Royal Gold Inc (RGLD) 2016 Q4 法說會逐字稿

Good afternoon and welcome to Royal Gold's FY16 fourth-quarter and year-end earnings call.

(Operator Instructions)

Please also note that this event is being recorded. I would now like to turn the conference over to Karli Anderson.

Please go ahead.

Thank you, Operator.

Good morning and welcome to our discussion of Royal Gold's fourth-quarter and full-year FY16 results. This event is being webcast live and you'll be able to access a replay of this call on our website.

Participating on our call today are Tony Jensen, President and CEO; Mark Isto, VP of Operations; Stefan Wenger, CFO and Treasurer; Bill Heissenbuttel, VP Corporate Development; and Bruce Kirchhoff, VP, General Counsel and Secretary. Tony will open with an overview of the quarter, followed by Mark with an operational update and Stephan 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 will turn the call over to Tony.

Good morning and thank you for joining the call.

Today, I'd like to focus our discussion on the excellent fourth-quarter results. But I would first like to reflect a bit on the fiscal year.

FY16 was a year of peaks and valleys. We closed $1.4 billion of new investments in the first fiscal quarter. At a point in the gold price cycle that we viewed favorably. These new investments at Andacollo, Pueblo Viejo, Wassa and Prestea are already among our top five revenue producers. And we look forward to Rainy River's contribution in about a year.

We then turned our attention to liquidity concerns at Thompson Creek for much of the remainder of the fiscal year to protect our investment at Mount Milligan. We're very pleased with the outcome of those efforts, and I'll speak more about that later.

The fiscal year was also of two minds with regard to gold market sentiment. The gold price experienced a six-year low in December, only to be followed with renewed market appreciation for the safe haven and strong currency characteristics of gold in calendar 2016. While the path was not linear from the start to end of the fiscal year, we delivered on our corporate objectives of providing shareholder exposure to growth, quality and opportunity.

Now focusing on the quarterly results, up again on slide 4.

We can also apply the objectives of gold growth, quality, and opportunity to the quarterly results. We recorded solid growth across all our financial metrics. Our new investments are now fully integrated into our financial results, with the first recorded sale of silver from Pueblo Viejo during the quarter. The new business added in FY16 contributed about 25% of revenues during the quarter.

We have often said good mines get better. And we have a lot of embedded opportunities in the portfolio that are worth noting. For example, Mount Milligan is already one of the lowest cost copper mines in the world. But there is room for improvement. We look forward to Centerra Gold's ownership of the asset and their plans to evaluate opportunities to boost gold and copper recoveries.

Similarly, at Penasquito, Goldcorp reported that it will move forward with the Pyrite Leach project, which is expected to increase annual gold and silver production At Pueblo Viejo, Barrick plans to commission a tailings expansion pre-feasibility study in the second half of the calendar year. Which could move a significant portion of the nearly 8 million ounces of gold and 45 million ounces of silver in measured and indicated resources to reserves.

And at Wassa and Prestea, Golden Star began stopping at the Wassa underground deposit, which will supplement volume from the open pit. We look forward to additional exploration at both Wassa and Prestea, which we believe will result in increased (inaudible) at both operations. The mines I just mentioned contributed about 60% of our revenue during the quarter. So any improvements have the potential to be important to the Company. And of course the beauty of the business model is that we don't have to commit any additional capital for these potential enhancements.

After a very active year from a business development standpoint, our liquidity position continues to strengthen. We paid down another $25 million of our revolver during the fourth quarter. We currently have liquidity of over $500 million in strong cash flow. Stefan will speak more about liquidity and other financial matters in just a moment.

Turning to slide 5, we reported another quarter of double-digit growth in our financial results. Revenue of $94 million is an increase of 28% over the prior year. The outperformance is driven by streaming revenue from Andacollo, Pueblo Viejo, Wassa and Prestea. These assets offset lower-than-budgeted revenue at Mount Milligan, Penasquito, as well as our first quarter without Voisey's Bay revenue. We anticipate Vale will continue to deduct costs from our royalties that are the subject of litigation. As such, we do not expect any Voisey's Bay royalty revenue until the litigation is resolved.

