Earnings Call Transcript - GROY Q1 2023

Joanne Jobin, Host

Good morning. I'm your host, Joanne Jobin, and welcome to another Gold Royalty Townhall Forum hosted by VIDMedia. Before we start, I'd like to introduce CEO, David Garofalo; John Griffith, Chief Development Officer; and Andrew Gubbels, CFO, who will provide an update on recent financial and operating results for the company. After their presentation, I'll be delighted to moderate submitted questions from our audience. Now a few words on the company. Gold Royalty Corp. is a precious metals-focused royalty and streaming company, offering creative financing solutions to the metals and mining industry. It currently has a diversified portfolio of over 190 royalties located in mining-friendly jurisdictions throughout the Americas. The company's business model includes acquiring royalties, streams, and similar interests at varying stages of the mine life cycle to build a balanced portfolio offering near, medium, and longer-term attractive returns for investors. Now before we get started, I would like to remind you that if you do have any questions for the company, please place them into the Q&A tab at the top of your chat sections. And please ensure that you fill in the short questionnaire at the end of the presentation, as this helps us and the company communicate more effectively with you for future events. And before I turn it over to the team, please note the forward-looking statement at the beginning of this presentation. Gentlemen, the stage is yours.

David Garofalo, CEO

Thank you, Joanne. Good morning, everybody, and welcome to John and Andrew as well, who'll be presenting along with me. Andrew will be providing a highlight on the financial results for the quarter and our forward-looking projections, and John will walk us through our portfolio, a very extensive portfolio. Actually, now 216 royalties across the portfolio, heavily concentrated in the Americas with even significant concentration in Nevada, Quebec, and Ontario, the three best mining jurisdictions in the world and some of the best producing gold assets in the world. And we'll get into that in a bit more detail as we go through the presentation. But I thought I'd spend a minute talking about the rally in the gold price of late. As we've said in the past, when we talked about the fundamentals for gold, we've always said it's more a monetary instrument than a commodity. What drives gold prices up and down is relative to interest rates. While gold as a monetary instrument has always yielded zero, Treasuries today, whether it's U.S. Treasuries or whether we're looking at European monetary instruments or in the Western world generally are really yielding negative on a real basis, even as nominal rates are starting to go up. We're seeing inflation accelerate and inflation will continue to accelerate because central banks are dealing with a quandary, that we're seeing the monetary system, particularly the financial services system start to collapse underneath, due to all the excesses introduced into the system since the credit crisis of about 15 years ago. There's been a massive expansion of the money supply and excess debt, and as interest rates go up, servicing that debt has become a significant challenge. We've seen evidence of that in the financial sector as we've seen banks collapse, and that's just really the beginning, the tip of the iceberg. That's the catalyst for gold, and it has been for the last couple of months as we've seen a significant acceleration in the price. The market has started to realize that central banks really cannot tighten monetary conditions significantly without undermining the financial system and governments. As we pointed out, the debt levels strapped on as a society since the onset of this inflation cycle and since the great financial crisis is significantly greater than it was back in the 1970s when we last experienced these types of inflation. Debt to GDP globally is about 350%, while it was only around 100% back in the 1970s. This indicates limited latitude for central banks to meaningfully tighten monetary conditions without undermining governments, corporations, and individuals carrying unprecedented debt levels. We're seeing central banks continue to increase interest rates; for example, the Federal Reserve recently raised interest rates another 25 basis points while also introducing $300 billion of new liquidity to stave off bank collapses. This is contradictory and will serve to accelerate inflation and likely lead to real interest rates going deeper into negative territory. The negative relationship between the gold price and real interest rates is striking and dramatic. We've been consistent in saying that gold will achieve new all-time highs of at least $3,000 an ounce on a real basis. If you inflation-adjust the last big inflation cycle in the early 1980s, that suggests gold could go to at least $3,000 an ounce, indicating at least a 50% upside from current levels. This will drive new capital into the gold sector and significant share price appreciation. We've seen the early evidence of that since the banking crisis in early March; we've seen a significant outperformance in both the GDXJ and gold prices relative to the general equity markets. Gold should provide insurance against volatility in equity markets. We're likely to see gold prices continue to rise, along with increasing volatility in general equity markets as people's confidence in the economy diminishes and inflation accelerates. People will be looking for gold to preserve their savings against inflation. With that macro discussion, I'd like to pass it on to Andrew to talk about our financial results. Oh, and I should end my discussion talking about the opportunity I see in the valuations before I hand it off to Andrew. The sector remains significantly discounted, and we're experiencing significant underperformance of gold equities relative to gold prices. Gold Royalty trades at 0.5x NAV with an enviable portfolio of assets within the Americas and peer-leading growth potential as we crystallize that revenue growth over the coming years. We own 216 royalties, all entirely bought and paid for. We essentially just need to wait for that growth to come to fruition. The value accretion on a per-share basis is immense, providing a great opportunity for our shareholders over the coming years.

