold price was trading near $1,100 per ounce. We are encouraged by the recent attention gold prices received over the last several weeks, and its resiliency against other commodities and strength in other currencies is hard to ignore. We are now well positioned for margin expansion.

I will now turn the call over to Bill to speak about our operating results, and some of these new streaming transactions. Then, Stefan will discuss our financial results later on the call. Bill?

Thanks, Tony. Turning to slide 7, we've updated the status of our recent streaming agreements. Last quarter, we told you about our annual volume expectations for these interests, and all of them are performing well, relative to their guidance.

Collectively, these four transactions are expected to bring an estimated 125,000 incremental net gold equivalent ounces, or GEOs, per year, once Rainy River is in production. You'll see that, at the currently producing Pueblo Viejo, Andacollo, and Wassa and Prestea mines, the operations are well on pace to achieve our full-year estimated net GEOs. Our thesis on these transactions was predicated on today's reserves, as well as the opportunity for future resource conversion.

In this respect, we are pleased to learn of some early success at the Wassa F Shoot that Golden Star announced yesterday. We continue to view this as an excellent exploration option. Development and exploration activity is well underway at Wassa and Prestea, where we recently upsized our investment. And effective January 1, 2016, we have a slightly larger interest in those two properties. We are benefiting from Wassa and Prestea's open pit production today, and we will benefit from the underground development in the near future.

On slide 8, we have summarized calendar year results at some of our property interests. The actual production reflect full calendar 2015 results, with the exception of Penasquito, where Goldcorp has not yet reported, and the volumes reflect actual totals through the September quarter. Andacollo's shortfall during the year was attributable to lower mill throughput, due to a tailings thickener failure in the first calendar quarter of last year, and the earthquake that impacted the operation in the third calendar quarter.

Strong results at Cortez were related to their production on our ground in early 2015. As you may recall, Cortez had produced 83% of the ounces expected to be subject to our royalty interest for the full year, within the first six months of the calendar year. And lower production in the second half of calendar 2015 was in accordance with the mine plan.

Mount Milligan's throughput increased during the fourth calendar quarter, and contributed to payable gold production at the top end of Thompson Creek's guidance. For the full calendar year, payable gold production at Mount Milligan increased by 23% over the prior year. We congratulate the Mount Milligan team on achieving throughput in excess of their design capacity of 60,000 tonnes per day.

At Pueblo Viejo, the effect of the oxygen plant motor failures in November was somewhat offset by Barrick's installation of portable compressors in December, which was able to return production capacity to 95%.

One of the two repaired motors has arrived in the Dominican Republic, with the second expected on site by the end of the month. Our other property interests finished the year largely in line with expectations.

Rubicon Minerals released an updated geological model and resource statement for the Phoenix Gold Project that included a significant reduction in resources, compared to previous statements provided by Rubicon. We were surprised at the magnitude of this change, and immediately began the process of conducting our own analysis of the mineralization.

We expect to complete our review in the March quarter, and will monitor the ongoing Rubicon sale process, as we consider our carrying value of the asset. Although Rubicon only comprises less than 2% of our NAV, this development is receiving our attention.

As many of you know, Royal Gold's initial success was through exploration at Cortez. While we generally want to leave exploration work to others, on occasion, we may see rare opportunities, as was the case with our Peak Gold joint venture in Alaska. In calendar 2015, we conducted initial regional exploration, and received sufficient encouragement to continue funding this project in calendar 2016.

While it is very early in the exploration cycle at Peak Gold, we want to guide that we will spend about $2 million per quarter, throughout the next four quarters. I'll now turn the call over to Stefan.

Thank you, Bill.

Slide 9 illustrates our financial highlights for the second quarter of fiscal 2016. We recorded record revenue of $98 million, and net income of $0.23 per share. We generated EBITDA of $70 million for the quarter, compared with $48 million in the prior-year quarter.

Operating cash flow increased to $52 million, up from $30 million in the December 2014 quarter, despite an 8% decline in the average gold price, as well as a significant investment in stream inventory during the quarter. As we guided in our last conference call, ounces in inventory at December 31 grew to 25,600, compared with 11,500 in inventory at September 30.

Cost of sales increased to $23 million, reflecting the significant increase in stream sales during the period. However, on a per ounce basis, cost of sales was $370 per stream ounce, which is a reduction from the prior-year quarter, at $435 per ounce, as we now have a number of our streaming purchases defined as a percentage of the spot price, rather than at a flat rate.

DD&A for the December quarter was $40 million, or $455 per GEO, reflecting the large increase in GEO volume compared with previous quarters. We now expect DD&A of $450 to $500 per GEO for fiscal 2016, down slightly from last quarter's guidance. Looking forward to the March quarter, we expect somewhat lower stream volume compared to the December quarter.

