Royal Gold Inc (RGLD) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to Royal Gold 2018 Full Year and Fourth Quarter Earnings Conference Call. (Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Karli Anderson, Vice President of Investor Relations. Please go ahead.

Thanks, Liam. Good morning, and welcome to our discussion of Royal Gold's fourth quarter and 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; Bill Heissenbuttel, CFO and Vice President, strategy; and Mark Isto, Vice President, operations.

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 our 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.

Tony will give you an overview of the quarter; followed by Bill with a financial update, and then we'll open the lines for a Q&A session.

Now I'll turn the call over to Tony.

Good morning, and thank you for joining the call. Since this is our fiscal year-end call, some of my comments today will be more global in nature. And I'll begin on Slide 4.

Today, we're pleased to report another year of record results for Royal Gold. Record revenue of $459 million was 4% higher versus last year, while the gold price was in line with the prior fiscal year. Record operating cash flow was $329 million, up 23% versus last year, reflecting continued strong performance from the portfolio of 40 operating properties. Our GEO volume was 354,000 ounces, which is slightly up from last year.

We've been guiding that we are allocating our strong cash flow to dividends, debt reduction and new business. In fiscal 2018, that emphasis has not wavered. We paid out a record $64.1 million in dividends. We paid off our revolving credit facility in June, just as we planned. And we now have over $1.1 billion of total liquidity for new opportunities. We took advantage of a relatively quiet year for industry growth to enhance our position in the Peak Gold joint venture through an agreement to acquire 13.2% of the equity of our joint venture partner, Contango ORE. And we look forward to sharing the results of our ongoing Peak Gold preliminary economic analysis with you later this fall.

We also increased our interest in the Mara Rosa property in Brazil through the acquisition of a 1.75% royalty, which is in addition to our existing 1% royalty interest we hold on the property.

Our balance sheet was further improved with the repayment of Golden Star's $20 million loan ahead of schedule. It's been impressive to watch Golden Star's operational and financial transformation from a high-cost open pit miner complex refractory ores to an underground producer of high-quality and cost-attractive oxide ores. Royal Gold identified this potential and invested at an inflection point in Golden Star's history.

On Slide 5, we've charted our operating cash flow over the last 5 years. Despite a flat gold price, Royal Gold delivered a 22% compounded annual growth rate in operating cash flow since 2014. And I'd like to highlight that our share count has been essentially flat during this period, making our cash flow numbers highly accretive. This impressive growth is a function of our business development's success in organic growth of our portfolio of 40 operating properties. And I note that we are not yet hitting in all cylinders at Mount Milligan and Rainy River. But we expect better days for both of those assets ahead.

On Slide 6, and turning to recent developments at some of our properties. At Rainy River, New Gold announced 55,000 ounces of gold production in the June quarter, only its third quarter of full operations. As New Gold is resolving some start-up operating issues, it has reduced its full year guidance at Rainy River to 210,000 to 250,000 ounces for calendar 2018. We continue to be encouraged that the mine has demonstrated the ability to improve both throughput, which is expected to increase to 24,000 tonnes per day by the fourth calendar quarter and recovery, which increased by 6 points in the June quarter to 87%. New Gold's current mine plan for Rainy River compares favorably to the 2014 feasibility study, which was a starting point for our investment. Overall, contained gold and silver is higher than the fiscal -- than the feasibility study. Slightly less gold grade is more than offset by higher reserve tonnage. The new production profile generally results in fewer ounces in the early years offset by higher production in later years.

At Wassa and Prestea, Golden Star's production of over 61,000 ounces of gold reflect the continued strong performance from Wassa Underground, where average grades were approximately 5 grams per tonne, which was a 65% increase in grade from the same quarter a year ago when much of the production was still from the open pit.

At Prestea, Golden Star reported that its average grade increased to 13.5 grams per tonne from 8.2 grams per tonne in the prior quarter due to improved stilt design and execution. Golden Star reiterated gold production guidance of 230,000 to 255,000 ounces for the year.

