Royal Gold Inc (RGLD) 2016 Q3 法說會逐字稿

Good afternoon and good morning. Welcome to Royal Gold's fiscal 2016 third-quarter earnings conference call. (Operator Instructions) Please also note today's event is being recorded.

At this time I would like to turn the conference call over to Ms. Karli Anderson, Vice President of Investor Relations. Ma'am, please go ahead.

Thank you, Operator. Good morning, and welcome to our discussion of Royal Gold's third-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 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 with an operational update, and then Stefan 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 and cautionary statement in today's press release and slide presentation, and is presented in greater detail in our filings with the SEC.

I'll now turn the call over to Tony.

Good morning, and thank you for joining the call.

Today I'd like to brief you on the key elements for our strong third-quarter results, and we'll update you on some of our key development assets, as well. I'll begin on slide 4.

Viewing our third-quarter performance through our corporate objectives of providing shareholders exposure to growth, quality, and opportunity, we demonstrated growth in the March quarter as revenue, volume, and EBITDA were all 20% to 30% higher than the prior-year quarter, driven by higher volumes associated with the new business we added in calendar 2015.

And Bill will speak later on the presentation to Rainy River, Wassa, Prestea, and Cortez Crossroads, which are expected to contribute to growth in the near term.

With regard to quality, we are pleased to see that Mount Milligan, our largest revenue source, is now rated among the lowest-cost copper mines in the world by Wood Mackenzie. And our second largest source of revenue, Pueblo Viejo, had strong performance during the quarter and registered all-in sustaining costs of slightly less than $500 per ounce.

We continue to position the Company for additional opportunity. We paid down $50 million of our debt, and extended our credit facility by two years, which will provide us access to capital through 2021. Existing liquidity of nearly $500 million and strong cash flow positions us to comfortably fund our near-term commitments and evaluate new business.

Turning more specifically to quarterly results on slide 5, we reported revenue of $93.5 million, an increase of 26% from a year ago, driven by 30% higher volume associated with new business interests at Pueblo Viejo, Andacollo, Wassa, and Prestea.

Comparing the results to the recent December quarter, you will likely recall that we had record revenue and record volume at that time due to robust sales at Mount Milligan, as well as reconciling payments from Wassa and Prestea. We guided towards and realized lower volumes for the March quarter due to those exceptional sales. Looking ahead, we currently expect the June quarter will have a similar volume to the March quarter.

We also previously disclosed that we expected to record nearly $100 million of impairments, which were associated primarily with Phoenix, Inata, and Wolverine. As a result, we had a loss for the quarter. But after adjusting for those items, earnings were $0.29 per share.

We are obviously disappointed that these investments did not achieve their expected return. Impairments are simply not in our DNA. And to emphasize this point, prior to this quarter we have only realized $30 million in total property write-downs against investments of $3.5 billion in the last 15 years.

Moving on to dividends, we paid $15 million during the quarter, or $0.23 per share, marking the start of our 16th straight year of higher dividends.

We also released our updated reserves last night showing a 21% increase to 6.4 million gold equivalent ounces. This impressive growth is a result of our new stream acquisitions in 2015. If you divide our royalty and stream interests on the balance sheet by our reserves, our carrying cost averages $453 per gold equivalent ounce.

Turning to slide 6, our cash flow per share continues to grow, and topped $1.00 in the March quarter. In addition to the volume expansion over the last several quarters, the inflection point in the gold price is also certainly welcomed.

Royal Gold's share count is essentially unchanged in nearly four years. Existing shareholders directly participate in the expansion of our business in the form of higher cash flow per share and higher dividends per share.

On slide 7, the six properties shown on this slide represented 75% of our revenue in the March quarter. Since the start of the year, operators of these properties have informed us as to their production expectations for calendar 2016. You will see that our three largest interests -- Mount Milligan, Pueblo Viejo, and Andacollo -- are scheduled for notable production increases.

I'll turn the call over to Bill to speak about our key producing and development assets in more detail. Bill?

Thanks, Tony.

Turning to slide 8, Mount Milligan operations focused on increasing mill throughput in calendar 2015 and the mill is now operating close to design capacity, achieving an average throughput rate of 58,100 tons per day in the first calendar quarter of 2016. Thompson Creek also approved the construction of the secondary crusher, which is expected to be completed by calendar year end and increase throughput to 62,500 tons per day.

Mount Milligan's focus this year will be on improving recoveries by optimizing mine and mill operations and balancing the circuit at these higher levels of production. For the quarter the mine produced approximately 53,000 payable ounces of gold, which was an increase of 16% from the prior-year quarter, as higher throughput offset lower grades and recoveries.

