Royal Gold Inc (RGLD) 2018 Q1 法說會逐字稿

Good day, and welcome to Royal Gold's Fiscal 2018 First 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 and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's first quarter fiscal year 2018 results. This event is being webcast live, and you'll 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 Stefan 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.

Thanks, Karli. Good morning, and thank you for joining the call. I'll begin on Slide 4 with a summary of the quarter.

We began fiscal 2018 with strong, steady performance. Royal Gold delivered solid cash flow generation, debt reduction and growth at Rainy River. Volume of 88,000 gold equivalent ounces was consistent with the year ago quarter. Our reported revenue of $112 million reflected a gold price that was down about 4% from a year ago.

We generated $72 million in cash from operations, which was our second highest quarterly cash flow in company history. And earnings of $0.44 per share topped most analysts' estimates principally due to lower expenses during the quarter.

Our growing and sustainable dividend continues to be a priority for our board and management team. We've paid out $16 million during the quarter, equivalent to a 22% cash flow yield.

And we continue to strengthen the balance sheet.

Over the last 3 quarters, we paid down $145 million of debt. Currently, all of our cash flow is dedicated to dividends and debt reduction.

We already have a strong balance sheet, but it's getting even stronger to prepare for future acquisition opportunities. Today, we have about $900 million of liquidity to pursue new deals, and we have no capital commitments.

In my final summary remark, we congratulate New Gold, which declared commercial production at Rainy River on October 19. Our management team and board traveled to the site in August, and we had a chance to meet with the construction and operations team and tour the property, just as they were finalizing all things to start operations. We are pleased with their progress and their pre-commissioning efforts, which certainly aided in the successful start-up to date.

We want to make Royal Gold an investment for all classes, not just the precious metal class. We benchmark ourselves well beyond just the precious metal industry, and one of the elements that is important in all companies is diversification. Rainy River is our 40th producing property. Few investment opportunities are for such rich diversification, with 40 unique sources of revenue, and all of our producing properties are in minerals.

On to Slide 5. As we ended -- as we near the end of calendar 2017, operators of our principal properties have updated their full year guidance projections. At Mount Milligan, Centerra experienced some unplanned downtime in the pebble crusher and SAG mill during the quarter. That throughput will be difficult to make up, so they have reduced their midpoint of their full year gold guidance by 11%. The calendar year copper guidance is unchanged.

Centerra continues to expect a strong December quarter for both copper and gold as compared to prior quarters of the calendar year. And I'd like to remind you that Mount Milligan remains firmly in the lowest quartile of worldwide production costs and is a strong cash flow generator for both Centerra and Royal Gold.

At Pueblo Viejo, (technical difficulty) low end of its expected gold production range from 625,000 to 635,000 ounces. And finally, at Wassa Prestea, Golden Star has reiterated their full year guidance of 255,000 to 280,000 ounces. And I'd remind you that our current stream of 9.25% of gold produced will increase to 10.5% on January 1, 2018.

Turning to our other sources of growth and diversification on Slide 6. Our sequential additions of new volume remain intact. On the heels of the Rainy River ramp-up, we expect Cortez Crossroads ore production and the start-up of the Pyrite Leach circuit at Peñasquito next year. These 3 volume additions do not require any further fund and capital investment on our part.

We are very pleased to see the progress that was made at Rainy River during the quarter. We invested $175 million in 2015 and returned for 6.5% of the gold and 60% of the silver at a purchase price of 25% of spot for each metal.

We will be delivered gold and silver monthly, so we expect our first contributions from Rainy River in the current December quarter. The mine has nearly 4 million ounces of gold and 10 million ounces of silver in reserves, which equates to a 14-year mine life.

We continue to look forward to production at Cortez Crossroads next year, where we have a 4.5% net value royalty, in addition to a 5% Gross Smelter Return royalty. It's a straightforward deposit with most of the ore volume dedicated to heap leaching. Barrick has been stripping the Crossroads deposits for about the last 20 months, and they have several more months to go before encountering ore. We anticipate more stable ore production from Crossroads in the second half of calendar 2018. Gold production will be lumpy, but in total, 3.2 million ounces of reserves will be mined over a 9-year period.

