Royal Gold, Inc. (RGLD) Q3 2023 Earnings Report, Transcript and Summary

Hello, and welcome to today's Royal Gold 2023 Third Quarter Conference Call. My name is Bailey, and I'll be your moderator for today. [Operator Instructions] I'd now pass the conference over to Alistair Baker, Vice President, Investor Relations and Business Development. Alistair, please go ahead.

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's Third Quarter 2023 Results. This event is being webcast live and you will be able to access a replay of this call on our website. Speaking on the call today are Bill Heissenbuttel, President and CEO; Martin Raffield, Vice President of Operations; and Paul Libner, CFO and Treasurer; Randy Shefman, General Counsel; and Dan Breeze, Vice President Corporate Development of RG AG are also available for questions. During today's call, we will make forward-looking statements, including statements about our projections and 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 yesterday's press release and our filings with the SEC. We will also refer to certain non-GAAP financial measures, including adjusted net income and adjusted net income per share. Reconciliations of adjusted net income and adjusted net income per share to the most directly comparable GAAP measures are available in yesterday's press release, which can be found on our website. Bill will start with a preview of the quarter. Martin will give some commentary on the portfolio and Paul will provide a financial summary. After the formal remarks, we'll open the lines for a Q&A session. Now, I'll turn the call over to Bill.

Good morning, and thank you for joining the call. I'll begin on slide four. Our third quarter was quiet and steady. We turned in good financial results with revenue operating cash flow and earnings all up compared to the same quarter of last year and we maintained our strong margins. Revenue was $139 million for the quarter and operating cash flow was $98 million. Earnings were $49 million or $0.75 per share after a minor adjustment adjusted earnings were $0.76 per share. We made a dividend payment of $0.375 per share for the quarter. We also continued our focus on the balance sheet and repaid a further $75 million of the outstanding balance on the revolver and we increased our available liquidity at the end of the quarter to about $770 million. So far in 2023, we have repaid $250 million of the outstanding balance on the revolver. If you recall, we drew $200 million at the end of December last year to help fund the second of two Royalty acquisitions on the Cortez Complex. We have now fully repaid that draw and we've added a cash flowing asset with multi-decade production potential without diluting shareholder exposure. While interest costs have risen recently, we believe that paying debt service costs for a short period is a really trade-off for full exposure to long life assets. Barring further business development investments in the short term, we will continue to allocate free cash flow to further reduce the outstanding debt balance. Our capital allocation strategy of using non-dilutive financing to acquire high-quality assets has been effective over the long term and our commitment to that strategy helps explain why we have the lowest share count in the GDX index. I'll now turn the call over to Martin to provide some comments on the portfolio.