We're also pleased to learn of the La Mancha Holding's $125 million financing, which in our opinion will further solidify Golden Star's balance sheet and position the company for the future if approved by shareholders. We believe Golden Star is rich with efficient opportunities, such as the potential to expand the Wassa Underground mine to meet the Wassa mill capacity to identify further surface reserves -- resources to supplement the Prestea underground feed, and to explore throughput throughout their land position, which is one of the largest holdings within the Ashanti belt in Ghana.

At Mount Milligan, Centerra reported strong throughput, topping 60,000 tonnes per day over a consecutive 30-day period. However, water supply remains the key focus for Mount Milligan in light of the temporary shutdown it experienced in early 2018, resulting from lower-than-normal water availability. Centerra is in the permitting process to ensure future water supplies are adequate, but cautioned that fourth calendar quarter production could be impacted if they experience delays in receiving permits that will allow them to continue to draw water from nearby sources.

Turning our focus to some exciting catalysts for near-term growth on Slide 7. And I should mention that these are all examples of organic growth at no additional cost to Royal Gold. I'll start with Cortez Crossroads. You need to understand that initial ore has been placed on the leach pad. This represents the top of the ore deposit, and we continue to expect more steady-state heap leach production building in calendar 2019.

At Peñasquito, Goldcorp reported that construction of its Pyrite Leach circuit was completed, with commissioning accelerated to the current quarter. Goldcorp expects first gold from this circuit later this year and anticipates that the project will add an incremental 100,000 to 140,000 ounces of gold and 4 million to 6 million ounces of silver annually over the mine life.

Finally, at Pueblo Viejo, Barrick continues to advance the prefeasibility study on the planned expansion to increase production substantially. This strategy includes a pre-oxidation heap leach pad and flotation concentrate. On a consolidated basis, Barrick states that the project has the potential to convert roughly 7 million ounces from resources to reserves, which would allow the mine to maintain an annual gold production of 800,000 ounces well into the next decade. Barrick reports that construction has been complete on the pilot leach pad and that civil works have begun on the pilot flotation concentrator.

I'll now turn the call over to Bill for our financial results.

Thanks, Tony. Turning to our fourth quarter results on Slide 8. As compared to the prior year quarter, revenue of $116.2 million was up 7%, while the gold price was up 4%. Volume increases at Andacollo and Pueblo Viejo during the quarter were sufficient to offset lower contributions from Mount Milligan and Golden Star. Our GEO volume was up 3% for the quarter.

Reported earnings of $0.41 per share included impacts of the U.S. tax reform legislation and some other small noncash items. Absent these items, adjusted net income was $27.6 million or $0.43 per share, up 39% from the prior year's quarter of $0.31 per share, which was impacted by higher noncash employee stock compensation expense and a higher effective tax rate.

Our cash from operations was up 17% due to volume, price and positive working capital and other balance sheet changes. Our dividends paid increased 5% as a result of the increase in our common dividend to $1 per share in November of 2017. And for the full year, dividends paid represented 19% of operating cash flow.

At the bottom of Slide 8, I'd like to draw your attention to our liquidity. In the June quarter, we paid the final $75 million outstanding on our revolver. And together with working capital, we now have $1.1 billion in total liquidity. Not only is our liquidity strong, our leverage, as expressed by net debt-to-EBITDA, is a conservative 0.8x.

Turning to Slide 9. Fourth quarter ending inventory was comprised of 22,000 gold ounces and 573,000 silver ounces, which was a decrease from the prior quarter. We have started to see the effects of the Mount Milligan suspension of operations earlier this year in the number of ounces delivered. As such, we expect our first fiscal quarter 2019 sales related to our streaming agreements to be in the range of 10% lower than the fourth quarter on a gold equivalent basis without having any notable impact on inventory levels, although this will depend on the ultimate timing of the deliveries from all sources we see in the quarter. Our only remaining indebtedness is the $370 million of convertible bonds, which mature in June 2019. As we have the ability to repay the outstanding principal balance of the bonds with proceeds from our long-term revolving credit, we did not reclassify the 2019 bonds as current on our balance sheet at June 30, 2018.