And finally, Goldcorp has accelerated its Pyrite Leach Project. It was originally scheduled to begin production in 2019, but the start-up has now been moved forward to the fourth quarter of 2018. Once the Pyrite Leach Project is in operation, 40% of the gold and 48% of the silver now reporting details are expected to be recovered in the new circuit.

According to Goldcorp, this equates to 1 million ounces of gold and 44 million ounces of silver over the current life of mine.

Turning to Slide 7. We have some additional details about Rainy River's progress. New Gold started processing ore on September 15 and declared commercial production on October 19. To date, this has been a very successful start-up. From October 1 to the 24th, New Gold achieved a processing rate averaging 18,500 tonnes per day or 88% of nameplate capacity.

Another milestone for the project was the completion of the Schedule 2 Amendment, which was obtained a few months earlier than expected. This further derisks the start-up and clears the way to finalize the construction of the main tailings storage facility.

Once start-up is complete, we expect that New Gold would turn to evaluating Rainy River's longer-term potential beyond its first 14 years of mine life. New gold has 200 square kilometer land package in one of the world's most favorable jurisdictions for mining activity.

And on Slide 8, I'd like to just talk about our portfolio for a moment. One of our corporate objectives is to further our portfolio diversification. And as I mentioned, Rainy River is Royal Gold's 40th operating property, so it's a good time to take a step back and look at the whole portfolio.

While we are the smallest of the 3 largest royalty and streaming companies, in terms of market -- and that's in terms of market capitalization, our diversity in terms of number of projects is as good or better than our 2 larger competitors.

We appreciate a large portfolio because you never know when a new discovery can transform a mine, just as was the case for Cortez and Goldstrike.

Our portfolio is 100% minerals and principally gold.

Even with the effect of the new copper stream at Mount Milligan, 87% of our Q1 revenue was precious metals. Specifically, our revenue during the quarter was made up of 77% gold, 10% silver, 10% copper and 3% other metals and minerals.

Our revenue comes from traditionally favorable jurisdictions. 89% of our Q1 revenue was derived from properties in Canada, Chile, the United States, Mexico and the Dominican Republic. The balance came from Australia and Ghana, also countries with strong mining traditions.

And now, I'll turn the call over to Stefan for the financial details.

Thanks, Tony. On Slide 9, there's a snapshot of our debt reduction efforts over the last 3 quarters. At September 30, our net debt-to-EBITDA was just above 1.5x. As Tony mentioned at the outset of the call, we are focusing on dividends, debt reduction and strengthening the balance sheet for future business opportunities.

When we are at or below 1.5x net debt-to-EBITDA, we will have a decrease in our drawn interest margin to LIBOR plus 1.5% and lower undrawn fees of 30 basis points compared to the 1.75% and 35 basis points that we are currently paying.

Moving to Slide 10. I've summarized our tax, DD&A and liquidity. Our effective tax rate was 22% in Q1. For fiscal 2018, we continue to expect an effective tax rate in the range of 20% to 25%, in line with our actual fiscal year 2017 rate. DD&A was about $450 per GEO, at the low end of our original guidance. We continue to expect DD&A to be between $450 and $500 per GEO for fiscal 2018.

We paid $16 million in dividends during Q1, resulting in a 22% cash flow payout ratio. We have paid down $145 million on our revolver over the last 9 months, with $50 million of that during the first quarter. At September 30, we had $916 million in total liquidity, an increase from $860 million last quarter. This includes $116 million of working capital plus $800 million available under our expanded revolver.

In fiscal 2018, we continue to expect to pay down debt aggressively, while maintaining the increased credit facility to fund acquisition opportunities. And as always, we continually evaluate our capital structure to determine the most advantageous cost of capital for future opportunities.

Tony, I'll turn it back to you.