Thanks, Bill. Turning to slide five, I'll give some comments on third quarter revenue. Overall, revenue for the quarter was $139 million with volume of 72,000 gold equivalent ounces or GEOs. Our Royalty segment contributed revenue of $40 million, a 21% increase over the prior year quarter. The positive variance was driven by higher quarter-over-quarter metal prices and higher revenue from the Cortez legacy zone. Also new revenue from both the Cortez CC Zone and King of the Hills royalties. This was partially offset by Peñasquito, where we recognized no Royalty revenue in the quarter due to the production suspension that started in early June. Peñasquito is one of our principal properties and is generally an important revenue driver. So, we are pleased that the strike has been settled and operations are ramping up and we look forward to seeing Royalty contributions restart before the end of the year. Revenue from our Stream segment was flat compared to last year at $99 million. The largest variances were due to higher revenue from Khoemacau Rainy River and Andacollo, which were offset by lower contributions from Mount Milligan and Pueblo Viejo. I'll turn to Slide 6 and give some comments on multiple developments at operations. At Mount Milligan, Centerra reported that production in the quarter was impacted by mine sequencing with the mining of some residual waste transition material, as well as lower recoveries because elevated pyrite to chalcopyrite ratios from re-lending low-grade gold, high-grade copper ore mined in Phase 9 with high-grade gold, low-grade copper ore mined in Phase 7. As a result Centerra's lowered 2023 gold production guidance to 150,000 to 160,000 ounces and expects copper productions coming in at the low end of the 60 million to 70 million pound guidance range. Centerra is expecting medium-term recoveries for gold and copper to be similar to those seen in 2023 and is undertaking metallurgical reviews to increase recoveries. For 2024, Centerra expects higher levels of gold and similar levels of copper production compared to 2023 guidance levels. Also at Mount Milligan, Centerra has launched an asset optimization review to assess productivity and cost efficiency opportunities alongside mine optimization. And their goal is to drive incremental operational improvements. We expect the review to be completed in 2024. At Pueblo Viejo equipment design deficiencies impacted ramp-up of the expansion budget during the quarter and gold production was impacted by lower ore grade process due to the mine sequencing as well as lower mill through some recovery associated with the commissioning of the mill. Barrick is working to address these issues. Approximately 81,000 ounces of silver were deferred during the quarter and the total deferred amount was 69,8000 ounces at the end of September. We don't expect any material deliveries of deferred ounces for the remainder of the year, while the expansion was commissioned and ramps up to full production levels and we expect it will take several quarters to deliver the entire deferred amount after the plant is running at full capacity. At Cortez, Barrick released the results of a conceptual preliminary economic assessment on the [Indiscernible] project, which indicates the potential gold production profile of 300,000 to 400,000 ounces per year in addition to the Cortez Complex production profile of 950,000 ounces to 1.2 million ounces per year over 10 years. Barrick has stated that ongoing drilling demonstrates the potential to increase the grade and size of the project and work is underway to assess an underground exploration decline to support a pre-feasibility study. Both of the Royalty acquisitions we completed last year on the Cortez Complex provide exposure to this project and we're pleased to see the upside potential advancing so quickly. And finally, we are pleased to see continued positive developments that smaller assets in the portfolio including significant reserve and resource growth at the King of the Hills mine in Western Australia, first gold produced last week at the Bellevue Gold project in Australia, construction progress at Côté and Ontario with first production expected in early 2024, first production expected at Mara Rosa in Brazil in the first half of 2024 and strong quarterly production at Rainy River in Ontario and progress towards first ore production in the second half of 2024 for the new underground mine zone. I'll now turn the call over to Paul for a review of our financial results.

