Royal Gold Inc (RGLD) 2017 Q2 法說會逐字稿

Good day, and welcome to the Royal Gold FY17 second-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Karli Anderson, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's second-quarter FY17 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; Mark Isto, Vice President Operations; and Bruce Kirchhoff, Vice President, General Counsel, and Secretary. Tony will open with a brief overview of the quarter followed by Mark with some comments on operations and Stefan with the 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 call over to Tony.

Thanks, Karli. Good morning, and thank you for joining the call. Today, we are reporting solid and straightforward financial results including record operating cash flow and impressive revenue growth amid continued strong performance from our portfolio of 38 producing assets.

On page 4, you'll see a rolling five-quarter comparison of key metrics. In the second quarter of FY17, we recorded substantially higher volume from Andacollo and Pueblo Viejo offset by lower volume from Mount Milligan, Wassa, and Prestea. While total gold equivalent ounces were in line with the year-ago quarter, recall in that prior period we reported record volume including 14,000 ounces of true-up deliveries from Pueblo Viejo, Wassa, and Prestea. As you can see, what was previously considered an exceptional quarter has now become a new base from which we expect additional growth.

Turning to page 5. We are particularly pleased with our strong performance that has been anchored by three of the four large royalty deals -- sorry, streaming deals Royal Gold did in 2015, including Pueblo Viejo, Andacollo, as well as Wassa and Prestea. Our fourth deal we announced in 2015 was a stream on New Gold's Rainy River project in Ontario.

While development continues to progress, New Gold has advised the first production target date by three months to September of this year, citing slower than planned ramp-up of mining rights which impacts delivery of construction materials to complete the mine infrastructure. Mark will speak more on this later.

When we described our deal with Rainy River in our earnings call nearly 18 months ago, we talked about the quality of the project including upside potential, cost competitiveness, and the favorable jurisdiction. None of those attributes have changed. With 3.8 million ounces of gold in reserves, this 21,000 ton per day operation is expected to produce 325,000 ounces of gold per year for the first nine years, with stockpiled material providing a 14 year life in total based on current project parameters.

There is an additional 2.9 million ounces of gold in resource that we did not include in our valuation that represents upside optionality for our shareholders. While a three month delay is certainly disappointing, Royal Gold's economic return expectations remain essentially unaffected. So we expect future volume growth with Rainy River when production commences, but also growth from Cortez Crossroads and the Penasquito Pyrite Leach over the next couple of years.

Before turning the call over to Mark, I'd like to emphasize that we have now completed all our scheduled payments associated with the $1.4 billion in transactions we announced about 18 months ago. All cash flow going forward will be available for acquisitions, debt reduction, and dividends. I'll now turn the call over to Mark Isto who will provide some operational updates.

Thank, Tony. Turning to slide 6. I will highlight both the recent performance as well as near-term growth prospects in some of our key properties. At Penasquito, Goldcorp reports that it is undergoing significant stripping at the Penasco pit while initiating stripping at Chile Colorado.

Goldcorp is guiding to calendar 2017 production of 410,000 ounces of gold compared to the production of 465,000 ounces of gold produced in calendar 2016. Goldcorp recently completed a review and optimization of their life of mine production plan resulting in lower production in 2017 due to high grade in the phase 5D pit being exhausted at the end of 2016 and exposure to high grade ore in Penasco phase 6 not being reached until 2018. Goldcorp expects the new pyrite leach product to contribute gold production beginning in the first quarter of 2019.

The project will recover gold now reporting tailings and they expect an incremental 100,000 to 140,000 ounces of gold production and 4 million to 6 million ounces of incremental silver production. On slide 6, we've included a picture of the prepared project site from Goldcorp's recent investor day presentation. Royal Gold has a 2% royalty on gold, silver, lead, and zinc at Penasquito.

At Pueblo Viejo, Barrick chalked up its best ever year for gold production, reporting 700,000 ounces attributable, and we are awaiting their estimate for calendar 2017 production. Gold recovery performance is attributed to lower levels of total organic carbon in the ore while improved availability of system components in the lime boil circuit contributed to higher silver recoveries and production.

We remain impressed with the size of this deposit with about 20 years of current reserves, and we understand that Barrick is evaluating an opportunity to expand its tailings facility which could potentially convert an additional 7.7 million ounces of gold and 44 million ounces of silver from resources to reserves. At Mount Milligan, Centerra is forecasting calendar 2017 gold production of 260,000 to 290,000 ounces, a substantial increase over the 204,500 ounces of gold production in calendar 2016.

Centerra reports a commissioning of secondary crushers underway and they are optimizing the mine and mill to gradually increase gold and copper recoveries. An increase in calendar 2017 production versus 2016 is attributed to achieving higher mill throughput. Centerra expects to have a secondary crusher fully operational and supporting throughput of 62,500 tons per day. We remain focused on gold and copper recovery.

