Royal Gold, Inc. (RGLD) Q3 2018 Earnings Report, Transcript and Summary

Good day. And welcome to the Royal Gold Fiscal 2018 Third Quarter Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [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, Alison. Good morning. And welcome to our discussion of Royal Gold’s third quarter fiscal year 2018 results. This event is being webcast live and you will be able to access a replay of this call on our Web site. Participating on the call today are Tony Jensen, President and CEO; Bill Heissenbuttel, Vice President, Corporate Development; Stefan Wenger, CFO and Treasurer; Mark Isto, Vice President, Operations; and Bruce Kirchhoff, Vice President, General Counsel and Secretary. 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. Tony will give you an overview of the quarter followed by statement with the financial update, and then we’ll open the line of Q&A session. I will now turn the call over to Tony.

Thanks, Karli and good morning, everybody. Thank you for joining the call. I’ll begin on Slide 4. We reported another solid quarter operationally. Higher revenue during the quarter included our full quarter of production from Rainy River, our newest royalty property. We also benefited from the gold price that was up 9% from year ago. Quarterly operating cash flow topped $190 for the first time ever, reflecting continued strong performance from the portfolio, and $21 million tax refund collected from Chile. Even without the impact of the tax refund, Q3's cash flow from operations was a record for Royal Gold. Our reported earnings were impacted by an impairment in Pascua-Lama where Royal Gold has 5.45% goad royalty and 1% copper royalty on the Chilean deposits. In coming to this decision, we balanced our view of the long-term potential of an asset with 16.5 million ounces of resource subject to our interest in one of the world's most prolific mining regions with the recent announcements by Barrick to re-categorize reserved resources and to suspend work on the underground prefeasibility study. While the impairment is reflective of the project conditions today, we continue to believe that Pascua-Lama represents significant option value for our Royal Gold shareholders. Absent non-cash impacts, our adjusted earnings of $0.48 per share continued our trend of consistent and solid performance over last several quarters. We’re allocating our strong cash flow to dividends, debt reduction and new business. We paid out $16 million in dividends during the quarter. We reduced our debt for the fifth straight quarter by paying down another $75 million. This leaves us the outstanding balance under our revolver of just $75 million, which we expect to pay off completely before the end of the year. And we now have over $1 billion of total liquidity for new opportunities. On Slide 5, we have some updates on some of the properties. At Rainy River, New Gold announced 39,000 ounces of gold production in their second quarter of operations. And the 1 million rate averaged 17,500 tonnes per day, lower than the designed throughput of 21,000 tonnes per day due to a combination of relatively minor operational issues. The project is still ramping up and we are encouraged that the mine has demonstrated ability to improve both throughput and recovery. On specific days, throughput has achieved 22,500 tonnes per day. And New Gold had commissioned a study to determine if design capacities could be exceeded. I’ll have a bit more about that later. Gold recovery was 81% during the quarter. But recent operational improvements resulted in 87% average gold recovery during the first three weeks of April. New Gold expects Rainy River production to increase throughout this calendar year due to improvements in throughput, grade and recoveries. At Wassa and Prestea, production of over 57,000 ounces was driven by stronger than expected performance from Wassa underground, and Golden Star reiterated gold production guidance of 230,000 to 255,000 ounces for the year. Wassa underground experienced 13% increase in grade and 26% increase in the mining rate to 2,400 tonnes per day, while the mining sequence at Prestea continued to improve, particularly with the second Alimak stope now in production. Golden Star also released some excellent exploration updates, more than doubling the inferred resources at Wassa underground to 5.2 million ounces. We've been talking about exploration potential within Golden Star significant property position in the Ashanti bell, and we are pleased to see such impressive results less than 36 months after Royal Gold made its initial investment. And finally, per our agreement with Golden Star, our gold stream percentage increased to 10.5% on January 1st. At Mount Milligan, Centerra sequentially restarted milling operations during the quarter, following a temporary shutdown at the end of December. We are currently operating at 40,000 tonnes per day, and will increase production once water supplies are adequate. Centerra is guiding to average throughput of 55,000 tonnes per day in the second half of this calendar year. Lower processing rates during the quarter were somewhat offset by higher gold and copper grades. Looking forward to the June quarter, we expect sales related to our streaming agreements to be in line with the March quarter as inventories will be reduced according to our routine sales procedures, offsetting lower expected deliveries from Mount Milligan in that period. However, we do anticipate lower overall sales in the September quarter as the final effects of the Mount Milligan temporary suspension are realized. Turning