With regard to costs, Mount Milligan's C1 cash costs ranked third in Wood Mackenzie's list of 255 copper mines ranked by costs. And even with the economic impact of our stream included its cash costs in calendar 2015 were $0.55 per pound, still one of the world's lowest cost copper mines.

In just over two years of production to date, we've already received in excess of $210 million in gross revenue from gold sales related to Mount Milligan.

Turning to slide 9, Pueblo Viejo has solidified its status as our second largest gold stream on a net basis in just the second quarter of deliveries. We received about 10,600 ounces of gold and 210,000 ounces of silver during the March quarter, which related to gold production for the December through February period and silver production for January and February.

You will likely remember the production was impacted during much of this time due to the motor failures in the oxygen plant. Barrick was highly successful in remediating the problem and achieved production in the March quarter that was notably above their annualized rate for calendar 2016 and the prior-year quarter.

For the first quarter of 2016 Pueblo Viejo's all-in sustaining costs were $496 per ounce, the second lowest all-in sustaining cost in the Barrick portfolio. The Company continues to expect attributable production of 600,000 to 650,000 ounces of gold in 2016, but all-in sustaining cost guidance for the year was just reduced to $550 to $590 per ounce, down from $570 to $620 per ounce.

On slide 10 we are pleased to see Golden Star make steady progress on improving the cost structure of the open pit mines, while the higher grade underground mines at Wassa and Prestea are under construction. Quarterly production of 53,000 ounces of gold was consistent with expectations and Golden Star estimates cash operating costs below $750 per ounce for the March quarter.

The new underground projects are scheduled to begin contributing to production beginning late this calendar year from the Wassa underground and in mid-2017 for the Prestea underground.

Of expected 2016 gold production of 180,000 to 205,000 ounces, 20,000 to 25,000 ounces are expected to come from the Wassa underground project. And longer term Golden Star expects these new sources of ore at Wassa and Prestea will increase annualized production levels to an estimated 240,000 ounces.

Now I'd like to talk briefly about additional projects within the portfolio that are expected to layer on growth in the near term.

Turning to slide 11, development work is well under way at Rainy River where New Gold estimates construction is 35% complete at the end of April. Royal Gold has invested $100 million into the project to date and our second and final investment of $75 million is scheduled to occur once the project reaches 60% of construction completion.

We understand from yesterday's release that New Gold is making some modification to the tailings and water management design which will require additional regulatory approval. We support New Gold and its remedial efforts and its decision to expand the geotechnical drilling to include the tailings management facility at the same time in order to address these issues in a timely manner. Despite the deferral of expenditures on these facilities until approval is received, we understand the company believes it can maintain the mid-2017 commencement of production.

And, finally, on slide 12 you will see an image of our interest at Cortez. This property has always been important to us, since it was where we created our first royalty. We have received about $250 million in royalty revenue from this property compared to an aggregate investment cost of about $11 million.

Much of the mining was focused off [of our ground] subject to our royalty interest at Cortez Hills for the past several years. But some of that opened open-pit equipment will now be utilized to develop the Crossroads deposit. We have 3.7 million ounces of reserves subject to our interest at Cortez, with about 3 million ounces at Crossroads alone.

Barrick has commenced stripping on the project, which they expect will be in production in 2018. Our total royalty interest at Crossroads is 5.6%, so we expect Cortez to be a significant contributor again in the near future.

I'll now turn the call over to Stefan.

Thanks, Bill.

On slide 13 I've summarized a few of our financial highlights. As Tony mentioned, we recorded a loss of $1.04 per share for the quarter. However, after adjusting for the impairment charges, net income per share was $0.29.

Revenue of $93.5 million was up nicely from a year ago, based on increased volume, somewhat offset by a 3% decline in the gold price.

DD&A was approximately $480 per GEO for the quarter, and for the full nine months our DD&A rate was $453 per GEO. I expect that we will end the fiscal year with a full-year rate of between $450 and $475 per GEO, which is on the low end of our previous guidance.

We recorded a tax benefit of $8.3 million for the quarter, resulting in a tax rate of 10.6%. However, adjusting for the impairment previously discussed, our tax rate would have been about 20%, consistent with our earlier guidance.

We ended the March quarter with about 12,000 ounces of gold and 210,000 ounces of silver in inventory. Looking forward, we expect to maintain gold equivalent inventory at any given quarter end of between 15,000 and 25,000 ounces, depending on the timing of deliveries to Royal Gold. Looking forward to the June quarter, we expect GEO volume to be roughly in line with the March quarter.

Our strong cash flow allowed us to repay $50 million of debt and to distribute $15 million in dividends during the quarter.

