Royal Gold, Inc. (RGLD) Q4 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Royal Gold Inc. Fiscal 2020 Full Year and Fourth Quarter Conference Call. [Operator Instructions] Please note this event is being recorded. I would like to turn the conference over to Alistair Baker. Please go ahead.

Thank you, operator. Good morning and welcome to our discussion of Royal Gold's fourth quarter and fiscal year 2020 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; Bill Heissenbuttel President and CEO; Paul Libner, CFO and Treasurer; and Mark Isto, Executive Vice President and COO. Dan Breeze Vice President Corporate Development of RGAG; and Randy Shefman, General Counsel are also available for questions. During today's call we will make forward-looking statements including statements about our projections or expectations for the future. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties are discussed in today's press release and our filings with the SEC. We will also refer to certain non-GAAP financial measures including adjusted net income, adjusted net income per share and net debt. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in today's press release which can be found on our website. Bill will give you an overview of the fiscal year followed by Mark with an update on our operating results. Paul will then provide a financial update for the quarter and Bill will wrap up the call with some closing comments. We'll then open the line for a Q&A session. Now I will turn the call over to Bill.

Good morning and thank you for joining the call. Before beginning, I would like to note that the Royal Gold team continues to manage its business remotely and as such our participants are in separate locations. We'll do our best to respond in a coordinated manner to any of your questions. I'll begin on Slide 4. Fiscal 2020 was a very strong year for Royal Gold. Despite the most challenging external circumstances that any of us have seen before, we realized annual records for revenue, operating cash flow and earnings. Our revenue was $499 million, up 18% from fiscal 2019. Gold equivalent ounce in volume was $320,000. It was down slightly from the prior year due mostly due to the reduction in revenue at Andacollo that we have discussed previously and impacts from COVID-19-related production disruptions. However, this volume reduction was offset by the significantly higher realized gold price that drove our revenue increase. Our gold weighted revenue stream was a significant beneficiary of the market fundamentals for our most important metal. Earnings for the year were robust at $199 million or $3.03 per share. After adjustments earnings were $162 million or $2.47 per share. Paul will go into more detail on the GEO volumes and earning adjustments in his remarks. Operating cash flow was $341 million up 35% from fiscal 2019. This strong financial performance provided the funds to reduce net debt by $115 million contributed $136 million to the Khoemacau project and paid dividends of $71.5 million. all without raising equity and diluting shareholders. As of June 30 our cash of $319 million, exceeded the $305 million of debt outstanding under our revolving credit facility leaving us in a very favorable net debt position. We also undertook a leadership change in January and the transition to the new leadership team has gone very well, especially in light of the highly unusual operating circumstances we have all found ourselves in during the past few months. Our entire team has operated with great professionalism and dedication, while managing the innumerable personal and family challenges everyone has had to deal with during the pandemic. All told, our business performed very well and we're in a great position as we start fiscal 2021. With that I'll turn the call over to Mark for a discussion of Khoemacau and a few other notable properties.