Our streaming business drove substantially higher net gold equivalent ounces, which were up 21%, and contributed in part to 38% higher reported earnings. Operating cash flow increased 12%. And we continued our 16-year tradition of paying a growing and sustainable dividend, with an increase of 5% over the year-ago quarter.

We also built inventory during the quarter, totaling about 20,000 ounces of gold and 324,000 ounces of silver, with a current market value of $33 million. This compares to an inventory market value of $18 million at the end of the March quarter.

Turning to slide 6.

We highlight Centerra Gold's proposed acquisition of Thompson Creek Metals. Those two companies announced a plan of arrangement agreement on July 5th. And we hosted a conference call later that day in support of the transaction. Centerra and Thompson Creek indicate they expect the deal to close in the second half of 2016. Royal Gold executed a bonding letter agreement with Centerra that calls for our stream agreement to be amended.

Our amended agreement includes both gold and copper production from Mount Milligan. And is designed to be value neutral to Royal Gold. We believe the Centerra transaction of Thompson Creek Metals is an excellent outcome for all stakeholders.

As I highlighted in the previous slide, we welcome Centerra Gold's focus and are excited to hear about their plans for Mount Milligan. Specifically, Centerra is talking about opportunities to increase gold and copper recoveries by adding additional flotation capacity; expanding regrind capacity; developing a geo-metallurgical model; and leaching the flotation tailings. We certainly support these efforts.

Onto slide 7.

We developed a pro forma comparison of the amended gold and copper streams versus the current gold-only stream. To recap, the current stream is for 52.25% of the gold for a payment of $435 an ounce. The amended agreement will be 35% of the gold at the same $435 per-ounce payment. It will include18.75% of the copper, at a payment of 15% of the spot price for each ton delivered. This is the same information we provided in our call on July 5, 2016.

It's important to note that this modified stream will be applicable to production after the closing date of the transaction. There is about a five-month lag between concentrate shipment and final settlement. So we would expect that we'll start receiving deliveries of the gold and copper under the new amended agreement, starting approximately five months after the Centerra/Thompson Creek deal closes. Until then, the current stream agreement continues. As I mentioned earlier, and as presented on this slide, we expect the amended stream to be value neutral to Royal Gold on a discounted cash flow basis at consensus gold and copper prices.

I'll now turn the call over to Mark to provide more details on our operations.

Thanks, Tony.

We're now turning to slide 8.

Pueblo Viejo is our third largest source of revenue and one of the world's most prolific mines. We're pleased to see that Barrick reiterated its full year 2016 production guidance of 600,000 ounces to 650,000 ounces of gold. During the quarter, we saw improved gold recoveries due to more favorable ore types being processed, and silver recovery improving to 60% through process enhancements.

Turning to slide 9, we're pleased to see that $420 million Penasquito Pyrite Leech project was recently approved by Goldcorp's Board. Goldcorp states that the Pyrite Leech project is expected to recover approximately 40% of the gold and 48% of the silver currently reporting to tailings. And will add incrementally annual gold production of between 100,000 ounces and 140,000 ounces. And between 4 million ounces and 6 million ounces of silver.

All permits are in hand for construction to commence next month. With a forecast for commercial production from the Pyrite Leach project in the first quarter of 2019. Royal Gold has a 2% net smelter return royalty on all metals produced from Penasquito.

On slide 10, we are actively monitoring underground development at Wassa and Prestea through monthly operational updates and quarterly site visits. Last month, Golden Star announced that it began stoping at the mid-grade F Shoot area in its Wassa underground deposit using long hole open stoping. And plans to access the higher grade B Shoot in early 2017.

Underground development rates at Wassa continue to trend upwards and currently average 10 meters to 12 meters per day. The underground projects are scheduled to contribute to production beginning in late this calendar year from the Wassa underground and in mid-2017 from the Prestea underground.