our focus to growth on the next few slides, I will start with the near-term catalysts and then highlight longer-term reserve updates. And then finally, talk a bit about our portfolio optionality. We expect that New Gold will continue to make progress ramping up to their design parameters. But as I mentioned earlier, they’re also finalizing the study to evaluate the potential to increase Rainy River’s throughput by approximately 15% to 24,000 tonnes per day from the current design of 21,000 tonnes per day. We expect Rainy River to be a top 10 revenue generator for us, and this study may enhance the stream value further with the potential for more ounces forward. At Cortez Crossroads, waste stripping continues. We anticipate the sporadic ore will be encountered in the second half of the calendar year, and we expect meaningful production to build early in 2019. At Peñasquito, Goldcorp reported that construction of its Pyrite Leach circuit was 86% complete with wet commissioning the carbon pre-floatation circuit already underway. Goldcorp expects commissioning of operations in the fourth quarter of this calendar year, and projects that the project will add an incremental 1 million ounces of gold and 44 million ounces of silver over the mine life. Turning to Slide 7, I’d like to highlight the depth of our portfolio. We have 192 properties in the portfolio, of which 39 are currently producing. Amongst our development stage assets, Sabina has made excellent progress at the Back River project. Royal Gold has a 1.95% NSR, and there are approximately 2.5 million ounces of reserves subject to our interest. Sabina has received most of its key permits with the last major permit of Type A water license anticipated by the end of this calendar year. In the September quarter, Agnico Eagle plans to begin production at LaRonde Zone 5 where we have 2% NSR, 2018 guidance calls for gold production of 20,000 ounces, growing to 42,500 ounces in 2020. Within our operating properties, we’ve been pleased to see double-digit reserve increases within the royalty portfolio that were South Laverton, Gwalia, Leeville and Twin Creeks, while calendar year production guidance at Dolores is up 35% due to pulp agglomeration and underground mining. While our royalties are generally not as large as our streams, they provide interesting option value. And we expect additional organic growth from a large portfolio in the future. On Slide 8 and turning to our Peak Gold joint venture in Alaska. Three years ago when we first told you about this project, we said that we would invest on a success basis. We committed $5 million to it initially, and we said that if we like what we saw, we continue to invest up to $30 million to earn 40% interest by the end of 2018. And indeed we’ve now earned our 40% interest earlier than that was scheduled, because we are encouraged by our exploration success. The gold resource consists of 11.3 million tonnes, creating 3.5 grams per tonne, and is located near surface. This equates to approximately 1.3 million ounces of gold. There is a bit of silver and copper present as well. The Peak Gold joint venture has set a budget of slightly over $9 million this calendar year to explore exploration -- to continue exploration and to complete an economic evaluation of the property. Royal Gold will be responsible for funding its pro rata share of the budget. We anticipate the PEA being completed during September quarter of this year. Tetlin is a native village in Alaska and owner of approximately 675,000 acres under lease by the Peak Gold joint venture. On the map on Slide 8, the darker green is the land associated with the Tetlin lease. And we’ve also extended our interest to the west under approximately 175,000 acres of state land. You can see that the size of our property position is significant compared to our friends at Fort Knox or Pogo or even across the border into the Yukon. Consistent with our success based investment strategy we opportunistically agreed to purchase 13.6 equity position in our joint venture partner, Contango ORE. This purchase increases our overall effective ownership stake in the property. While we haven't considered exploration an integral part of our growth strategy, we will continue to pursue opportunities where we find them as long as we can identify means to exit into our core business. Turning to Slide 9, I want to highlight some long term optimality in the portfolio. For example, Barrick recently announced a scoping study to evaluate pre-oxidation heat bleach and flotation concentrate at Pueblo Viejo, which proved successful, paving the way for prefeasibility study this year. This plan has the potential to increase the conversion of approximately 7 million ounces of current gold resource into reserves on a 100% basis, which would extend the mine life and enhance the annual production profile. Another prefeasibility study was recently completed at NuevaUnión, which is the joint venture between Teck and Goldcorp. A few years ago, we purchased 1.4% NSR on an area covering roughly 30% of the La Fortuna deposit. Our interest is in the heart of the deposit, which is expected to produce silver and copper in years four through 18 of the current mine plan. Finally, I want to remind you of our trial related to Voisey’s Bay, which is set to begin in September. We have 2.7% NSR in all metals produced, but are currently receiving no royalty revenue from the mine according to Vale’s calculation of the royalty. Given the significant production profile from Voisey’s Bay, we are eager to resolve this matter in court. Now, I’ll turn the call over to Stefan.