Thanks Bill. On Slide 5, I'd like to start with an update of the Khoemacau project in Botswana currently under development by Khoemacau Copper Mining or KCM. As I mentioned in our last quarterly call, a 6-month state of emergency had been declared by the government of Botswana and travel restrictions came into effect on April 2, to help prevent the spread of COVID-19. However mining was declared in the central service. The restrictions remained in place through May 21st and while construction and mining development continued during that period, some activities were curtailed particularly with respect to the process plant refurbishment. Since then construction manning and the activity level has largely returned to normal. However after a review of the project schedule, KCM now expect that shipment of first concentrate will be pushed out from midyear to later in the third quarter of calendar 2021, a delay that is not unexpected in today's environment. The delay notwithstanding, KCM has done an excellent job of advancing underground development and construction completion reached approximately 54% at the end of June, with 81% of the capital committed. Slower progress in the quarter reduced our funding requirement below previous expectations and we made our fourth contribution to the advanced stream payment on July 5 of $11.1 million. We have now advanced approximately $147 million towards the project. The photo on the slide shows an aerial view of Zone 5 looking Northeast with the South boxcut in the foreground. The following three slides will provide a view on construction progress across the site. On slide 6, the photo on the left shows the South boxcut in early July, a view of the underground development and photo on the lower right shows construction underway on the Central boxcut infrastructure. All three boxcuts are the subject of active underground development which has been advancing ahead of plan with a high level of quality being achieved by Barminco the mining contractor. Turning to slide 7, the photo on the left shows progress on the administration area and the photo on the right shows the Zone 5 man camp area. Moving to the Boseto mill facility on slide 8. The photo on the left shows the secondary and tertiary crusher facilities and refurbishment work underway for preparing to sandblast and paint. The photo on the right shows an area of new construction activity in the concentrate regrind area with progress on the regrind mill at Jameson Cell foundations. Overall, the progress is progressing well and the project is taking shape nicely. Moving on to slide 9, I'd like to highlight a couple of recent developments at Mount Milligan and Peñasquito. Starting with Mount Milligan, Centerra reported that operations return to planned levels during May, after reducing throughput at mining rates in April due to COVID-19 manpower reductions. They reported the process plant operated at approximately 60% of target throughput and mining operations were partially shut down for approximately four weeks during April, with reductions in gold and copper for the quarter. Centerra also reported that a wet spring and a substantial snowpack allowed Mount Milligan to pump water starting in April. By the end of June, they pumped more water than in the entire 2019 pumping season and have over six million cubic meters of water at storage. They also reported continued efforts to explore for groundwater sources around the existing infrastructure and will continue to do so for the remainder of calendar 2020. The Centerra continues to look for a long-term water supply solution and is working with regulators and several stakeholder groups. Turning to Peñasquito. Newmont announced that operations ramped up after government-imposed COVID-19-related shutdown was lifted and production in the process plant reached pre-COVID production levels of about 110,000 tonnes per day by mid-June. Recall that operations were placed on care and maintenance for about 35 days from April 12 through mid-May. According to Newmont, now that operations are restarted they will continue to apply their full potential program to eliminate constraints reduce cost and increase productivities with the goal of extending mine life through resource conversion. Newmont also provided updated production guidance for calendar 2020 of 510,000 ounces of gold, 20 million ounces of silver, 360 million pounds of zinc and 190 million pounds of lead. I'd like to briefly touch on Golden Star's announced sale of Prestea to FGR. Negotiations for the separation on the stream between Wassa and Prestea are ongoing and completion requires final Board approval. We think that this is a good development for all parties. The sale of Prestea allows Golden Star to focus on exploration and the various phases of growth management as outlined at Wassa and management of Prestea will become the sole focus of a new owner, who will be motivated to invest and improve the operations. Wassa has the potential to become a world-class operation and Golden Star has done a commendable job of adding mineral resources and improving performance. We look forward to seeing focused advancement at both Wassa and Prestea. I'll now turn the call over to Paul to discuss our financial results.