Thanks, Martin. I'll now turn to slide 7 and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended September 30, 2023 to the prior year quarter. Revenue was up 5.5% to $139 million for the quarter. As Martin mentioned in his remarks, contributions from the new Cortez royalties and the ramp-up at Khoemacau were large drivers to our increased revenue this quarter. Metal prices also contributed to the increase in our revenue this quarter as the price of gold was up 12%, silver was up 23% and copper was up 8%. Gold remains a dominant revenue source making up 78% of our total revenue for the quarter followed by silver at 11% and copper at 10%. At 78% Royal Gold has the highest gold revenue percentage compared to major peers in the Royalty and Streaming sector. Turning to slide 8, I'll provide a bit more detail on specific line items. G&A expense increased to $10 million and was due to higher corporate costs and higher employee-related costs, which include non-cash stock compensation expense. While we are not directly exposed to inflationary pressures that have impacted operating costs in the mining sector, we have seen some inflation impact on our cash G&A. Although, we did see an increase over the prior year our margins remain high and the small employee count and a focus on cost control, our cash G&A costs remain low at about 5% of total revenue. Our DD&A expense increased to $40 million from $38 million in the prior year. On a unit basis, this expense was $558 per GEO for the quarter compared to $497 per GEO in the prior year. The higher overall DD&A per GEO this quarter was a result of revenue mix. Specifically, we had higher overall revenue contributions from our Cortez royalties in the current quarter, which royalties carry a higher average depletion rate. In addition, we had no revenue from Peñasquito which has one of our lowest depletion rates in the portfolio. These two factors resulted in the higher DD&A per GEO for the quarter as there were no other significant changes to our depletion rates during the period. Provided that Peñasquito can return to full capacity by the end of the fourth quarter, we are currently forecasting that our DD&A per GEO will be near the upper end of our previously provided guidance range of $490 to $540 per GEO for the fourth quarter. Interest expense decreased to $7.3 million in the quarter from $8.8 million in the prior period. The decrease was due to our continued focus on debt servicing during the quarter as we had lower average amounts outstanding under our revolving credit facility when compared to the prior year. The all-in interest rate for borrowings under our credit facility was 6.7% at the end of the third quarter. Tax expense for the quarter was $11 million resulting in an effective tax rate of 17.8%. This compares to a similar tax expense of $11 million and an effective tax rate of 19.3% in the prior year period. We continue to expect our effective tax rate absent discrete tax items to be in the range of 17% to 22% for the fourth quarter and full year. Net income for the quarter was up over the prior year to $49 million or $0.75 per share. After adjusting for a small change in the fair value of equity securities, our adjusted net income was $50 million or $0.76 per share, which is 5.5% higher than our adjusted net income in the prior year quarter up $47 million, or $0.71 per share. Our operating cash flow was strong again this quarter at $98 million compared to $95 million in the prior year. The increase during the quarter was a result of higher royalty revenue, primarily from the addition of Cortez interest we acquired in 2022. I will now turn to slide 9, and provide a summary of our financial position at the end of the quarter. During the quarter, we repaid $75 million on our revolving credit facility, and reduced the amount drawn to $325 million. As Bill mentioned, we have repaid $250 million of our revolver balance so far this year. And in keeping with our approach, to capital allocation we expect to repay the remaining $325 million before the end of 2024 absent significant business development activity and as cash flow allows. The $675 million undrawn revolver capacity combined with $93 million of working capital provided us total available liquidity of just under $770 million at the end of the quarter. 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. We had a solid quarter and our portfolio generally performed well. However, we did see short-term production delays and interruptions at a small number of our larger assets. As a result, we expect that total sales for 2023 may come in at the low end of or slightly below our initial April sales guidance of 320,000 to 345,000 GEOs. The main drivers for this are well known and they are: one the slower-than-anticipated ramp-up of the plant expansion of Pueblo Viejo; and two the 4.5-month suspension of operations at Peñasquito. We hope that, these issues are behind us now and we are pleased that Newmont has restarted operations at Peñasquito, and we feel confident that Barrick is working to address production levels at Pueblo Viejo. Finally, I want to comment briefly on the metal and jurisdictional mix of our portfolio both of which are important differentiators for Royal Gold. Gold has remained strong this year with strong central bank demand and has performed well despite steady increases in interest rates. As Paul highlighted 78% of our revenue came from gold this quarter which is the highest among our large cap peers. And jurisdictionally the two most significant revenue sources for this quarter were Canada and the US, which combined provided about 53% of our revenue. We seek to acquire precious metal assets in safe jurisdictions operated by high-quality counterparties and we believe the transactions we've completed over the past couple of years will continue to enhance our shareholders' exposure to gold revenue in low-risk jurisdictions. Operator, that concludes our prepared remarks. I'll now open the line for questions.

Thank you. [Operator Instructions] Our first question today comes from the line of Jackie Przybylowski from BMO Capital Markets. Please go ahead. Your line is now open.

Thanks very much for taking my questions. I have a couple. So maybe I'll start with a quick one just to get it out of the way. On Peñasquito you mentioned that the mines restarted after the strikes. Can you just remind us what if any of the lag you expect to see between the mine restart and sales or production to your credit?

Yes. Jackie this is Bill. The Peñasquito royalty we get paid on provisional and final settlement. So if either of those occur in the fourth quarter we should receive revenue. There isn't a delay that we have in some of the streams. What I can't tell you and Martin can interject if he disagrees is how fast they're going to start up. That's just an unknown for us.

Yes. That's fair. I appreciate that. I guess it's the difference between a Royalty and a Stream in kind where you're accepting delivery right? This is a little quicker?

It is quite, but I would say the delays in the Streams are unique to two contracts. So that doesn't apply to the all Streams with a few months delay.

Got it. That's helpful. Thank you. If I can ask – I think this is probably the first opportunity If I had to ask you both. The press release you put out in September about the ACG transaction. I've read through the disclosures that ACG had on its website as well as your disclosure. And maybe I'm not enough of a legal expert but if you can maybe just simplify it a little bit, is that opportunity completely off the table for you now? Or is there still – I know it's obviously delayed from the original time line but is there still an opportunity at some point that could rematerialize?