Andrew Gubbels, CFO

Thanks, Dave. You would have seen yesterday that we announced our financial results for the quarter ended December 31, 2022, following the change in our fiscal year-end from September 30 to December 31. This period will serve as the fourth quarter of what will be our 2022 fiscal year. In the December quarter, we continued to generate robust revenue from our portfolio, earning $1.1 million in total revenue and option proceeds for that three-month period, which is an 11% increase from the same period in 2021. This increase is largely due to higher revenue contributions from core royalties such as Canadian Malartic and Borden. For fiscal 2023, we expect total revenue and option proceeds to increase year-on-year, and we've guided a range of $5.5 million to $6.5 million in total revenue and option proceeds for the year. We concluded the calendar year with a strong financial position, having approximately $35 million in cash and available liquidity, positioning us well to fund our business and continue to grow throughout the year. Additionally, we anticipate recurring cash operating costs to fall between $7 million and $8 million for the year, which would represent about a 30% decrease from the previous year. This reflects our evolution after a fast start on the IPO and three large strategic acquisitions during our initial growth phase. Beyond the financials, I want to highlight our company's progress regarding ESG and ESG disclosures. In 2023, we've joined the UN Global Compact and will disclose our ESG performance in our inaugural sustainability study around our Investor and Analyst Day in May. Alongside the sustainability report, we also anticipate publishing our first asset handbook, an important document that will provide investors with detailed insights into our market-leading growth portfolio.

John Griffith, Chief Development Officer

Thank you very much, Andrew, and it's a pleasure to have you all join us today. Thank you for your time. It's worth recalling that it was only two years ago that we went public with a portfolio of 18 royalties. We now have over 200 royalties that are fully paid for in a portfolio poised to deliver multi-decade growth. Our portfolio places us among the top five in the number of royalties, following the likes of Franco-Nevada, Sandstorm, and Triple Flag. Our portfolio is organic in the sense that many of the assets are progressing under the capable management of leading, well-capitalized, and socially responsible gold producers. As these key top-tier operating partners advance these assets through the development pipeline, they become increasingly valuable without Gold Royalty needing to raise additional capital or incur extra costs. Our seven producing royalties are closely followed by 14 royalties on development assets, many of which will enter production over the next several years, delivering peer-leading revenue growth. Behind the development royalties, we have another 38 advanced exploration royalties with substantial resources, many of which present large gold resource endowments, and the potential to rapidly enter the development stage. Additionally, we have over 150 exploration royalties, primarily in the most prolific gold-producing regions in the Americas. These royalties provide significant optionality and the potential for meaningful future value accretion over time. The producing and development royalties in our portfolio will be key drivers of our peer-leading growth over the next several years. Using research analyst consensus estimates, Gold Royalty is expected to deliver organic revenue growth on a compound annual growth rate basis of 60% over the next few years. Importantly, we do not need to raise any capital or incur additional costs to benefit from this growth. Beyond the next few years, we foresee continued revenue growth as assets such as Odyssey, Granite Creek, and Côté come online, supported by the REN project, among others.