Thanks Mark. I'll turn your attention to slide 10 and give an overview of the financial results for the quarter. For purposes of this discussion, I will be comparing the fourth quarter of fiscal 2020 to the prior year quarter. We recorded revenue of $120 million on volume of 70,100 gold equivalent ounces or GEOs. While revenue was up about 4%, GEOs were down nearly 21% quarter-over-quarter, primarily due to lower Andacollo sales resulting from the strike in October and November an impact we have discussed with the market for a few quarters. The decrease was also attributable to lower stream sales from Mount Milligan and Pueblo Viejo. The lower stream sales however were somewhat offset by higher royalty contributions from Cortez and Peñasquito. Despite lower volumes, metal prices had a significant positive effect during the quarter with gold and silver prices up 31% and 10% respectively, while copper was down 12%. The gold continues to be the most significant driver for our revenue and accounted for 84% of our total revenue for the current quarter, up slightly from 80% in the prior year quarter. D&A expense for the quarter was $6.5 million in line with $6.3 million in the prior year quarter. Our DD&A expense for the quarter was $45.4 million, or $648 per GEO, down slightly from our previous guidance range, but up from $495 per GEO in the prior year quarter. As I discussed on our last call, recent reserve reductions at Mount Milligan and Rainy River have caused our depletion rates on those interests to increase. Interest expense decreased to $2 million this quarter from $6.1 million in the prior year quarter, due to overall reduced debt levels. Earnings were $49 million or $0.75 per share up 85% compared to the prior year quarter. There were several adjustments to our earnings specific to the quarter, which included a $0.17 gain due to the release of an uncertain tax liability, which resulted from a settlement with the foreign tax authority specific to withholding tax; a $0.10 gain due to the increase in the fair value on our equity holdings; a $0.02 charge due to complete impairment of our royalty interest at El Toqui; and a $0.03 reversal for the combined tax effect of these adjustments. As Bill mentioned, we also saw some relatively large adjustments to the full fiscal year earnings, which included a $0.61 tax benefit, which combines the release of the uncertain tax liability, I just mentioned, and the effect of Swiss tax reform from earlier in the fiscal year; a $0.05 charge due to the onetime non-cash employee compensation expense we recognized in the March quarter as a result of recent senior management retirements; a $0.02 gain due to the increase in fair value on our equity holdings; and a $0.02 charge due to the full impairment of our El Toqui royalty interest. After elimination of these adjustments, our adjusted EPS was $0.53 per share for the quarter and $2.47 per share for the fiscal year. Cash from operations was approximately $91.6 million for the quarter, up significantly from $72.3 million in the prior year quarter. The increase is primarily due to an increase in revenue proceeds, lower income taxes paid and a decrease in the amount of interest paid on our outstanding debt. At the end of June we held approximately 25,000 GEOs in inventory, which was higher than the guidance range I provided during our last quarterly call. The increase was primarily due to an Andacollo delivery that was received earlier than forecasted. Looking forward to the September quarter, and absent any potential new operational impacts due to COVID-19 we expect stream segment sales to be in the range of 53,000 to 58,000 GEOs and inventories for the quarter-end to be in the range of 25,000 to 30,000 GEOs. With respect to our fiscal 2021 DD&A and effective tax rate guidance, it is a bit too early for us to provide this information at this time. But I expect we can provide this guidance on our next quarterly call. I'll now turn to slide 11, and provide a summary of our financial position. Our liquidity remained strong and we ended the year with cash of $319 million working capital of $320 million. And with our credit facility, we had access to just over $1 billion of total liquidity. You will remember from our last call that, we drew $200 million on our credit facility in early April. This was a precautionary measure and we did it to ensure cash is readily available, to support our current commitments in the event COVID-19 operational impacts worsened. While the environment appears to have stabilized and revenue contributions have largely returned to normal across the portfolio we remain cautious on the outlook. Although, there is no immediate requirement for the funds, we will keep the draw proceeds on our balance sheet for the time being. The company will revisit this position as the overall operating environment returns to normal and as we continue to further meet our investment commitment at Khoemacau, which also includes establishing a better understanding of KCM's ultimate financing needs at Khoemacau. At the end of June we had an outstanding revolver balance of $305 million with $695 million undrawn. We remain committed to reducing our debt and absent any funding required for new business opportunities, we expect to manage our debt levels accordingly. In line with that approach, we paid down $30 million on our revolving credit facility in early July leaving us with $725 million of undrawn capacity. During the fiscal year, we contributed $136 million toward the Khoemacau project, including a $48 million advance payment in the current quarter. As Mark noted earlier, we also made an $11 million advance payment in July and now have contributed $147 million towards the project. We expect to contribute a further $35 million to $45 million during the remainder of calendar 2020. In calendar 2021, our remaining contribution will be between $25 million and $78 million depending on whether KCM exercises its option to increase the stream rate and raise the advance payment from $212 million up to $265 million. We expect remaining payments to be made on a quarterly basis in proportion to the total capital spend of the project and we anticipate making these payments from our available cash resources. That concludes my comments on our financial performance for the quarter. And I'll now turn the call back to Bill for closing comments.

Thanks Paul. 2020 was a year of significant change for Royal Gold. I took over the CEO role at the beginning of January, and a new generation of leadership was appointed at the same time. All of this internal change occurred shortly before the onset of significant global challenges and a very uncertain business environment. I am very pleased to say that, the team looked past the challenges and remains focused on all key aspects of our business. Our company remains healthy. And despite COVID-related revenue impacts during fiscal 2020 at several operations in our portfolio, the bulk of our asset base continued to generate revenue and cash flow highlighting one of the main benefits of our business model. In addition to a portfolio of 187 assets, 41 of which produced revenue of almost $500 million, our cash overhead remained low, representing about 4% of revenue. It is this combination of revenue diversification and high cash margins that should allow us to withstand the potential uncertainty of future COVID-19 impacts. We increased our dividend year-on-year by 6%, improved our net debt position by $115 million and funded $136 million towards our Khoemacau stream, all without diluting our shareholders by issuing equity. We ended the year with a healthy balance sheet and our access to liquidity positions us to act on new business opportunities. While we are encouraged by the recent strength in the gold price, we are also mindful of long-term returns and we'll continue to pursue new business opportunities with a disciplined approach. I think we are in a great position, and I look forward to using these advantages to continue to deliver accretive growth and results for all shareholders. Operator, that concludes our prepared remarks, I'll now open the line for questions.