You can see on this slide that our liquidity of nearly $500 million is comprised of about $150 million of working capital, plus $350 million of revolver capacity. Last month we also extended the maturity of our revolver by two additional years to 2021. We are well equipped to satisfy our remaining outstanding commitments as well as to consider new business opportunities.

On slide 14 we've demonstrated our excellent track record for returning capital to shareholders. We have one of the highest dividend yields in our business, and we are proud of our commitment to returning capital to shareholders and to have delivered a dividend increase in each of the last 15 years, including in both the good times and the bad times. This is a reflection of Management's confidence in the business.

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

Thanks, Stefan.

Speaking more globally, we are very pleased with the new contributions we are seeing in the financial statements from Pueblo Viejo, Andacollo, Wassa and Prestea, which have made a meaningful contribution to Royal Gold as compared to a year ago. These assets have helped grow and diversify our company and are now generating significant cash flow.

Strategically we wanted to be in a position to invest capital opportunistically, and we believe our investments in 2015 were well timed in terms of the gold price cycle and industry need.

The quarterly performance was in line with our expectation and we anticipate steady volume in our final quarter for fiscal 2016. We expect sales growth in fiscal 2017 as Mount Milligan improves operational performance, and we get into a full cycle of gold and silver deliveries from Pueblo Viejo.

We are closely monitoring the development work at Wassa, Prestea, and Rainy River and look forward to their contributions. These additions, coupled with the renewed focus on Crossroads, should pave the way for incremental growth through 2018. And, of course, we will always look to be opportunistic in adding any new business along the way.

Operator, that concludes our prepared remarks, and we're happy to answer any questions.

(Operator Instructions) Mike Jalonen; Bank of America Merrill Lynch.

I just had a couple of questions. Both yourself and Stefan mentioned evaluating new business opportunities and how with the four deals you did a year ago you hit the gold price cycle well. And you've got $501 million of liquidity, but obviously the gold cycle has changed, obviously for the better for the producers. And, well, the royalties are benefiting you also share-price-wise. But what about for business opportunities? I would think -- is it getting more difficult to do deals? Are the prices rising because the producers are in a better position financially?

Mike, thanks for the question. First of all, I just want to emphasize that we did deploy over $1 billion last year. So we've moved our entire financial portfolio in a new direction with those investments.

So I also want to emphasize in my closing remarks I talked about incremental growth through 2018. So the point there being is we don't feel compelled to have to do a deal right away. We think we've got a great portfolio the way it is.

But now speaking directly to your question, there is obviously more equity opportunities for gold producers than what we've seen over the last, say, 12, maybe 18, months. So that certainly is an alternative source of capital that we'll have to compete against. But there's still a lot of troubled balance sheets in the marketplace today. And we always are looking for opportunities to do business where our source of capital makes sense to that capital structure.

So probably not as lucrative of a business environment this year as what we saw last year. We've been saying that on the call for a couple of quarters now that we liked the quality in the portfolio of new business opportunities a year ago at this time a bit more than we do today. But I wouldn't expect that we'd be deploying another $1 billion this year, but surely we think there's some deals in the marketplace that would be attractive to us.

Yes. Maybe I could just follow on. Thanks for that explanation. And certainly the deals you did last year, obviously the timing was spectacular.

But this morning -- sorry, Golden started a $50 million equity deal. And did they come to you first? Or did they just go right to the equity markets?

No, they didn't come to us. We've made our investments there and we're very happy with those investments. And so we're pleased to see them look for other sources of capital, as we've already said we really don't want to be the primary and only source of capital in any particular project.

Okay. Maybe just one more question before I turn it over. What's the annual production at Crossroads going to be? Is there a number?

You know, in all honesty we do have that number. We do get the detail from Barrick, but we're not at liberty to share it. But I think if you look at the production, sort of the reserve there, I think there was just a little under 3 million ounces of gold. And as I recall, it's probably close to a five-year, six-year mine life, something like that, once it's in production.

But, Mike, we're going to have an investor conference in early June and we hope to provide a little bit more clarity on that asset at that time.

Okay. I'll be there. Thank you.

Andrew Quail; Goldman Sachs.

Thanks for the call and congratulations on a good quarter. A follow-up from Mike's question, actually. Do you have -- splitting it into two, I suppose you'd say the primary producers of gold and precious metals. Are you seeing any sort of trends in more of the base metal guys? I suppose you've done the last couple deals, except for the Barrick PV and New Gold. But are you seeing that the base metal guys need money more than, say, the primary producers at the moment?

Andrew, I'll ask Bill to answer that question.

Andrew, I'd say the answer is a bit of yes and no. Obviously with the base metal prices where they are you're not going to have the project development need for financing. But I'd say some of the larger balance sheet issues that you're going to find are with the larger base metal companies. And I'd say that's probably where we see more of the opportunity today.