We expect to provide some guidance on depreciation and tax rates for fiscal 2019 after the first quarter. This will allow us to properly consider some key elements of U.S. tax reform that took effect for us at the beginning of this new fiscal year.

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

Thanks, Bill. I'll conclude on Slide 10. Looking back over fiscal 2018, Royal Gold navigated its business with a steady hand. We delivered solid, steady performance with total shareholder return during the fiscal year that beat the S&P 500, the price of gold and the gold equity indices. We stayed true to our core objectives to provide optionality and leverage to the gold price. Our fiscal 2018 revenue was 77% from gold or 86% stated in precious metal terms.

Our cash flow will grow quickly now that our revolver is repaid, positioning us well for new opportunities. We are patient and disciplined regarding capital allocation. Investing at the troughs when opportunities are often abundant and being patient during quiet times while rebuilding the balance sheet. This organic growth strategy, utilizing our own cash flow, has been effective for Royal Gold over the last deployment and recapitalization cycle and that we have not issued a share for equity finance since 2012.

This is a very interesting market in which we can be relevant. Operators have limited access to equity markets and few wish to issue equity today because of large market value discounts. We would not be surprised to see precious metal miners going private in this market, something I certainly haven't seen before in the sector.

At the same time, the cost of debt is climbing. As we have said many times, debt and equity are our main competitors. So when miners intensify their efforts to develop and purchase additional properties or recapitalize their companies, we'll be there and ready.

We're still paying a growing and sustainable dividend. Royal Gold paid over $400 million in dividends since 2001 when the gold price traded at $263 per ounce. Our commitment to a growing return of capital has been unwavering in nearly 2 decades. We strive to be the most valuable company in our business. A purchase of a share of Royal Gold at the beginning of fiscal 2001 would have yielded over a thirtyfold fold increase in share price through the end of fiscal 2018, not including the benefit of 17 years of dividends. Looking forward, we will continue managing our company to pursue best-in-class total shareholder return.

Operator, that concludes our prepared remarks, and we'd be happy to open the lines for questions.

(Operator Instructions) And our first questioner today will be Cosmos Chiu with CIBC.

Maybe a few questions from me here. First off, last week, Centerra's update on Mount Milligan and New Gold's update on Rainy River caused a bit of investor concern. Maybe we can tackle each of them separately first. At Rainy River, I know you've talked about, Tony, potentially for the production to improve on a go-forward basis. But are you at all concerned about the liquidity position of New Gold?

Well, look. We obviously are managing and monitoring that actively. But the issue is, I think, their first bonds don't come due -- Bill, correct me if I'm wrong -- until 2022?

Yes.

And so we think there's plenty of time to get them -- get this operation up and running. So I think it's a little early to be too concerned. Our focus is on the assets, and we see no reason why the asset can't perform at very successful levels.

Yes. And Tony, on that front, could you remind us what kind of security you have on that stream?

Bill is our expert on that. Bill, could you speak to that?

Sure. Yes, Cosmos, so the stream is unsecured relative to the assets of New Gold. The stream is an obligation of New Gold, the parent company, so we have all of the assets underlying it. We do have a collection account into which our share of proceeds is paid and that's used to make deliveries. It is one of the stream agreements where we actually put a leverage test into the document. And so we have a leverage test that's very similar to the banks, but it's independent of the bank agreement. So that's some background on where we stand.

And Bill, so not saying it's going to happen, but in the case where something does happen to New Gold, what kind of protection do you have? Like where would you rank?

We rank with the bond. The bonds in the bank facility are both unsecured. We're [pari passu] at the top of the food chain right now.

Got you. Okay. And then maybe again on Rainy River here, could you remind us in terms of how much you paid for that stream? And how much cash flow has been returned so far?

We're very early days in the cash flow return. I might stall a little bit, and see if Karli can come up with that figure either now or a little later in the call. But we purchased that for $175 million, Cosmos.

Okay. So the book value today is still pretty close to $175 million?

Yes. I believe at the end of June, we've gotten about 4% of that -- the advance payment back.