Centerra has laid out a series of recovery improvement options which are being systematically reviewed and include additional rougher flotation capacity, additional regrind capacity, and the development of a geo-metallurgical model. Finally, at Wassa and Prestea, Golden Star is forecasting calendar 2017 production of 255,000 to 280,000 ounces of gold, well above their calendar 2016 actuals of 194,000 ounces. Commercial production at Wassa underground was declared a few weeks ago.

Wassa underground will contribute to the 2017 production growth along with the Prestea underground deposit where commercial production is expected later this year. Beyond 2017 impressive growth forecasts, we continue to believe that there's potential for additional additions to reserves from both Wassa and Prestea underground deposits and are pleased that they plan to dedicate some of their recent offering proceeds to additional exploration.

Turning to slide 7, you'll see an aerial view of New Gold's Rainy River project. New Gold recently announced that first production will be delayed three months to September 2017. The schedule revision is attributed to an increase in construction materials due to redesign work coupled with the slower than planned ramp-up of the mining rate. Open pit mining achieved an average of 100,000 tons per day in January while the revised schedule assumes an increase in the rate to 120,000 tons per day over the next seven months.

Long truck cycle times to deliver construction materials and difficult to handle clay overburden are identified as two key issues. Additional mining equipment was procured in the September quarter, and contractors with small equipment have been employed to move overburden. Approximately 24 million tons of overburden and waste have been moved through late January.

New Gold reports that the primary crusher and conveyor are 80% complete, and commissioning of the crusher is scheduled to commence in March followed by commissioning of the SAG and ball mills during the June quarter. I will now turn the call over to Stefan.

Thanks, Mark. On to slide 8. We thought it would be a good time to review the scope of our amended gold and copper stream at Mount Milligan. Last year, we amended our 52.25% gold stream at Mount Milligan to a gold copper stream where we will receive 35% of the payable gold production at $435 per ounce and 18.75% of copper production for 15% of the copper spot price.

The amended stream goes into effect for concentrate shipped after the closing of the Thompson Creek acquisition by Centerra Gold. That deal closed in late October, and there is a maximum of five months between shipment and delivery to us. We expect to begin receiving deliveries of gold and copper under the amended stream agreement in April.

As Mark mentioned, Centerra recently announced calendar year 2017 guidance and is expecting total payable gold production of $260,000 to 290,000 ounces of which 91,000 to 101,000 ounces of gold is expected to be delivered to Royal Gold. When you consider that Royal Gold received 105,000 ounces of gold on its original stream interest in calendar 2016, the calendar 2017 guidance results in nearly the same amount of gold, even with the new 35% stream rate, and we also get 18.75% of the copper.

Centerra is forecasting 55 million to 65 million pounds of payable copper production in 2017 with 10 million to 12 million pounds expected to be delivered to Royal Gold. Having said that, it is important to remember that Centerra is guiding to a back-end weighted production profile and, with the five months lag between production and delivery to Royal Gold, we would expect to receive that late calendar 2017 Mount Milligan production in calendar 2018.

On slide 9, I've summarized a few of our financial highlights. Second-quarter revenue of $107 million was up 9% from last year. As Tony mentioned, while GEOs were in line with the prior year, we benefited from a stronger gold price. Our effective tax rate was 15.7% in Q2 and 18.5% for the full six months ended December 31. Our Q2 rate was lower than the prior year's December quarter due to certain tax items in the prior year quarter associated with the liquidation of our Chilean subsidiary.

For FY17, we expect that our full-year effective tax rate will be around 20%. DD&A was $451 per GEO for the quarter and $453 per GEO for the six months ended December 31. Both on the low end of our original guidance of DD&A per ounce of between $450 and $500 per GEO for FY17. We are now tightening our DD&A per GEO guidance to a range of between $450 and $475 per ounce for the full year.

We paid $15 million in dividends during the quarter resulting in a 22% cash flow payout ratio. For the full calendar 2016, we paid a total of $60 million in cash dividends resulting in a 25% cash flow payout ratio. Proud of our track record of growing and sustaining our strong dividend every year since 2001. We ended the quarter with about $420 million in total liquidity. This includes about $115 million of working capital plus $305 million of revolver capacity.

We advanced $20 million to Golden Star in early October and paid $75 million to New Gold for Rainy River in November. On January 3, we funded our final scheduled payment of $10 million to Golden Star for Wassa and Prestea. We have now funded $1.4 billion in new stream and royalty acquisitions over the last seven quarters, and we're only required to increase net debt by $345 million during this period without issuing equity. Now, I'll turn the call back over to Tony.

Thanks, Stefan. On slide 10, our second-quarter results support the corporate attributes of a quality company, namely, good margins, accretive growth, embedded optionality, and disciplined return to shareholders. Our gross margins are nearly twice as high as the senior golds in the S&P. We continue to expect near-term volume to increase with some new additions from Rainy River and Crossroads.