And I suppose my other question's on Milligan. You're seeing at Thompson Creek obviously they're scheduling the secondary crusher. Was there a need, of if there is a need, if prices correct, for those guys to need more financing? And if so, would you be happy to put in more for maybe 100% of the gold [stream]?

Well, they have sufficient --

Hypothetical, hypothetical, Tony.

Yes, they have sufficient capital on the balance sheet to go ahead and finish up the secondary crusher. And they're largely committed to that. In fact, they're talking about commissioning that by the end of this year. So that's well under way.

I think the broader issue, to your question, is servicing their capital structure. And while you've seen the cash costs at the operation are still quite healthy even after our stream is considered, we would rather not put additional money in, just because it's a very large exposure to us at this time. We've always enjoyed a diversified portfolio. We're going to work towards moving to a more diversified portfolio as we have over the last year.

But, Andrew, the bottom line that I want to end this particular question on is that we're going to do what's right for our shareholders. And we'll just assess that potential opportunity when it comes to us and we won't rule anything out at this point.

I suppose one more, just on leverage. It obviously peaks at the moment, given your investments from last year. And you put it through your model, you guys delivered pretty quickly. Is there a level of debt that you guys are comfortable with going through the cycle?

Andrew, let me ask Stefan to answer that question.

Sure. Hi, Andrew. We think about a conservative amount of leverage being appropriate in our capital structure. When we did the deals at the end of last summer, our initial leverage at that point was just under 3 times. And today we're closer to 2 times levered. We're 2 times today and by the end of the year I'd see us closer to 2.

But as we look at new opportunities we think there is room in the capital structure for additional indebtedness. But you wouldn't see us be comfortable for any long period of time over 3 times net debt to EBITDA.

Got it. Thanks very much for the questions.

Stephen Walker; RBC Capital.

Just briefly on the legal dispute with Vale at Voisey Bay, can you give us an update on that, Tony, if you would?

So, Stephen, the concentrate from Voisey Bay is now going to Long Harbour. And there are some deductions that are being incurred against our royalty that we disagree with with regard to Long Harbour. So we have added those to our litigation claim that has been outstanding. We're in the discovery process. We're very active in that whole process. And we are very much looking forward to getting our day in court to be able to argue our position. We think that our position is very traditional with regard to how net smelter return royalty should be calculated.

So we're in a bit of a -- that type of pattern, I would say, until maybe 18 months or so before the matter is heard before the Court.

Great. And thank you for the timing on that, or potential timing. Also, with respect to Euromax's Ilovitza project, can you give us your thoughts on where that stands, and I guess some of the flexibility that you have around making further investments in the project?

Right. Stefan showed a slide where we have our committed, rather firmly committed, investments of $125 million still going. And that's really for Wassa, Prestea, and Rainy River.

We look at Ilovitza as an option, and purely that. And we'll make that decision once the option is ripe. We'll have a look at how the market looks at that time. We'll look at the feasibility study and see if we're satisfied with it. And if we think it's a good piece of business we'll move ahead. But we just look at it as an option at this point, Stephen.

And with the capital that's sunk so far, [do you have] a residual royalty or ownership or anything at that point? Or is it just waiting until the appropriate time to invest the remainder of the capital within the transaction?

Well, I don't remember the details. I'm going to have Bill speak to this in just a minute if he can remember the details. But we do have mechanisms in there where we can get our money back. We also have mechanisms in there I believe where we can convert into a royalty if we wish to do that. So this is all part of the optionality that we have on the project.

Did I get that --?

The only thing I would add, it's a conversion into a smaller stream as opposed to a royalty.

Okay, thank you.

Okay. Thank you for that, Bill, and thank you, Tony.

(Operator Instructions) Lucas Pipes; FBR and Company.

This is Derek Hernandez on for Lucas Pipes. Just wanted to follow up on Andrew's question earlier with regards to potentially looking at other additional royalties or streams. Is there a possibility of looking beyond base or precious metals? Is that a consideration for the Company?

Derek, we're really not focused at all on anything but gold and silver and -- actually I even hesitate when I say silver. I mean, we really like gold and we really want to stay our core investment there. I think we have somewhere, Stefan, on the order of 90% of our revenue coming from gold --

That's correct.

-- at present. And we've always said that we wanted to maintain a precious portfolio over 70%. If we had a base metal opportunity that came to us at the right return and right quality of project, we'd probably take a look at it. But don't expect that to be a big investment. It's probably rather a marginal investment.

I see. Thank you very much.

And, ladies and gentlemen, with that we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Management for any closing remarks.

Well, thank you, everybody for joining us today. We, as always, appreciate your interest in our company and in our results. And we look forward to continuing to update you along the way.

All the best.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.