Okay. And then the last question on Rainy River here is given the news item that happened last week, given the update coming from New Gold, again, maybe still early days, but is there any potential that you need to test it for impairment, much like what you did with Pascua last year?

Cosmos, we have taken a look at that new technical report that came out, and we actually look at the contained gold being about 10% higher throughout the entire life of mine plan than what we actually did our work on back a few years ago. So you do see a little bit less production in the first few years and then the higher production later on in the portfolio. But we're not at all concerned on our carrying costs on the asset at this point.

Okay. And under accounting rules, what's a potential trigger for needing or leading to an impairment test? Is it if reserve and resources come down? Or is that -- or is there some other trigger points as well?

Well, there are a number of tests for impairment. I think that one of the key drivers, as you look at the undiscounted revenue or cash flow that you expect to get from the asset, if that is below your carrying value, you then have to do a discounted analysis. And that's really what we did with Pascua just a couple of quarters ago.

It's different than IFRS. We are able to take a look at the cumulative cash flow versus our carrying cost. And then if that's below the carrying cost, then we'd look at the discounted rate.

Okay. So I guess, from that perspective, you've looked at the Rainy River technical report that came out 2 days ago, you've looked at projections in terms of cash flow at this point in time. You're very comfortable with your book value that you have in place.

We are.

Okay. Maybe switching gears a little bit here on Mount Milligan. The water issue here, I was there myself 5, 6 years ago, never could have thought that, that was going to happen. But Tony or Bill, how close are you to the situation here? Have you been to the site recently? And sort of what's your perspective on this?

Well, Mark Isto is our VP of ops, and he's very, very close to this. And I think I'll just turn that question over to him because he knows what's going on there.

It's probably been about a year since we've been to site, but we get a regular update as far as what's happening with the operation in general and specifically about the water situation. So I would say that we've got enough details to feel comfortable we understand the situation and also feel comfortable that the message track that Centerra has put out, we fully understand it. And the permitting in the near term is the key issue on water sources that they've, in fact, are using or have used last winter. So we think it's a very straightforward plan that they have to, in the near term, to continue with steady state operation.

And again, on the question of security, could you remind us what kind of security you have on the Mount Milligan stream?

We are secured. We are subordinated. And I just can't remember the basket that sits in front of us.

I think it's like [$230 million] or something that sits in front of us. We can sure get that for you.

Okay. So Tony, you're -- on Mount Milligan, you're secured on the asset?

We are.

Okay. So it's not a similar situation to Rainy River?

No. That's correct.

Okay. I got it, yes. And then in terms of book value here for Mount Milligan, could you remind us how much you paid for it and how much you've received so far?

Well, the total investment was $781.5 million. Just -- I'm trying to think on the return of the asset. I think it's over 40%...

[200?]

But I want to confirm.

Yes...

Yes, 40%. But I want to confirm that number for you.

But you'd be able to see that in our financials, right?

You'd see the net book value. You wouldn't necessarily see the returns.

The net book value...

Yes, okay. And again, no concerns about impairment at Mount Milligan?

No.

Maybe on a half year note, on Golden Star, it sounds like they've received a large injection of cash from La Mancha. Certainly, Tony, you're fairly close to Golden Star; previously on the Board of Directors, not so much anymore. But would you say that's a positive? And how does that -- if they do look at expansion potential of Wassa, what they call Wassa Deep, is that going to benefit Royal Gold?

Absolutely. So let me speak specifically on Royal Gold's behalf here, and I encourage you to talk directly to Golden Star for their comments. But we just view this as a very good suite of assets. We're very pleased to be associated with it, and it's just amazing, the endowment of this area in the Ashanti belt. And so you know that the B Shoot continues to plunge and it continues to intersect some pretty exciting grades there. It's probably plunged deep enough to think about some other access other than a ramp, and perhaps a shaft would be in place. And what I get excited about is -- Mark, you'll have to help me out with the throughput -- but I think their -- what is their underground ramp throughput or (inaudible) right now?

They're doing 2,500 tonnes a day.