Speakers, your lines are now live. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question will come from Jim Stuckert, who is a retired Board member. Please go ahead.

Thank you. Well, Bill, Paul and Mark, great report. Glad to see that the new team has continued the tradition of the former team, so that all shareholders have to like that. I'd just like to know if there's any comment relative to Contango or that you could reveal?

Yeah. Jim, nice to hear from you. Certainly appreciate all you've done over the years. So with Peak and with Contango, COVID-19 has kind of put us on the back foot a little bit. We've had to be very mindful of the health conditions in the state. The beginning part of this year, I think the state was actually closed we really couldn't do much. And we have to be really mindful with the village and take care of the community there. So, there really hasn't been much going on. Strategically, we're -- it's consistent with what we've always said. It is non-core. We're not going to build it. We're not going to operate it. And we'll look for the right time the opportune time to exit that investment.

Okay. Well, then as a follow-up not for that particular property, but anything on Pascua-Lama.

Yeah. I think with Randgold coming in, with Mark, Bristow coming in, I'm encouraged. He seems to have breathed -- put new breath into that project. With that being said, I think one of the things Barrick has said is that they're almost going back to square one. They're going to go back and effectively to my understanding rebuild the geologic model and take a really fresh look at the project. So, that's going to delay it a little bit. But, I think the new management is really -- they're taking a more serious look, if you will, as to what to do there. And Mark, I don't know if there's anything else you'd like to add to that?

No, I think you've given a good description.

Well, I certainly realize those two are long-term projects and potentials. And it's -- every now and then I like to just hear if there's any upgrade. So that's super. I appreciate your comments.

All right. Thanks, Jim.

Our next question will come from Tanya Jakusconek with Scotiabank. Please go ahead.

Good morning, everybody. I just wanted to circle back on the M&A opportunities that you're seeing out there. On your Q3 call, you mentioned that you were seeing opportunities from base metal operators, so streams from base metal operators in the $100 million to $500 million range with most of them available at the upper end. Has that changed?

Tanya, afternoon, thanks for the question. The one thing we don't get to do a lot here is let Dan Breeze talk a little bit about his area of expertise. So Dan, if -- can I turn that over to you?

Yeah. Thanks. Hi, Tanya, thanks for the question. I hope you're well.

Hi, Dan. I hope you too.

Yeah. Look the environment is really, really quite good for us right now. And you've heard from Paul about our balance sheet strength and cash generation. So we feel very good right now. And you're right, what's happening with the precious metals right now. They have obviously strengthened versus base metals. And so, there are certain opportunities that we're starting to see now where those byproducts are looking to potentially get monetized in some way. So, it's been interesting for us to look at those. We're obviously being very disciplined right now on that front. And I think the other part that we're seeing more of right now is in this higher price environment is projects starting to move forward and looking for financing as well earlier stage projects. So, we're encouraged that development as well. In terms of the size the $100 million to $500 million range still holds. Obviously, that's the real sweet spot for us here at Royal Gold just given our size versus the peer group. So, that's great for us to see. There are some that maybe are a little bit bigger than that, but that's really where the focus is right now in that range. Hopefully that helps you.

Okay. And what about completing your technical due diligence because of the current travel restrictions? How are you getting around that in terms of doing that technical due diligence? Has that opened up since Q3?

Yes, I'm going to defer that over to Mark to speak to but we certainly are finding creative ways to get things done on the desktop and remotely. But Mark do you want to add some comments there?

Yes. I can give a few comments. It's a good question and we've spent a lot of effort in trying to figure out how we can effectively do it and get comfortable that we're getting the same experience that we would on a site visit which is difficult to do as you might expect. But we've worked on I think three projects now where we've done things remotely. And we're using third-party video tools where possible. We've used drone photography to help us out to get a better picture of site. We're using interactive geological tools to create virtual core shed visits which frankly has turned out exceptionally well. And we'll certainly use tools we're developing now on due diligences going forward regardless of COVID-19. So, I think we're being successful at doing it. We have yet to go to the Board yet and get their blessing on it. But I feel very confident that we put up a very strong case with virtual diligence not but it is very project specific.

And are you seeing travel restrictions being lifted in areas that you're interested in or is it still pretty much locked down?

Yes, we're pretty much still seeing things locked down and we're even obviously we try to take a visit to our existing assets on an annual basis the larger ones. And our view is we likely won't be doing any traveling certainly for the calendar year and then maybe well into next year. So, we really have to be very diligent about these tools being effective.