We get deliveries based on final settlements at Mount Milligan, which represents a lag of four to six months, post production. As such, our March quarterly deliveries will largely be based on Mount Milligan's September quarterly production, which was slightly lower than average. We also received the final catch-up deliveries from Wassa and Prestea in the December quarter. Partially offsetting this should be higher sales associated with our Pueblo Viejo stream.

Turning to slide 10, I've summarized our liquidity position. Working capital totaled $142 million at December 31. When combined with the $300 million of availability under our revolving credit facility, total liquidity at December 31 was about $440 million.

We have just two near-term conditional commitments that we will fund over the next 12 months; $70 million at Wassa and Prestea, and $75 million at Rainy River. We expect to fund these commitments from operating cash flow and existing cash on hand.

I'll now turn the call back over to Tony.

Thank you, Stefan. On slide 11, you'll see an example of Royal Gold's valuation, relative to its peers. While Royal Gold generated 25% of the industry's economics for the 12 months ended September 30, 2015, we are trading at just 15% of the industry's market capitalization.

On slide 12, we provide further analysis to this point, demonstrating that our current market cap reflects just 1 time Street consensus, net asset value, without any value ascribed to Mount Mulligan, despite its contributions to our ongoing strong financial results. We recognize that there is concern with Thompson Creek's financial situation that is being reflected in our valuation.

However, I'd like to remind you that we have a strong security position at Mount Mulligan, that the mine is performing very well, and that it has proven to be a very attractive asset. We expect Mount Mulligan will continue to operate, regardless of Thompson Creek's financial situation.

On slide 13, we chart Royal Gold's impressive history of returning capital to shareholders. While many companies are reducing or eliminating their dividends, Royal Gold's Board voted in November to increase its dividend for a 15th straight year. This is a reflection of the confidence that management and the Board has in our Company. Our calendar 2016 dividend of $0.92 per share leads our peers on a per-share and yield basis.

Wrapping up on slide 14, I'd like you to take away the following three points. First, that our recent transactions are already driving record operating financial results, with more growth to come. Second, we are continuing to diversify our Company with quality assets. We are excited to be associated with Pueblo Viejo so early in its life, and we are looking forward to Rainy River's contributions in the near future.

Finally, our valuation has never been more compelling. We are trading at levels not seen since the financial crisis, when our cash flow per share and dividend per share were only 41% and 30%, respectively, of what they are today.

Operator, that concludes our prepared remarks. And we'll now open the line for questions.

(Operator Instructions)

The first question comes from Garrett Nelson with BB&T Capital.

Hi, everyone. It's good to see the new streaming deals really start to drive EBITDA improvement. And also, thanks for the new disclosure on the streaming business. That's very helpful from a modeling standpoint.

It looks like you had about 25,700 ounces in inventory at the end of the quarter. Would you expect that inventory number to increase, decrease, or stay about flat by the end of March?

Garrett, I'll just ask Stefan to answer that question.

Sure, thanks, Tony, and hello, Garrett.

As we guided last quarter, we expected a large inventory build during this quarter, as the new streams came on. And now, I would expect, as we look ahead, inventory to stay within about 5,000 ounces, at that level, plus or minus. And as I guided in my discussion, we do expect slightly lower deliveries in the March quarter than the December quarter.

Okay. And can we assume that you're done with new deals for the time being, in that you're in a phase right now of digesting everything that you acquired last year? Unless something very lucrative were to come along?

Garrett, I think that's a reasonably accurate statement. We very much still have the door open to new business opportunities. We want to be opportunistic there, but we don't feel compelled to have to grow.

We already recognize that we have a tremendous growth profile built into the Company from the last nine months of work, and we'll just be very selective. And we're going to watch the leverage ratios in our Company, as well. We're equity shy, so we want to be very careful with any kind of debt we might put in the Company.

Okay. And also, one of the impacts of the new streaming deals is that your total revenue mix has become even more levered to gold. I noticed that gold accounted for about 90% of your total revenue during the quarter, which is up from about 70% a couple years ago.

I'm just curious whether that was one of your goals, heading into the new deals that you entered in to last year in terms of wanting to become more of a gold pure play? Or whether the streams were just the best deals that came along?

Garrett, we've always said that we wanted to be at least 70% precious metal. And we always are focusing on gold whenever we can. And we're just fortuitous, during this last cycle of new business opportunities, to be dealing with a lot of companies that were pure precious metal companies.

So we're pleased to see that grow. We're not actively going out looking for base metal deals, by any stretch of the imagination. But we're still guided by our goal of at least having 70% precious in our Company.