David Garofalo, CEO

Thanks very much, John, and thanks to everyone for your attention today. I think it's indisputable that we are headed into what I believe is an unprecedented bull run for gold. The ingredients are clearly present in terms of an accelerating inflationary environment, and the likely pivot by the Federal Reserve and central banks globally to ease monetary conditions. They're confronted with the conflicting challenges of high inflation and also a financial contagion, necessitating increasing liquidity to stave off financial turmoil within the sector, reminiscent of the great financial crisis just 15 years ago. We are likely to enter a period where gold will exceed all-time highs of $3,000 an ounce on a real basis. In this environment, we expect gold equities to respond. Interestingly, gold equities have not yet reacted even though gold is again reaching all-time highs. They remain significantly discounted from where they were when gold had gone above $2,000 an ounce, sitting at least 30% below that all-time high. The producer universe is feeling pressure from inflation which undoubtedly affects their valuations. That's why we believe that the royalty space is ideally positioned to offer optimum leverage to the gold price and the exploration upside while protecting against inflation in the underlying gold producer universe. Gold Royalty is uniquely positioned for rising gold prices in several ways; we anticipate increasing production from our underlying royalty portfolio and peer-leading growth in revenue. We are currently in an equity market environment where growth is heavily discounted as nominal rates rise, leading to underperformance for many. However, we believe that as monetary conditions ease and gold prices increase, we are uniquely set to offer substantial growth from exceptional jurisdictions like Nevada, Quebec, and Ontario, where we have a significant concentration in our portfolio. Our operating partners invested over $200 million last year, encompassing 700,000 meters of diamond drilling on our properties, which increased reserves and resources and granted our shareholders considerable exploration upside. We expect similar enthusiasm from our operating partners throughout 2023, which will further enhance the exploration prospects within our portfolio. Therefore, we’re excellently positioned to grow our cash flow, our dividend over time, and maintain strong liquidity to seize new opportunities as they arise over the next year or so. With that, we would be delighted to take questions from our shareholders. Thank you for your attention today.

Joanne Jobin, Host

Thank you, gentlemen, for a fantastic update, and thank you for your time today. By the way, we had almost 120 participants on this call. So well done. I can see through their comments and questions that many of your shareholders appreciate the opportunity to interact directly with you. So with that, we'll start taking questions. Just let me come into the portal. Here we go. Can you please outline the specific areas where cash operating expenses can be reduced to achieve the 2023 guidance level? And also, can you break out between the royalty revenue and the option proceeds to get to the 2023 guidance?

Andrew Gubbels, CFO

Sure. I can take that. The recurring cash operating expense reductions through 2023 will likely occur in several areas. First off, as you may know, our company made three large acquisitions post-IPO, including a major subsidiary in Nevada and Val-d'Or, Quebec. One of our goals is to consolidate and reorganize those subsidiaries to eliminate excess overhead costs in those areas, and reduce consulting costs, among others. We also expect to see moderation in our office and IT setup costs throughout 2023 as we stabilize. Additionally, refocusing our marketing efforts will contribute positively in meeting the guidance for costs. Those are the primary areas we will focus on for cost reductions to meet the $7 million to $8 million recurring cash operating expense guidance. Regarding the question about royalty and option proceeds for 2023, we expect around 40% of that will derive from royalties, mainly from the Canadian Malartic mine, while approximately 60% will come from options.

Joanne Jobin, Host

Thank you, Andrew. Next question, we've had many inquiries concerning the performance of the stock. Can you discuss why there is pressure on the stock? Or, as I would phrase it, what is the market missing?

David Garofalo, CEO

I believe, as I hinted earlier, that growth has been severely discounted in this market. In a situation where interest rates are rising, we're seeing our growth being significantly undervalued. Immediate cash flows are garnering a premium, whereas our current cash flow is not as substantial as it will be in the next 3 to 5 years as we realize growth from our impressive portfolio within the Americas. Once interest rates begin to trend downward, we are optimistic that the Federal Reserve and global central banks are initiating a pivot towards easing monetary conditions. This change will attract global generalist equity investors back into the gold market, from which they have been noticeably absent, contributing to the underperformance of mining equities overall. Consequently, I expect that a premium will shift toward growth like our own, which is entirely funded. Notably, all our royalties are bought and paid for, so no further investment is required on our part to pursue growth, and all of that growth will be realized for free. The value accretion on a per-share basis is tremendous because our share count remains static while our growth potential continues significantly. As capital reallocates into the gold sector, a small adjustment in global asset allocation—currently less than 1%—could substantially uplift not only gold prices but also valuations within the gold sector. As investors start arriving in the market, they're less likely to invest in shrinking businesses, making potential investments in those that are growing on an absolute and per-share level. Our growth is completely funded, meaning we anticipate dramatic increases in value and cash flow on a per-share basis in the years ahead. This dynamic is a distinct opportunity for us.