Golden Star expects 2016 gold production of 180,000 ounces to 205,000 ounces, which includes 20,000 ounces to 25,000 ounces coming from the Wassa underground project. The new sources of underground ore at Wassa and Prestea will increase annualized production levels to an estimated 240,000 ounces once in full production.

Finally, I'll wrap up my comments with a brief update on Rainy River presented on slide 11.

New Gold estimates the construction is 40% complete at Rainy River. And they continue to target first production in mid-2017. Royal Gold has invested $100 million in the project to date. And our second and final investment of $75 million is scheduled to occur once the project reaches a spending level of 60% of the estimated cost of completion. Which is expected to occur near the end of the third or the beginning of the fourth calendar quarter of 2016.

New Gold states that they continue to make good progress with respect to the challenges encountered at the water management and tailings management facilities. New Gold submitted revised construction designs for the water management facility, and they anticipate receiving the permanent amendments to begin remedial work in the coming weeks. New Gold also plans to submit its final designs for the tailings management facility by mid-August and expects final approvals early in the fourth calendar quarter.

I'll now turn the call of to Stefan.

Thanks, Mark.

On slide 12, I summarized a few of our financial highlights.

As Tony mentioned, fourth-quarter revenue of $94 million was up nearly 30% from a year ago based on increased volume and a 6% increase in gold price. DD&A was approximately $470 per GEO for the quarter, resulting in a full-year rate for FY16 of $460 per GEO. Looking forward to FY17, we expect that DD&A per GEO will be between $450 and $500. For the fourth quarter, our effective tax rate was about 22%. And for the full year our normalized effective tax rate was approximately 20%.

We utilized our strong operating cash flow to repay another $25 million of debt. And to distribute $15 million in dividends during the quarter. Our current liquidity of over $500 million includes about $140 million of working capital, plus $375 million of revolver capacity. Our remaining commitments include $75 million to New Gold for Rainy River and $30 million to Golden Star for Wassa and Prestea. We expect to fund the balance for Rainy River around the end of September. And the balance for Wassa and Prestea with $20 million in October and the last $10 million in January of 2017.

While we have been focused on paying down our revolving credit facility over the past few quarters, during the next couple of quarters we expect that debt repayments will cease while we fund our remaining commitments. We expect to resume paying down the revolver during calendar 2017.

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

Thanks, Stefan.

We're very pleased with the quarterly results and the significant investments that we've made to the portfolio over the last fiscal year. We are focused externally again. And we will continue to look for opportunities that will provide our shareholders exposure to quality assets with upside potential.

On slide 13 I will leave you with our vision and strategy that we shared at our Investor Day. We don't need to be the largest company in our business, but we do want to be the most valuable. We believe the results that we have delivered today -- strong financial and operational growth, combined with the potential for expansion at several properties at no cost to Royal Gold -- are certainly consistent with that goal.

Operator, that concludes our prepared remarks. We'll be happy to open the line for questions.

(Operator Instructions)

Our first question comes from Mike Jalonen from Bank of America. Please go ahead.

I guess I've been called worse, Tony.

Yes, we know who you are.

Just calling on Voisey Bay there. So you basically said it. No revenue until the litigation's resolved. Which we saw there in the fiscal quarter.

What is the time line for this being resolved? And is Valley accruing the money that will be owed to you, and they keep it in a separate account, assuming they lost? That's my question.

Mike, let me just start with the latter first. I think that's a question you have to ask of Valley. I don't think he we have that transparency on how they're going to account for this. But as you know, we've been very active in our position that we think that the deductions that they're making are inappropriate, essentially turning an NSR into an NPI type royalty. We feel very strongly about it, we're defending ourselves very actively.

We have gone through a lot of the litigation process already. From a discovery standpoint and we're going to be thorough and dedicated. And we think that the schedule that's before the court now would call for a trial somewhere in the very early part of 2018.