Thanks, Stefan. Well, let me conclude on Slide 11. Over the last 20 years, Royal Gold has delivered value for shareholders through significant share price appreciation and 16 years of a growing and sustainable dividend, outpacing the price of gold and the S&P 500. We've gotten there by staying true to our lower risk royalty and streaming model, focusing on expanding our portfolio during opportunistic times and stewarding our shares by growing the company out of cash flow generation as much as possible.

Today, we have a diverse portfolio of 40 producing properties and decades of experience developing royalty and stream transactions. In the future, Royal Gold will continue to pursue this strategy.

We will continue to focus on per share returns, to diligently return capital to shareholders, and to be prepared for future opportunities.

Finally, if you've had an opportunity to read our recent proxy filing, you'll know that our Director, Craig Haase, has decided not to stand for reelection at our upcoming annual meeting. Craig joined our board back in 2007, and he ushered in a new era of governance for the company as our market capitalization grew from $720 million when he joined, to the $5.5 billion we are today.

He ensured that our governance programs aligned with that maturity. Craig has a deep expertise in mining law and is truly an expert in the mining and royalty business. Craig's guidance, attention to detail and his always independent thinking, as well as his unwavering support and passion for the company will be dearly missed. We are grateful for his decade of dedicated service to our company.

And Phil, I'll turn the call back over to you, and perhaps we can open up the lines for questions, if there are some.

(Operator Instructions) Our first question comes from Cosmos Chiu with CIBC.

You certainly beat my estimates, and it's being reflected in the share price today. A few questions from me here. Tony, as you've talked about, you have a very strong balance sheet. You have untapped room on your line of credit. Could you, maybe, quickly comment on -- I know you touched on it, but again, quickly comment on opportunities out there? What's a better opportunity at this point in time? Would they be in precious metals, base metals, and other stuff? Just maybe a general comment.

Thanks, Cosmos. Happy to do so. We continue to see activity. It's certainly quieter than it was 24 months ago, but that was a very, very unique time in our company history. And I think we're back to business as normal. So we're seeing things across the board, both in precious metal and base metal. When I say base metal, please understand that I'm talking about streaming opportunities on base -- principally base metal assets. So we're still seeing some opportunities in both of those areas. But when I get asked that question, I kind of guide that the business size is probably somewhere around the $100 million to $500 million range, not the $500 million to the $1 billion range it was 18 months ago. So we're still active. We still like some things. We covered some things. And we'll just to have to see whether we can -- we'll be successful at the right price point for our shareholders.

Sounds good. Maybe moving back to your current portfolio here. You touched on a few, I would say, production guidance updates such as Mount Milligan and whatnot. But looking at Table 3, I would say the other ones that are sort of behind at this point in time, with 9 months completed now in calendar 2017 will be your Cortez, GSR 1, 2 and 3 and Cortez NVR. Could you maybe comment on that in terms of, are you going to be looking for a much better Q4 calendar 2017? Or is that sort of you're not sure at this point in time?

Let me just put some opening remarks there, and then I'll pass it to Mark Isto, our Vice President of Operations, to see if he has anything further to add. But as you know, we're a bit of a swing producer there at Cortez, if you'll allow me to use that term, and they're focused principally in other areas at the Cortez Hills property, where we don't have a royalty interest. So we see the tonnage come in bits and spurts, if you will, and I don't know that we have a tremendous amount of confidence that they'll meet the annual guidance there. So I wouldn't suggest that you put in your model a large quarter. We're going to see a much more sustained production, as I mentioned, in the second half of next year, when all of the major open pit equipment will be back over on the pipeline site, where we have most of our royalty interest. So those would be my general remarks there. Mark Isto, do you have any more comments to add there?

No. I think you described it correctly. I mean, we've seen a lot of variability in the forecasts that they give us for our production for exactly the same reasons Tony mentioned, and that variability has occurred over the last several years. So I would not expect to have an overly different couple of quarters coming up.