Joanne Jobin, Host

Thank you. Sticking with the gold market, what is the impact for GROY if gold rises by $100, for example?

David Garofalo, CEO

Absolutely. Every $100 shift in the gold price significantly impacts our revenue, which becomes increasingly pronounced as a larger proportion of that revenue transitions from options to production. As we look beyond the next couple of years, all our growth is anticipated to stem from royalty revenue, not option proceeds. In fact, our assumptions in revenue projections suggest that our option proceeds will effectively fall to zero over the next 2 to 3 years. Therefore, every $100 change in the gold price translates into a substantial effect on our revenue growth. We're currently using $1,650 gold as a long-term consensus for our estimates, meaning there's still upside potential for revenue at current gold prices. Additionally, I’d like to note that the beauty of our royalty model is that incremental revenue derived from a rising gold price goes directly to the bottom line, as we incur no associated costs.

John Griffith, Chief Development Officer

Dave, I'd like to add that the incredible leverage of the royalty business model allows that incremental revenue to flow directly to our profits, which is one of the most appealing aspects of our model.

Joanne Jobin, Host

Thank you, John. Can you comment on Marin Katusa and why you advised his subscribers to sell?

David Garofalo, CEO

Yes. Marin turned bearish on gold last year due to the Federal Reserve's unprecedented rate hikes. He famously advised his investors to liquidate their gold positions—a broad strategy that extended beyond just Gold Royalty. Interestingly, over the past few weeks, he has re-engaged with the gold sector, encouraging investors to consider the potential for a remarkable bull run in gold. Like many others, he seems to recognize the forthcoming shift toward easing monetary conditions by central banks in light of potential financial contagion.

Joanne Jobin, Host

Thank you. We've discussed stock performance pressure extensively. Is there an actual catalyst that will help improve share price in the upcoming year?

David Garofalo, CEO

From a macro standpoint, I would consider the gold price a considerable catalyst for not only our equity but mining equities in general. Particularly for royalty companies amid increasing inflation, that’s where we want to focus our efforts to optimize exposure to gold price increases and benefit from exploration upside while safeguarding ourselves, as John pointed out, from inflation. Each dollar increase in our revenue goes straight to the bottom line and we'll continue to streamline our costs, which have already decreased by 30% from previous years as we integrate growth post-IPO. Given that we're still a comparatively young company, optimizing our operations and cost structures continues to be a priority. We believe our position is very favorable for a rising gold price environment.

Joanne Jobin, Host

Thank you. I know you've thoroughly discussed the First Majestic closing at Jerritt Canyon, but could you further clarify for our listeners? We’re receiving many questions on this topic.

David Garofalo, CEO

Certainly! Jerritt Canyon represents less than 2% of our fundamental business value, indicating the strength of our diverse portfolio that a royalty company can offer, unlike even the largest producers in the gold industry, who operate a limited number of mines. With 216 royalties, we could uphold a tenfold business engaging the same workforce. While Jerritt Canyon is not currently in production and First Majestic is working on restarting operations, it has been taken out of our forecast—it simply represents upside potential. The beauty of royalties is that they do not expire or require funding. We have the flexibility to wait for operations to resume and benefit from exploration efforts without additional investment, providing substantial optionality for our shareholders.

Joanne Jobin, Host

Thank you, David. Is the company looking to continue growing through portfolio acquisitions, or will you rely on organic growth for the near future?

John Griffith, Chief Development Officer

The appealing aspect of our portfolio, as I mentioned, is that numerous significant and prolific gold producers are heavily investing in advancing the underlying assets we possess. This allows for organic growth without any action needed from us. Beyond projects that we discussed that are scheduled to come online, this dynamic creates a solid growth impetus. We remain very active in our pursuit of enhancing our portfolio. We have considerable interest in a range of opportunities, but we prioritize finding the right strategic fit that will enhance our value and net asset value per share. We are exploring opportunities across various areas—consolidation, establishing new royalties, providing fresh capital to operators, or focusing on singular assets. While there are currently less opportunity for corporate consolidation, our corporate development team is fully engaged and busy on multiple fronts.

Joanne Jobin, Host

To clarify for our audience, are you open to evaluating any M&A possibilities in light of recent consolidations in the industry?