Well, the original transaction has terminated. Our involvement was based on the satisfaction of certain conditions precedent in those conditions were not satisfied. The assets still remain with the seller to say, you could have come back yet and might come back but we're not going to know that for a period of time.

Okay. No, that's helpful. The disclosures that ACG had on its website it sounded like it sounded like they were sort of still working on it but it was – I was I don't know it's just my poor reading of the – of the text. I think it be a hard time understanding exactly what they're saying.

Yes. As we said today, what I would say is just assume there is no transaction there.

Okay. That's helpful. Thanks. And maybe just on like a bigger picture on that point Bill. What is your outlook for new Royalty or Stream transactions right now? Is there a lot sort of in the pipeline? Is there a lot that you guys are kind of working on or how optimistic are you at the moment?

I'm always optimistic. We're always busy from a business development perspective but maybe if I can get Dan to chime in here and give you his perspective as Head of our Business Development team.

Sure, Bill. Hi, Jackie, hope you're doing well. Thanks. Thanks for the question there. Yes, I agree with Bill. It's been quite busy for us Jackie. And I think where we're seeing a lot of the activity right now is in let's call it the sub-$100 million range. So more on the Royalty side. And I think that's just a function of where the equity markets are right now. As you know it's really difficult for smaller companies to raise equity and so they're talking to groups like ours. Maybe that will change with gold at 2000 here or so and maybe that window will open up. But right now they're very interested to talk to a group like ours. So we're – we're quite active on that side. We're looking at geology. We're looking at the land packages. Our geologists are quite busy and we're just trying to look for good investments with interesting upside. So that's really where a lot of the focus is now. And if you look at what Martin talked about in the comments there and the various royalties that are just starting to produce. We've had good success with these smaller royalties. So we happily add more of those in the portfolio. But we always talk Jackie about this $100 million to $300 million range. That's still very much intact. And so we do see opportunities in that range. It's more development type project financing that we're seeing and more on the gold side as well. So, overall quite busy for us right now.

That's great. I mean...

Does that help?

Yes, absolutely. It's totally understandable in light of the relatively high cost of other sort of project financings that years would be fairly attractive but also, if equity and debt are unavailable it makes it difficult to do those bigger streams. So I appreciate that. That's helpful color. Thanks Dan and thanks Bill. That's all for me.

Thanks, Jackie.

Thank you. [Operator Instructions] Our next question today comes from the line of Brian MacArthur from Raymond James. Please go ahead, Brian. Your line is now open.

Hi. Good morning. My question has to do with the deferred Silver Stream at PV. And can you just remind me, when we finally get this up and running how this trigger works? Do you get back -- I mean once they get the fixed rate 70% and it works, you're entitled to 75% of the silvers I understand it. But to catch up do you go right 100% of the silver when the trigger works? Or is there a scale in function because you made the comment, it would take a number of quarters going forward. I mean any details you could give us on that would be helpful.

Yes. Brian, well, the thing that sticks in my mind is I believe and someone on the team can correct me, if the recovery goes above somewhere around 52.5%. We start to recoup the silver. So it is gradual. We don't jump to a given number. The reason there's deferred silver is we could not demand from Barrick more than 100% of their share of the silver. So it's not as though we can go beyond that. But that's really -- to me that's the number I'm looking for. If the recovery gets above that 52.5%, we'll start to see it. And I think at that point we can probably do a better job of helping you figure out when it might come in.

Okay. But you do -- you do get -- like technically just in the Stream rate you get 75%. You can't go over 100%. But at the minute you get the trigger then you can go and take -- you can basically sweep all the silver that comes out any quarter theoretically. Is that fair?

Theoretically -- their share.

Okay. Right. Their share. Okay. I think I've got that. I just have always -- because I noticed last year you did get some -- you did catch up some and then it went the other way. So I was just trying to figure out exactly because it is starting to build up to be a significant amount right now. So I was just trying to figure out how fast that would come out going forward. Great. Thanks very much, Bill. That was my questions.

Thanks, Brian.

Thank you. There are no additional questions waiting at this time. So I'd like to pass the call back over to Bill Heissenbuttel for any closing remarks.

Well, thank you very much for taking the time to join us today. We certainly appreciate your interest in Royal Gold and we look forward to updating you on our progress during our next quarterly call. Take care.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.