Thanks, Tony and turning to Slide 10. We ended the quarter with over $1 billion in total liquidity, an increase from $975 million last quarter. This includes approximately $100 million working capital plus $925 million of revolver capacity. For the remainder of fiscal 2018, we continue to expect to pay down debt aggressively. Absent any new transactions, we will fully repay the remaining $75 million outstanding under our revolver by the end of June. On Slide 10, there’s a snapshot of our debt reduction efforts over the last five quarters. We paid down $270 million on our revolver over this period, $75 million of that paid in Q3. At March 31st, our net debt to EBITDA was right at 1 times. Following the repayment of our revolving credit facility, our only remaining indebtedness will be $370 million of convertible bonds, which mature in June 2019. We currently plan to repay the principal amount of bonds in cash using cash flow and availability under our $1 billion revolving credit facility. As we have the ability to repay the outstanding principal balance of the bonds with proceeds from our revolver, we do not anticipate reclassifying the bonds as current on our balance sheet at June 30, 2018. On Slide 11, I’ve summarized our tax stream sales and DD&A outlook for the remainder of fiscal 2018. For the last quarter of 2018, we expect that our effective tax rate will be between 17% and 23% subject any revisions to our preliminary accounting for the U.S. tax reform. Third quarter ending inventory was comprised of 26,000 gold ounces and 659,000 silver ounces, which was an increase over the prior quarter due to deliveries received in late March. We expect our fourth fiscal quarter 2018 sales related to our streaming agreements to be in line with the third quarter as inventory is expected to be reduced according to our routine sales procedures, offsetting lower expected deliveries from Mount Milligan. DD&A for the third quarter was $455 per GEO and it was about 460 per GEO for the nine months ended March 31st. We now expect DD&A to be between $450 and $470 per GEO for our full fiscal year. We have paid more than $47 million in dividends during the first three quarters of fiscal 2018, reflecting our commitment to paying consistent and sustainable return to our shareholders. For the nine months ended March 31st, we’ve paid out nearly 20% of our operating cash flow in dividends. With that, I’ll turn the call back to Tony.

Thanks, Stefan. Looking back over to third quarter, we can reflect on several accomplishments; we reported record operating cash flow, even net of the joint tax refund; Mount Milligan rebounded from an abnormal water shortage and returned to milling operations ahead of schedule; Peñasquito began wet commissioning in the carbon pre-flotation circuit and continues to post updates that are ahead of schedule for the Pyrite Leach circuit; we had our first full quarter of sales at Rainy River, and the production ramp up schedule is trending favorably; Golden Start reported a significant increase in reserves, as well as positive underground advancements; and six of our royalty properties reported double-digit reserve increases. Looking forward to fiscal 2019 which is just around the corner for us. We expect to see initial production from Peñasquito Pyrite Leach in LaRonde Zone 5 later this calendar year, quickly followed by Cortez Crossroads’ production. We will release the preliminary economic assessment at Peak Gold, and we will continue to seek opportunities to deploy our strong liquidity. Alison with that, we’ll -- that concludes our prepared remarks, and we’ll turn the lines open for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question will come from Carey MacRury of Canaccord. Please go ahead.

Just a couple questions on Voisey’s. Do you have a potential timeline on how long the trial would take? And also, would you have a sense of what the cumulative payment could be retroactively when they stopped paying the royalty?

Look, we’re going to start just probably in mid-September and we think that’s going to be a couple of months for sure. It may actually drift into December, but the time will tell. And of course, the decision that’s rendered from the court will be up to the court at that point in time. We can’t give very much guidance as to when that likely will come out. But we wouldn’t expect any decision before the end of this calendar year. With regard to what is at stake here, there’s some historical claims that we have filed that relate to the very first pound of nickel that was produced there. And we think of those historical claims in the tens of millions of dollars. But what’s significantly at stake is the forward-looking royalty after Long Harbour was built. And that's, as I mentioned in my prepared remarks, we’re not getting any revenue at all at this point, and because of the way they’re calculated. And so when you look at the volume, I think we put the volume up on one of the slides. When you look at that volume and do your math, you can see that going forward over the rest of the mine life that could be well over $100 million in value going on a forward-looking basis. So certainly, something that we’re thinking very, very seriously, Carey.

Our next question will come from Josh Wolfson from Desjardins Capital. Please go ahead.

For the Peak Gold project, I am operating under the assumption that it's not your main interest to be an operator of this asset. Would you be able to talk a bit more I guess on what the potential options are available to I guess convert that equity interest into something else? And also I guess in the context of there being an existing royalty on the order of 4% to 7% on the property?