So that's the guidance that we would give. That until we have clarity from the court, that you should not be expecting any revenue to be in our financial results on a quarterly basis.

How long before the court would make a decision, do you think, or is that just up in the air?

Yes, I'm looking at Bruce Kirchhoff, our General Counsel. He's not able to make a prediction there. Certainly, would take some time after the hearing happens.

Where would the hearing be held? What court?

It would be in St. John's.

Better book my ticket. Okay. Well, thanks.

Thanks for the question.

Our next question comes from Lucas Pipes of FBR and Company. Please go ahead.

Hey, good morning everybody.

Good morning, Lucas.

So Tony, if I understood you correctly, there in your prepared remarks, I think you mentioned, quote, looking externally again. I was hoping if you could maybe define this a little bit more narrowly in terms of size, location, timing? Would appreciate your thoughts on that subject.

I'll be very, very general on that, Lucas. As you can imagine, we don't comment on any specifics with regard to business development.

We had wanted to keep our powder dry during the course of the first part of this calendar year, until we had clarity on the Mount Milligan situation. We think there's obviously a good result there.

We never left the business development space. Bill and his team were active in monitoring and watching all things that were coming across the space.

But we are now in a position where we think that Mount Milligan is such that we can look for new opportunities. We said that we have over $500 million in liquidity. And certainly a transaction the size of several hundred million dollars would be of interest to us.

That's helpful. And the same time, I think you also would like to grow the dividend. Broadly speaking, do you have a preference of one over the other? Are they not mutually exclusive?

We think a good company ought to do both. That's exactly was we're striving to do. We've been able to do that over the last 16 years. That would certainly be the focus of our Board and our management team.

Very helpful. I appreciate your thoughts. Thank you.

Thanks, Lucas.

Our next question comes from Andrew Kaip of BMO. Please go ahead.

Good morning, Tony.

Good morning, Andrew.

I'm just wondering, along the theme of the previous caller. You also have some organic opportunities within your portfolio, and I'm just wondering what your view on some of those opportunities are? Probably most significant would be [Zero Max] and the [Ilibitsa] Project. Can you comment on how you see that developing and how that fits into that organic pipeline?

Andrew, you're speaking softly or the line's softly. So just for the benefit of the rest of the callers let me try to paraphrase what I think you said. And you can correct me if that's not right.

You're talking about other capital commitments we have within the Company. And specifically, I think you were talking about the Ilibitsa project. And there we have an option to put $160 million into the construction of the project to get 25% of the gold.

Before I go on and answer that, is that a proper paraphrase of your question?

Well done.

Okay. Yes, Stefan spoke about what we have yet to deliver on a Rainy River transaction, that's $75 million. Mark mentioned sometime near the end of September, plus or minus whatever. We'd expect to pay out the other bit. And then we have $30 million left on Wassa Prestea.

So, those are easily handled out of cash flow. I think the one that you're most focused on, Andrew is the $160 million from Ilibitsa. First of all, we don't have a schedule or we could time that. There's sill some deliverables that they have to achieve before we would ever get serious about putting a time frame around that.

Moreover, we look at that as a complete option. We'll look at it at the time, if it makes sense to us to invest, we will. So that's one that we don't put quite in the same category as Wassa Prestea and Rainy River.

All right. At the same point in time it does represent an opportunity for your Company. And I'm just wondering what is your current thinking about how that's going to develop?

We're getting into the areas where we're just not able to provide detail and comment on that specificity. All I can give you is just a general statement to say that, as in any business opportunity, we'll look at that at the time it comes into us. We'll make our decision based on the facts on the table at that time.

All right. Thanks very much.

Thanks, Andrew.

Our next question is a follow-up from Lucas Pipes of FBR and Company. Please go ahead.

Hey, thank you very much for taking my follow-up question. It's a broad industry question. Tony, you're extremely well connected across the gold space. And I was wondering how is the industry looking at production growth right now? Prices have had an exceptional run this year.