John Griffith, Chief Development Officer

Absolutely. As I said, the key consideration is that any opportunity aligns strategically with our goals and brings additional value. We must remain disciplined. We evaluate many opportunities, but the current market dynamics can change quickly, making it difficult to predict outcomes definitively. That said, our corporate development team has never been busier.

Joanne Jobin, Host

What is the percentage of Eric Sprott's current holdings in GROY?

David Garofalo, CEO

It's challenging to discern individual shareholder holdings unless they make public filings. However, we are aware that we've attracted high-caliber shareholders since our IPO, including Eric Sprott, Rob McEwen, and Jimmy Lee. We also have Nevada Gold Mines, a joint venture between Newmont and Barrick, as a significant shareholder resulting from acquiring the Granite Creek royalty. According to public filings, they hold around 6%.

Andrew Gubbels, CFO

I'd like to add that Eric Sprott was a strong advocate for the Ely assets, which still remain within Gold Royalty Corp. Investors currently gain exposure to those assets through our shares.

Joanne Jobin, Host

We've received many questions regarding perceived dilution of the stock. Can you comment on that?

David Garofalo, CEO

I'm not quite sure what you're referring to. We haven't had any major share issuances apart from those for share-based compensation and restricted share units for our board and management. The majority of our compensation is share-based. Aside from that, the last significant issuance of stock was related to the acquisitions we've made. We haven't issued any stock for cash of significance since our IPO, when we raised $90 million.

Joanne Jobin, Host

On average, how much time do you anticipate it will take for development projects to begin generating income? 1 to 2 years, 2 to 3?

John Griffith, Chief Development Officer

I'll tackle that. If we refer back to our growth slide, we project a 60% growth from 2023 to 2025 based on analyst consensus estimates. That should provide a reference point for the upcoming revenue growth. Additionally, key assets such as Odyssey, Côte, and others are in the pipeline that are expected to yield revenue within the next few years. We haven’t provided explicit guidance beyond 2025; however, we anticipate revenue reaching at least $50 to $60 million depending on commodity prices, without issuing any new shares or spending additional capital.

Andrew Gubbels, CFO

In terms of development timelines, we expect some projects to contribute within the next year, with others in 2 to 3 years. With our portfolio of 216 royalties, the life cycle of development spans across projects, leading to a gradual increase in future revenue as various assets move toward production.

Joanne Jobin, Host

Thank you, gentlemen. How much exposure does GROY have to silver production, given the recent push towards EVs and renewables—will this potentially bolster prices for that commodity?

John Griffith, Chief Development Officer

We have a modest amount of silver exposure, but it's not expected to be a major driver for our revenue growth. It's beneficial to hold that exposure, and we do have some copper as well, which I believe shares a similar investment narrative to silver in the context of EV and renewable energy demands.

Joanne Jobin, Host

How many of your assets do you anticipate will be producing by 2024?

David Garofalo, CEO

Côté, which is expected to come online in 2024, represents our most significant addition in terms of cash flow. In 2024, we anticipate this growth will elevate us significantly in producing assets, contributing substantially to our revenues. Côté is projected to produce around 0.5 million ounces annually, ranking as one of Canada's largest gold producers compared to others such as Canadian Malartic. Our portfolio uniquely boasts royalties on not just Côté but also the underground extension of Goldstrike, the largest gold mine in the U.S., underscoring our competitive advantage compared to other small-cap entities.

Andrew Gubbels, CFO

By the end of 2024, we expect to see total producing assets increase from about 7 to perhaps around 11 or 12. This includes contributions that will materialize late in 2024.

Joanne Jobin, Host

We are approaching the end of our time here. One final question: Are any of your royalties subject to buybacks?

John Griffith, Chief Development Officer

We have a limited number of royalties that are subject to partial buybacks; none feature full buyback options. We are pleased to have most of our royalties structured as NSR royalties. Our portfolio lacks significant buybacks, ensuring robust protection for our investors.

Joanne Jobin, Host

Thank you. Thank you, David, Andrew, and John, and thank you to everyone who joined us today. If you have further questions for the company, you may email them at [email protected]. Thanks to all for participating; it’s been a pleasure to host you. We will see you soon at the next VID Town Hall Forum.