We have nearly 200 streaming and royalty interests that introduce optionality into our business as several of them are receiving investments in further exploration and development activity at no cost to us. Like the Penasquito Pyrite Leach, a project that is also expected to deliver near-term growth. And our dividend has grown at 20% CAGR since 2001. These attributes are attractive not just within the precious metals sector but also the broader market as well.

Wrapping up on slide 11, I'd hike to extend a special welcome to Sybil Veenman, who recently joined our Board of Directors. Sybil is the former Vice President, Senior Vice President, and General Counsel at Barrick. She is well-known for her legal expertise in transactions and governance, as well as ethics and corporate social responsibility. She is already up-to-speed and hard at work, and we look forward to benefiting from Sybil's contributions, and I'm particularly delighted to have her join us on the Board.

Operator, with that, that concludes our prepared remarks. We'd be happy to entertain any questions.

Thank you, Mr. Jensen. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

The first question will come from Josh Wolfson of Dundee Capital Partners. Please go ahead.

Good afternoon, everybody. I just wanted to ask you related to Rainy River at this point, New Gold has talked about a bit of a funding gap. When you look at this with the potential opportunity could be in terms of maybe streaming from that particular asset additional metal ore from the Company's other assets of metal, would that be within the bounds of I guess the risk management the Company would be looking to?

Josh, thanks for the question. And we generally would like to own more of everything that we have. We like our investments significantly. And so given the opportunity, we'd be looking at that, at all of our assets.

We can't comment specifically with regard to anything we might do at Rainy River or any other New Gold asset. But I think you can understand that we look at some of these things as opportunities and not as negatives.

Okay. Understood. So there's just in terms of I guess risk mitigation, obviously you guys are evaluating both asset specific risk and then exposure to specific companies as well I'm assuming, right?

Absolutely. You've got it right.

Okay. That's it from me. Thank you.

The next question will come from Tanya Jakusconek of Scotiabank. Please go ahead.

Yes, good morning, gentlemen.

Good morning, Tanya.

I have a question on the security package of Rainy River stream. Tony or Stefan, can you just review the security package? I don't think you've filed any information on that.

Tanya, as you know, Bill Heissenbuttel comes from a banking background, and we literally look for Bill to help us with our security aspects of our transactions. Let me turn that question to Bill.

Sorry, Bill.

How are you? Yes, so the obligations under the stream agreement are unsecured with respect to the Rainy River assets. That ranks us pari passu with the banks and the notes with respect to those assets. Once they are in production, there will be a collection account that is established, and our share of proceeds from gold and silver sales will go into that collection account and we'll have a first lien on that account.

Can you just remind us, are there any penalties for the delay in start-up?

No, we don't -- we're not like a project finance bank that would have a sort of failure to achieve completion by such and such a date. That really has never been part of the contracts that we've executed.

And then just on the covenants, I know that New Gold has released that there is one leverage covenant. Are there any others that we should be aware of?

There are no other financial covenants in that contract.

Okay. Great. Thank you so much.

Thanks, Tanya.

(Operator Instructions)

The next question will come from Mike Jalonen of Bank of America. Please go ahead.

Hi, Tony. Everyone there.

Good morning, Mike.

Tony, I had a question, I guess this came to me. Right now, you mentioned you have no more capital or spending needs, having made the last payment for Golden Star. What's more important going further? Is it growing the dividend or acquisitions, or are they kind of in competition with each other? And also maybe just one other question. I guess you do have another payment coming on Euromax I guess, if they ever get that permitted.

Mike, I think let's talk about the dividend first. We always have said that we want to pay a growing, sustainable dividend. We never have and I don't necessarily think we would do a special dividend of any sort. So I think kind of steady expectations of what we've done in the past would be a good reflection of what we likely will do in the future.

We're very much interested in continuing to grow our business. We have a nice piece of growth already in place between 2017, 2018, and 2019, with the likes of the assets we talked about. Rainy River coming in in 2017, late 2017 now, Cortez Crossroads in 2018, and then Pyrite Leach at Penasquito in 2019.

There's growth that's already bought and paid for in the portfolio. Nonetheless, we'd like to continue to add to that. So that would be a priority for us. Then also servicing our debt and moving into a net cash position is certainly a priority for us. So I hope that kind of answers the potential use of cash flow.

But with regard to Ilovitza, we're continuing to evaluate that on a daily basis. I look at it more as an option rather than a commitment. And we'll just see how that project develops and if we decide to continue to support the project, we will certainly let you know what that issue is or how that unfolds. But today, the status of the project hasn't changed much from our standpoint.

Okay. Well, thank you for that.

Thanks, Mike.

(Operator Instructions)

Well, operator, this is a very straightforward and solid quarter, so it doesn't surprise me there's not a tremendous amount of questions. Very pleased how the Company performed and how the assets performed, and we look forward to continuing to update you as our Company progresses and continues to grow into the future. Thank you very much for joining the call today.

Thank you, Mr. Jensen. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.