Okay, great. Thanks a lot, Tony.

Thank you, Garrett.

(Operator Instructions)

The next question comes from Phil Russo with Raymond James.

Hi there, Tony, Bill, Stefan, Karli. Just one question here, and thanks for the call, and the color on Mount Milligan. Is there a scenario -- I'm thinking a Chapter 11 scenario -- for Thompson Creek, where you would stop receiving ounces from that mine for a period of time? I'm just curious on your thoughts there.

Well, Phil, there's many, many different ways this could all play out. And we've always said that we want to be a catalyst to see a solution here out of any kind of court-type system. And there is scenarios, if it were to go all the way to bankruptcy, that there could be an interruption in our production.

Or -- we just can't specify exactly what might happen in bankruptcy court. But that's why I wanted to emphasize in my prepared remarks that we thought long and hard about this, even at a point when Thompson Creek was not into a financial situation.

Years, in fact, ahead of that, when all the commodity prices were going at a high price, we felt it was important to have security on this asset. And we feel it's a very strong security position, if we have to rely on it. Surely don't want to rely on it, but we have that in the back, if we do need it.

Great. That's all I had. Thanks a lot. Good quarter.

Thank you, Phil.

The next question comes from Tanya Jakusconek with Scotiabank. Please go ahead.

Good morning, everybody. I have two questions. The first one is actually on Pueblo Viejo.

Maybe, Tony, can you talk about how the silver circuit is doing at Pueblo Viejo? Has that been resolved at all? Or are we still a bit delayed, with the motors being delayed?

Tanya, allow me to be a little bit general in the response to that question, because this is really Barrick's place to talk in detail. But let me just say that the silver circuit works best when all of the rest of the circuit is working. And the fact that we had some autoclaves off line in December would have impacted the silver circuit, as well, we believe.

So I don't think it's a very good test to look in the December quarter, for how the silver circuit actually is capable of running. Having said all that, we -- as you know, we put a minimum silver recovery into our transaction with Barrick, of 70%. And of course, they anticipate having a lot higher silver recovery than that.

So regardless of what the circuit does, they have to pay us the 70% level. So there's encouragement for them to do better than the 70%, and we're quite happy with that.

We're pleased if they can get higher, and they take that excess. But we're also quite comfortable having the security of having a 70% recovery factor on that circuit.

Okay. And then Tony, just on the silver, are we looking at similar inventory levels as you are looking at for the gold at Pueblo Viejo? Should we model it in that --?

Yes, when Stefan answered the question that Garrett asked, he was really talking about gold equivalent ounces there. So we're going to have to give you better disclosure on reporting, as far as what we hold in gold and what we hold in silver. But he was referring to that 25,000 ounce level, plus or minus 5, as a gold equivalent basis.

Okay. And then -- thank you for that. And then just my second question is actually to do with Phoenix.

Can you just talk a little bit about your technical due diligence? What exactly are you going to do? And who exactly is doing that for you, in your technical team?

Well, look, our entire technical team is led by Mark Isto, and I don't know if you know him, Tanya, but he's a very well-seasoned individual in this sector. And beyond that, we've got some consultants that we are employing.

We'd rather not -- and don't feel I need to go in to the details on who they exactly are. But they're obviously people that we have good confidence in, that are experienced in these type of deposits.

So what we're doing is, going back into the raw data, and we're using a bit of a stage and gates process of looking at what was just recently done by Rubicon. Looking at the most critical assumptions that they made, and determining whether we believe in those assumptions.

And if we find that there's room for other interpretations, then we'll continue to move towards a resource estimation ourselves. But we're just into that process now. We have a goal, as I think Karli guided in our press release, that we want to come to a quick conclusion on this.

But there's other factors at play here, as well. You'll have noted that Rubicon has hired TD and BMO to conduct a strategic review, and we're very anxious to hear how that process is going to play out, as well. So all of those things, I think, keep us in a position of not making any firm decisions in this quarter.

And Tony, you think, with looking at the raw data and doing your own valuation by the end of March, you will be in a position to have a view on the deposit yourself?

Yes, I think we will. It's an aggressive -- I'll grant you that -- it's an aggressive feat of engineering. But I think we'll have, certainly, a good feel for how we think the deposit opportunity really stacks up in it.

And again, if we're not to the point where we're completely satisfied in it, we'll certainly tell the market that. But we have an internal goal of having this all understood in the March quarter.

Okay, good, looking forward to hearing on that. Thank you.

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, operator. And thank you all for joining us for our update, and our 2Q.

We were very proud of the results that we have today. We're very confident in this Company, and we look forward to updating you in the very near future as additional developments come about. Thanks for joining us.

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