I guess it's hard to say at this point in time. But in the past, have you seen any kind of sort of, not underperformance, but if it was lower than what you had expected in a particular year, would it be followed by a year that was better than expected? Or it's too hard to kind of pinpoint at this point in time?

Yes. Let me answer your specific question with more of a generic answer. And all good miners are going to mine the highest-grade available to them. So that's kind of what I mean by a swing producer. To fill the mill off, and the additional tonnes will come from the lower-grade areas, where that's particularly on the South Pipeline and GAP area today at the pipeline site. So it's not a -- it's -- the only thing I can say there is the reserves are in the ground and they'll come out eventually. And as the higher grade diminishes in the open pit, then, the priorities swing to the pipeline complex.

Yes. Okay. And Tony, we had talked about base metals earlier, and you talked about base metal mines as well. One base metal asset within your portfolio that, I guess, we didn't talk about today is Voisey's Bay. Any kind of update on what's happening there in terms of the legal issues or legal dispute? And clearly, it's a nickel and cobalt asset, and I would imagine right now is a pretty good time to have a cobalt royalty.

Yes. We -- we're very, very active in the litigation at present. We have guided that we're going to be -- we have a court hearing, a court trial date that's set for the second half of next calendar year. And I'll be a little more specific about that today. It's set for September, and we are doing all things to be absolutely prepared for that at the present time. So there's a lot of activity that's going on there. The attorneys will call it the discovery phase, but very much advanced in our thinking and preparation at this point.

The next question comes from Stephen Walker with RBC Capital Markets.

Tony, 2 questions. The first one, broadly speaking, given your technical background and experience with large-scale plants, when you read through the lines at Mount Milligan, you've got a 62,000-tonne a day plant that's struggling to get up to the rated capacity. You've got issues with the SAG mill and the pebble crusher not just this quarter, but previously. Does this put up any red flags for you when you look at it? As I say, when you put your mine manager's cap on, your engineering background, can you talk a little bit about kind of what you see happening there and how you see it being resolved? Bearing in mind, obviously, you're not the operator but from a very high level, what are your thoughts?

Yes. Stephen, thanks for the question, and any chance I get to put my manager's hat back on, it's a good day. But we are not the operators, so please take my comments appropriately. Look, I wanted to say in my prepared remarks how good the project was doing. It's in the lowest quartile of worldwide cash production. I think they actually -- all-in sustaining costs were $437 an ounce this quarter. I mean, it's just a fabulous asset. And yet, it kind of has a bit of this stigma that it's not performing well. Well, it's not performing necessarily up to the 62,000 tonnes per day nameplate capacity, but it's a very, very successful mine. I just want to lay that groundwork first before entering into any other part of the conversation. Now we don't have -- the things that we can't control, in a deposit or in a mine site, are the things that nature has put there, with the grade and the volume and all of those things. And there's not an issue there. We don't understand that it's an issue with the particular hardness of the material. The plant is a well-built plant, but there is truly a problem that Centerra is highlighting regarding maintenance. And if we look at the availability of the plant during the quarter, we would agree that it's not a number that we'd expect to see out of a typically run plant. And that one, we know it can do better. And so these are the man-made issues that we can work on. And I don't really focus very much on the throughput as much as I do on maximizing the recovery on an NPV basis. I think there's not going to be a lot of difference. At a reasonable throughput rate, will it get all the way up to 62,500? I don't know. But I know it can do a whole lot better than where it's at today. If you can get another 5 points on availability, that's a lot, a lot of tonnage, throughput on a tonnage per day basis. So those things will come along. Centerra highlighted to us and to you on the call -- their call, yesterday, that they made some management changes there. They made some system changes. And if we really look for some of the optimistic things that have happened on the project since Centerra has come in, they've only had a bit of time and the operators see it before they had to put out their guidance for the entire calendar year. And they have matured their geometallurgical model significantly now, which I'm sure they'll continue to calibrate that, but it's going to be a better estimating tool for them, both in production and budgeting purposes going forward. So I think setting proper expectations is going to be huge for all of us on Mount Milligan. And finally, I'd say, one of the things that hasn't been really discussed very much is some improvements in recovery since we've taken over. We've seen some nice tick-ups in the copper recovery, and the gold recovery has ticked up not as much, but certainly in the right direction. So I think there's a lot of good, positive news around this deposit. And as a mine manager, I'd be tickled to be the operator. There's still a lot of low-hanging fruit that can be harvested.