There are several different things that we can do with Peak Gold, and when the timing is right. We don’t think the time is right to monetize it. At this particular point, we very much think that there’s additional exploration potential in the project that we’d like to spend some time with first. But the second point I’d like to make is that, we’re long in this project. We were long in the project right from day one. We like the asset and that's what we picked up the two different royalties, it’s essentially one royalty but it's applicable on two different parcels between 2% and 3%. So we already have an ongoing interest. With regard to the core of your question, let me just say that we’re not particularly interested in gold in -- in dollars, we’re more interested in gold. So to the extent that any party that ultimately came in as a partner on the project, or somebody that might take operating control, we’ll be much more interested in very strategic and creative options where we can exit into our core business rather than just simply taking dollars in our position.

I guess when you -- maybe more broadly, when you look at this type of asset, which has very high grades and likely attractive margins for the operator. Is there a rough number in mind that you have that would represent the potential streaming percentage of production, or is that -- is it too early to evaluate that?

Josh, I think quite a bit too early to really put pencil to paper on that. I think just now, if you were to look at it from a valuation perspective of what resources are in the ground, that’s probably one of the better metrics at this particular point. But we’re going to give you a whole lot more guidance about what we think about the quality of the asset when our PEA comes out in September.

And maybe just one last question on the asset. Any perspective on timelines when you think it could be in production, or range of dates that would be reasonable?

I think it would be too early for us to speculate on that at this time. But let me just turn the question to Mark Isto who happens to be sitting remotely in Toronto today. Mark, will there be any permitting timelines associated with the PEA, or will it just simply be production estimates from pre-construction and forward?

Yes, we’ll have a preliminary schedule for sure. I mean, it’s obviously hard to get to precise, but we know what type of studies need to be done for the permitting. And we’ll be able to have a general project scheduled for sure.

Josh that should give you some strong help in -- we’re completing this preliminary economic study on what’s there today. But by no means, do we expect that to be the end of the exploration potential on the project. So it could be an interim look at the project at that point.

[Operator Instructions] Our next question is from the Lucas Pipes with B. Riley FBR. Please go ahead.

I noticed the filing of an automatic mixed shelf. And I wondered if there’s particular motivation to file it at this time, and maybe looking for some things on the M&A, for example. I would appreciate your perspective on the [indiscernible], thank you.

It’s just a matter of our previous shelf expiring. And so we want to be completely ready and available to do any business and be prepared for any opportunity that might come our way, so just replacing the old shelf, very, very consistent with the prior shelf that was filed.

But since we are on the topic of M&A, and it’s been a while since you’ve been more active on that front. What’s the appetite at this point in time and what opportunities are you seeing in the market at this point in the cycle? Thanks.

Do you want to take that question, Bill?

Sure. We’re still seeing a number of opportunities. It’s very reminiscent of the pre-2015 time period. I think what we’re seeing is really more in the development space than balance sheet restructurings. And those just take more time to mature. Often times you need other sources of capital to come along. So we just have to patient there. And I think previously, we’ve talked about transactions in the $100 million to $500 million range. And I’ll just give you a sense, we’re probably seeing more towards the lower end of that range. But with the growth pipeline that Tony talked about, I just think we can remain patient and just let these opportunities mature.

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

I just had a question on Pascua-Lama. What’s the book value of Pascua-Lama now post the write down? Then I have a second question.

The book value post the write down is $178 million.

And then part two, Tony, as you come up for the option value for that 170. Was it $172 million, Stefan…

$178 million…

What type of mining plan did Royal Gold model for Pascua-Lama to arrive at the optionality?

We took and look at as much data as we can get our hands on, both publicly and through Barrick, were quite helpful. And we took our own view on whether an open pit plan might look more promising versus an underground plan. And we have to ultimately use our experience and determine what probability we thought was applicable to both plants. And of course, we used quite a significant discount rate. We used the 9% discount rate once we determined an impairment was applicable, which is quite a bit higher than what we normally do. And we did that because we think it’s reflective of the project conditions today.

So you're assuming that one day there might be a mine here still?

Yes we are. Otherwise, we’d write the whole thing off. We’re still believer. But at some point, there’s going to be a production here.

[Operator Instructions] Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Tony Jensen, President and CEO, for any closing remarks.

Thank you very much for joining us today. We very much appreciate your interest and continued support of Royal Gold. And we look forward to updating you on the future progress on quarterly calls to come in the future. And Mike, and I particularly look forward to updating you on Pascua-Lama at some point. All the best and thank you for joining us.

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