And can I ask just on you mentioned opportunities on project starting to -- the financing start-ups for projects. What about those royalty portfolios? Are those shaking out?

Tanya, it's Dan here again, and I'll turn it over to Bill to add some comments as well. But certainly the environment is such that we are seeing portfolios available right now. And I think it's just a function of the environment right now. So, we're looking at those. We're pretty disciplined. Sometimes with these portfolios the challenge is you try to find one or two of the core assets to really focus in on and you get a bunch of other things that you may not want. So, there's a bit of a challenge there but we're looking at those things as well.

Okay. And can I just make sure that you're still focused on gold or gold and silver?

We are.

Strategically, that we're focused on precious metals. But as you can tell from the percentage of revenue we're still weighted to gold and we like that. We as I always say if you're looking at five opportunities some are gold some are silver and some are base metal. We're going to focus on the gold ones first and then move on move down the list.

Okay. Good luck.

Thank you.

Thanks for your question.

[Operator Instructions] Our next question will come from Carey MacRury with Canaccord Genuity. Please go ahead. Carey, your line is live. Your line maybe muted on your end.

Sorry about that. Good morning. Tony last year mentioned that you guys were close to meeting the criteria to being included in S&P 500. Just given where gold prices are presumably that potentially has moved up. Just wondering if you have any thoughts on that.

Yes. So, I mean it is something that we have looked at very closely. As you probably know there's not much you can do about it. We've made sure that the folks who are on the committee that make those selections know who we are. But beyond that, there is no lobbying you can do. You can't go make a marketing presentation. You just have to make them aware of the company. I did find it interesting in the paper this morning that Barrick was thinking of moving to their primary listing the NYSE. So I don't know what that would bring. But we've done all we can quite frankly and it's to us to keep them updated as to what we're doing. But ultimately that decision is theirs.

And as of today do you meet the criteria and presumably if some names follow that could be an opportunity?

Yes. I mean, we look at it on a market cap basis, but there are a number of other tests. So I don't -- I'm not in charge of the criteria so I don't want to say, yes, we qualify. But we feel good about where we sit relative to eligibility.

Great. Thank you.

Our next question will come from Brian MacArthur with Raymond James. Please go ahead.

My question comes -- has to do with the loss of Prestea stream structure. I'm just curious, I think, this is interesting. It's obviously being restructured. Were they three individual contracts there, or how is the security set up? I'm a little surprised they can just go sell it. And obviously it's subject to your Board of Directors approval. But I'm just curious how that works and it brings in a whole question of security in this industry as you set these things up. So I don't know if you can give any more color about how that's set up.

Yes. So right now it's one contract. So we basically have two mines feeding into one contract. And what is being proposed is that we effectively separate those contracts into two. It wouldn't change the security per se. I mean, we currently have security over the assets in both mines. And where we'll ultimately get to I think will be -- we'll still have security over both mines. So it's doable. And I will say in a lot of our streams we often provide the operator with the ability to do things like bring a joint venture partner in where they can take over some of the obligations. So this is actually to us it's not unusual. It's something that we contemplate in the streams all the time because these are life-of-mine contracts. So we have to build some flexibility for these guys to deal with changes at the mines where we have those streams.

So you just have two separate contracts going forward.

Exactly.

Okay. Great.

Thanks very much.

It is what entirely clear how that being done. Thank you.

Our next question will come from Kip Keen with S&P Global Market Intelligence. Please go ahead.

Yes. Thanks for taking the question. Just to circle back on M&A. Are you seeing any opportunities, sort of, evaporate given financing markets in terms of some of the earlier stage projects that are picking up, or are you just, sort of, seeing all boats rising here? What does that look like?

Dan, do you want to jump back in?

Yes. Sure. Thanks for the question. And so I'd say that obviously, the equity markets we've seen the equity markets open up quite a lot here in the last three to six months or so. So that's obviously been something new here versus the last year or so, but we're actually quite happy to see that happen. As far as the capital structure goes, these projects need equity. They need streaming. They need data as well. So it helps the projects move forward in general. So I wouldn't say it's been a deterrent from our perspective.

Okay. Thanks.

You’re welcome.

This concludes our question-and-answer session. I'd like to turn the conference back over to Bill Heissenbuttel for any closing remarks.

I'd just like to thank everybody for their interest in Royal Gold and we certainly look forward to updating you in the near future on our progress. Hope everyone stays healthy. Thank you.

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