2,500. The mill has capacity for 7,500. And so there's another way that you could either increase the ramp production or supplement that with shaft production. But it could be very, very exciting for that asset. And it's already a large producer, but it could even be larger. And then as I said in my prepared remarks, Prestea is still ramping up and they're still learning how to do things with the Alimak raises. But we don't see any reason why that isn't going to be a very, very successful operation. And to the extent that they could find some additional surface ores to supplement the high-grade underground, there's plenty of mill capacity there at Bogoso available. So I mean, that's just speaking about the 2 assets. But then beyond that, there's all -- there has been and there continues to be all kinds of other targets and resources throughout their property package...

Yes, I think they've talked about like Father Brown and some of the other satellite deposits.

Right, Father Brown was a very, very successful operation for them a few years back and an open pit scenario, and so they're just looking at the underground now. But combining those assets with liquidity to be able to do things, that's really good for Royal Gold. And by the way, to answer your other question, we have our interest on all of their entire property position.

(Operator Instructions) And our next questioner today will be Lucas Pipes with B. Riley FBR.

Tony and team, I was intrigued by some of your comments in your prepared remarks about how the market fundamentals have impacted the way some miners are looking at financing. I think you even mentioned some companies are looking to go private. Can you elaborate on that? And will Royal Gold play a role in that? Could Royal Gold play a role in that?

Yes, I don't want to speak for companies and say that some companies are looking at that. What I said is, "I would not be surprised if," when there's very high-quality companies. And you can look through your own portfolio there and see which ones might be in this basket. But when you're trading at 0.5x NAV, it's awful tempting to capture that value internally. And there are some good assets that are trading at that kind of level, so I won't be surprised if that were to happen. And to the extent those kinds of companies want to continue to grow, their access to other capital is limited. And so what I really want to kind of emphasize here is that this financing product that we have is very malleable. We can fit into a lot of different scenarios, market scenarios. And we really got to this scenario where we're restructuring balance sheets. And now we've moved into kind of another very unique, potentially unique period of time where I think we can be relevant. So those are the nature of my prepared remarks.

Got it. Are you seeing increased inbounds given the change in the market over the past couple of months?

Look, we think about things very creatively here. We don't really wait for inbounds to happen. We actually would consider strategies and then execute on the strategies. So yes, we've seen a reasonable amount of traditional inbounds. But some of the more creative things, we're acting more like an investment banker.

Interesting, interesting. Okay. And then quite a number of questions on impairments from the prior participant. Maybe you can just kind of remind us how you're reporting under U.S. GAAP, how that would be different from companies reporting under IFRS. Maybe that's part of why we got so many questions on that.

Do you want me to take that, Bill? Or you want me to take it? Okay. So Look, IFRS, I think you have to look at the discounted cash flow of those assets when comparing to your carrying cost. Under GAAP, we look at the cumulative cash flow and compare it to the carrying cost. And then if there is -- if the cumulative cash flow is less than the carrying cost, then we have to use discounted cash flow theory to determine what the impairment might be. So that's the nature of the difference. And then, I guess, the other -- going down the road just a bit further with that, the other difference would be, under IFRS, I understand you can write down an asset and then later write it back up. And we don't have that write back up -- that ability to write up later on under GAAP.

And so if we apply this to Rainy River, for example, given that the cumulative amount of gold, I think you mentioned, even increased 10% and since you're not discounting that stream by any rate, just a cumulative amount of cash flow coming from this asset is unchanged or even higher than before, hence, no impairment even if the timing of those cash flows have changed.

I'm looking to Karli for this collaboration. But New Gold marks to market their liability to us on a quarterly basis; I believe it's how they treat their accounting. We paid $175 million for that asset, as I mentioned. And I think they mark-to-market our interest at about $280 million. So I'm -- as I said earlier, at this time, we have no concerns about our carrying cost on Rainy River.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Tony Jensen, President and CEO, for any closing remarks.

Well, thank you, operator. And we really appreciate all of you taking the time to join us today and appreciate your interest and continued support of Royal Gold. And we look forward to a very exciting first fiscal quarter for Royal Gold. And we'll hopefully have some very interesting things to talk about at Peak Gold and others. And we look forward to updating you as those news events become available. Thank you.

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