Right. And just, if I may, the second question. You talked about Crossroads. You mentioned several more months of waste stripping, and then, beginning to put ore in the patch here. That's early 2018 from the sounds of it, with a larger contribution in the back half of the year. As I understand it and as I would model it for yourselves, look to be building up pregnant solutions through the first half of the year. And so production, to your credit, really doesn't kick in until the third quarter? Or do you expect to see a smooth ramp-up from Day 1 early, call it, Q1 2018 calendar, and then production from that point on increasing through to the back half of the year? Can you give us a sense on how you think that -- the leach contribution from Crossroads will flow through to your revenue line?

I -- you have a very good understanding of it. It will be back-end weighted for sure. They're going to encounter bits of ore in the top part of the deposit that'll go to the leach pad early in the year. But it won't be -- in my understanding, it won't be material. And then the bigger volumes start coming in, in the second half of the year. And then, of course, you have all of your leach residency time and everything else to be concerned with. So I would very much guide you later in the back half of 2018. Then, let me just touch base with Mark. I apologize, Mark is not in the same office as us today, but I just want to make sure that he has -- if he has anything to add to that.

No. No. Your explanation is correct. It's definitely back-half weighted.

Okay. So does that give you enough, Stephen, to go on?

That's very helpful. And Mark and Tony, just from your recollection, do you know if there's a higher grade, either perch zones within that, that could go to the plant? Or your understanding is it's fairly homogeneous and everything goes to the leach pads?

No. No. There'll be some tonnage that goes to the pad. If you look on the split between metal volume, what's produced in the mill and what's produced in the heap leach pad, it would be a stronger percentage than it is on the ore volume, if you understand what I'm trying to say. So I don't know exactly what the breakdown is, but you should expect some of that volume, of the 3.2 million ounces will be going into the mill.

The next question comes from Andrew Kaip with BMO.

Just to follow up on Stephen's question. That 3.2 million ounces, how long is that mine plan? How long should we expect production from Crossroads?

Well, it's a 9-year mine plan. But I think that takes in some leach downtime as well. So the heavy ore will be 2 years prior to the end of the mine plan. So you have some ramp-up and ramp down. And again, since -- the mine is not restricted by -- principally by the volume going through a confined mill, they can put as much volume as they need to when they encounter on to the heap leach pad. So I really want to stress the lumpy word that I used, that 3.2 million ounces could be -- could swing quite a bit. And as we get into it, Andrew, and the rest of the folks on the call, we'll try to give a little better guidance than what we're giving now because I truly believe it could be a significant variance from year-to-year.

Okay. And then, just another operational question. Wassa and Prestea. Prestea had a very strong quarter, and it somewhat offset weaker-than-expected production at Wassa due to dilution. And I'm just wondering, you've probably reviewed the project recently. What are your views on Wassa? And certainly, in particular, Wassa being able to get to above 2,700 tonnes per day with the new outlook that they have.

Yes. Mark has been watching this project very, very closely. He's had boots on the ground himself probably every 9 months or certainly not more than a year. And so he's as close as possible to this one. Let me pass that question to you, Mark.

Yes. Well, I think they reported that they're at 2,400 tonnes a day for this last quarter, and we think that achieving the 3,000 tonnes a day that they're talking about is very achievable. The infrastructure that they put in, their twin declines, if you will, are good for 4,000 tonnes a day. They've had very steady progress on their stope production, positive trends. So I think it's all -- bodes well for them to achieve their forecasts of getting to 3,000, for sure; and possibly beyond, I think, is very good.

And then, just the dilution issues that they were running into, have you had a conversation with them about what exactly was taking place?