Is there a sense of urgency to add production back? Or are folks, based on the more recent experience, you mentioned December was the low. Are they still more hesitant to add production again? I would appreciate your big picture thoughts on that.

Let me speak to my thoughts only. And not put my opinion upon any producer out there. I think this industry is one that's hungry for margin. We certainly have seen some escalating gold price over a number of years that really didn't lead to margin expansion. We saw production expansion during that period of time. So, I think there will be a natural tendency for people to be looking for margin expansion. We're seeing some of the larger companies that are starting to right-size, would be my words, not theirs. Right-size their portfolio for sustainability. And all that makes good sense to me.

And does that attitude or approach to this market, does that reduce the set of opportunities in your opinion? Or how would you say it impacts Royal Gold's strategy, if at all?

The kind of projects that we're going to be interested in are going to be the higher quality projects. And I think there will still be opportunity for us in those areas.

Today, I think the biggest opportunity for Royal Gold would be more on the base metal side. Where there's still balance sheets that are stressed. And that market hasn't come back as much as gold and silver have in the recent six months or so.

So I think that's just a natural for us. That's the place where we can get assets that are very long-lived. It's a natural arbitrage between us and the base metal companies. They covet the base metal we covet the precious metal. That's really where I think the future of our business lies, at least in the near term.

Having said that, Bill will not give up on opportunities that might be in the precious metal producer's space either.

When you say base metals, if you would, would you do royalties or streams on base metal operations? But only on the right precious part of it? Or would you look at essentially copper, zinc, mine, et cetera, if you could clarify that, I would appreciate it.

Lucas, thank you for putting that question back to me because I don't want to miscommunicate here. We're very much looking for base metal mines with precious metal byproducts. And we really only desire the precious metals.

Perfect. Great. Thank you very much.

Thanks, Lucas.

Our next questions comes from Shane Nagle of National Bank. Please go ahead.

Thanks, operator. Thanks for taking my question, guys. Stephan, real quickly on the accounting treatment for Voisey's Bay going forward. Will you just be booking the receivable for your expected revenue over that time period? Maybe offset by the liability related to the LIBOR tax? Or is there some different form of treatment there, given the ongoing litigation?

Sure, Shane, thanks for the question. Actually, for the last three quarters or so we've just been booking the Voisey Bay royalty on a cash basis. So we are not booking any revenue or expected revenue on an accrual basis for Voisey's Bay. We're just booking cash when it's received. That's been the case for all of this fiscal year. Until we got better clarity or we started receiving payments, we will not have any revenue or accrued revenue for Voisey's Bay.

The same goes for the tax liabilities as well, I'm assuming.

That's correct.

Okay. So there will be some sort of cash settlement in 2018 or 2019 or whenever that's settled?

We really wouldn't have any accounting until he we received some cash or the litigation was settled in some way.

Tony, maybe real quick, just on the Rainy River. The tailings management facility. The time line there with their revised plan, does it give you any pause on their expected time line? Or maybe asked another way, now that Mount Milligan is resolved, is there anything within the portfolio that maybe gives the team there a little bit of concern going forward?

Well, I was going to ask Mark to answer that question until you broadened it right there. I'm just kind of searching through my mind. Our portfolio's running very, very well right now.

So not anything that we would have had concerns on. We would have guided the market to that would be material. So nothing on that standpoint.

You know that the management team's focused on the Voisey's Bay litigation and has been. We're not taking our eye off the ball but Bruce is working on that. And with regard to Rainy River's construction there, we're very much focused on a quality project over the long term.

And we have encouraged, and we didn't really need to emphasize this to New Gold, because they know how to do things right. We want to make sure that they take the time and get the skills and resources they need to build a quality project for the next decade and a half or two decades. We're quite comfortable with how that's coming together, Shane.

Thanks, guys.

Thanks very much.

(Operator Instructions)

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

Thanks, operator. And thank you for joining the call today. We surely appreciate your interest and continued support of Royal Gold. And we'll look forward to updating you on our next quarterly conference call. Thanks everyone.

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