Well, they're still mining longitudinal stopes, which I think is part of the issue. I mean, they haven't got into the trends we're stoping, which implies the bigger, more expansive ore zones. So the longitudinal stopes, in my opinion, are going to have more dilution. I mean, they've talked about not having the amount of definition drilling in front of them that they like to have, and I know they're pushing to make that happen. And that will certainly improve their dilution management. But I think as they switch to getting some transfer stopes, which I think are coming in the first quarter of the year, I might be mistaken on that, but I think that will be a significant -- a potential significant improvement in the issue as well. I hope that helps.

(Operator Instructions) The next question comes from Lucas Pipes with B. Riley FBR.

So I wanted to follow up a little bit on the Wassa open pit. Obviously, saw the announcement yesterday that they will cease operations there in January 2018. And I wondered if you could give us a little bit more color as to what led to that decision and at what point they may return to that part of the project.

Lucas, let me just -- let me make some general comments there because we're -- obviously, we're not the operator, and we guide most of those specific comments back to Golden Star. But I can tell you, as I said earlier, a good miner is going to be focused on margins. And the highest and best margins they have is through the underground. And they've been able to increase that underground throughput. They've had a very successful start-up. You heard Mark talk about the current underground tonnage per day, and I think the plan was somewhere around 14,000. So they're well, well above that, and they even see scope to go higher. So the high-margin ounces are underground rather than open pit. And so I'm sure the management team and board just took a look at what the most -- best-margin ounces that were available and weighed them against the capital required to deliver those ounces and came up with this decision. It's something that we have been very close to ever since we looked at the project. And so this move to the lower volume, but higher grade, higher margin, is very much what we were anticipating.

Got it. And so as I kind of think about the progression of volumes for you, that should have an impact, correct?

Well, we -- there may not be as many ounces that are produced because the mill is, I think, at Wassa is going to be really cut in half, and they're only going to be utilizing one ball mill at a time. But the grade's going to be a little higher over time as well. So let us just see what their budgeted projections are for next year. We don't have those yet. But, again, in our acquisition philosophy, in our thoughts about how we've been thinking about the project, this doesn't come as a surprise to us.

That's helpful. And then, maybe a question to try to put it all together. Obviously, there's been a little bit of the delays, issues at Mount Milligan and the ceasing of open-pit operations at Wassa. And then, on the other side of that, of course, we still have some growth coming forward from Rainy River, Cortez, et cetera. So if you try to put it all together, when I think about kind of 2018 volumes, gold equivalent ounces, what is that going to be up year-over-year versus '17? I would appreciate a little bit more guidance, given all those moving pieces.

Yes. We -- Lucas, we don't come out with specific guidance in any particular forward-looking period of time. But what we have said in the marketplace is that we expect continued growth in our company even would offset the declines that we've had. And with regard to specific guidance on calendar 2018, we'll get that probably in the June -- well, probably in the May-or-so time frame.

End of our March quarters.

End of March quarter. And we'll be able to show you what those numbers look like for the calendar year. But we still -- we've got a lot of new, good pieces of business, which we really haven't spoken on the Q&A about Rainy River at all. But that's starting up faster. If that proves to be the case, will certainly be a big benefit to us. The effect that we see, the Pyrite Leach being accelerated into the end of 2018, now that's going to be a lot of 2019 tonnage. That's also a big positive. The fact that we've got a little bit of an uptick in our streaming rate at Wassa Prestea starting in January 1 is another good piece of little incrementals -- incremental bits that all make a difference to us. So no, we don't have any specifics to guide for you at this time, but just generalities.

And then, in terms of maybe a range, in terms of growth, would that be -- would you be able to provide that?

No, we've not done that. We've been very conservative in how we think about that. So sorry, we're not going to be able to speculate at this time.

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

Well, thank you for your interest and all the great questions on the Q&A session. Now we look forward to continuing a steady and solid performance in the months and quarters ahead, and look forward to speaking with you in the very near future. Thanks for joining us.

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