Earnings Call Transcript - GROY Q2 2023

Joanne Jobin, Host

Good morning, everyone. I'm your host, Joanne Jobin, and I'd like to welcome you to the Gold Royalty Town Hall Forum hosted by VidMedia. Today's town hall will be focused on Gold Royalties' Quarterly Performance including Financial Results and will be hosted by CEO, David Garofalo, CFO, Andrew Gubbels, and Peter Behncke, who is the Manager of Corporate Development and Investor Relations. After the presentation, I will be delighted to moderate submitted questions from our audience. And 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 lifecycle to build a balanced portfolio offering near, medium, and longer-term attractive returns for you, the investor. Now one more item before we commence. If you do have any questions for the company, please place them into the Q&A tab at the top of your chat sessions. And please ensure that you fill in the short questionnaire at the end of the presentation. This really helps us and the company communicate more effectively with you for future town halls. And before I turn it over to the team, please note the forward-looking statement at the beginning of this presentation. David, the stage is yours.

David Garofalo, CEO

Well, good morning, everybody, and Joanne, thank you so much for the kind introduction. As Joanne said, I will be joined shortly by Andrew Gubbels who will talk about our quarterly results for the second quarter, and then Peter Behncke will talk about the portfolio and update on our many assets with a diversified portfolio. But what I thought I'd do to, kind of launch this discussion with you today is talk about the broader business, the gold markets, the state of the equity markets, and our prospects going forward, and the growth that we've achieved, and expected to achieve going forward. So thank you so much for your time today. I'm delighted to take questions after our presentation, and have a more fulsome discussion over the course of this hour. But thank you so much for your time today over the summer weekend. What I thought I'd do is welcome our existing shareholders, delighted that you could join us today, but I thought for the newer shareholders, just give you a brief overview of the business. We are a precious metal-focused royalty company as the name of the company might indicate. But I would also say that while we're focused on precious metals, we have a very well-diversified portfolio with over 220 royalties in the portfolio, across the Americas to have diversified asset exposure. And I would say that's the beauty of the royalty model: we can offer a measure of diversification far beyond what an operating company can offer. There's a practical limit to what even the biggest gold producing companies can manage within their portfolio, no more than maybe a dozen assets. There's really no limit to the amount of diversification we could achieve in our royalty portfolio, because we're not managing the mines. We're effectively just managing a portfolio of contracts on these mines on which we own royalties. And so, with a very small contingent of employees, eight full-time employees, we could run a business 10 times the size with the same team. So that means our cost structure is quite stable. And by virtue of our top-line exposure, in other words, we get a royalty on the gross revenue from these mines, we have a very scalable business, one that has increasingly higher margins as our portfolio growth is achieved over the course of the next several years. Our margins will continue to expand, and our ability to return capital to shareholders, we think will expand over time as well. As I said, over 200 royalties in the portfolio, a lot of exploration stage royalties, but we have a broad array of assets across the spectrum in the mining business and early-stage exploration right through to production. We have five cash flow producing royalties. But I would say we also have a royalty on three of the biggest producing gold mines in North America. So, it's not just a quantity proposition, it's a quality one as well. We have Tier 1 assets to provide an underpinning foundation to our business that will provide royalties for many decades to come and significant optionality within all those early-stage exploration opportunities. The beauty of this model is once you own a royalty, you own it outright, you never have any capital calls. We don't have any capital commitments in our portfolio, which means that we have nothing but upside in our royalties once we own them. That's a lot of optionality for our shareholders, not only for the gold price but in the exploration and development success of our operating partners, which is also quite well diversified. The reason we've been able to grow this business so rapidly over the last couple of years is a testament to the organizational depth that we have within our Board, and management collectively. We have over 400 years of industry experience, and that's given us unmitigated access to anybody in the mining industry. That's why we've been able to pick up assets almost all on a bilateral basis rather than competitive processes, which tend to result in royalty companies overpaying for assets. We have not overpaid for assets. We've had significant value, not only on an absolute basis but on a per share basis since we launched this company a little over two years ago. I'll get into a little bit more detail over the course of the presentation on that very topic. But before I do that, I want to talk about the gold market. The question I commonly get these days is, why is the gold price responding so well in these volatile times? It actually is responding extremely well on every front in every major currency. Gold is at an all-time high in every major currency other than the U.S. dollar, and even against the U.S. dollar in spite of a flight to the U.S. dollar across the world. We've seen gold hold its value, hovering around $2,000 an ounce. The purchasing power of the U.S. dollar since the early 1970s has gone down 90%. Gold has done exceptionally well as a barometer of inflation, which has become so deeply entrenched in our economy. In fact, the purchasing power of the U.S. dollar has been significantly impacted, and we do believe that the Federal Reserve and central banks are on the cusp of pivoting on nominal rates, which will likely drive gold prices to real all-time highs well beyond what we've experienced recently. If you adjusted the gold price back in the early 1980s, when it was a little over $800 an ounce, that would be over $3,000 an ounce today. If you look at bellwether stocks in the industry, they are at half the valuations they were back in 2020 when the gold price was last $2,000 an ounce. There has been significant compression of multiples in the gold sector, and we believe this provides a unique opportunity for investors. Overall, the royalty model is very attractive right now as it provides top-line exposure while protecting from inflation. Last year alone, our operating partners invested over $200 million in exploration in their underlying assets. We get the benefit of that upside without any financial commitment. We believe that as we see the gold price pick up momentum, the royalty companies will provide the best upside with the best protection against inflation. We think the opportunity you see within the royalty sector is a re-rate potential for the smaller-cap players. We see a strong growth potential given our 60% compounded annual growth in revenue through the end of the decade. We've been able to grow our royalty portfolio 12-fold from 18 royalties at our IPO to over 220 royalties today. We've seen a five-fold increase in our net asset value based on analyst consensus estimates, translating into a 50% increase in the underlying value of our business on a per share basis. We're excited about our impending transition to free cash flow generation for the first time next year. So as we start to generate free cash flow, we hope to reintroduce our dividend. With that, I'd like to pass it on to Andrew to talk about our operating results for the second quarter of 2023.

Andrew Gubbels, CFO

Thanks, Dave. As Dave mentioned, I'll run you through some of the highlights of our second quarter. In Q2, we've maintained our financial guidance of $5.5 million to $6.5 million of revenue and land agreement proceeds for the year. This is despite lower revenue in the second quarter, which has really been due to resequencing of production within the Barnat Pit at the Canadian Malartic mine. We are confident that cash flow expected from Malartic will be substantially recovered in the second half of this year. Our Q2 2023 cash operating costs were down 30% compared to the second quarter of 2022, which continues a trend that began in the first quarter and we expect to continue going forward. The lower operating cost has helped offset the lower revenue, and contributed to an unchanged adjusted net loss per share of $0.02 in the quarter. We're on track to meet our expectations for recurring cash operating costs of between $7 million and $8 million for the year. In the quarter, our operators, including Agnico Eagle, IAMGOLD, Barrick Gold, Walbridge, and i-80, all announced positive developments at their respective projects. Given our portfolio's weighting towards the growth end of the market, this has further de-risked our world-class portfolio and giving us even more confidence about our future. To complement the positive momentum of these growth assets, we announced the acquisition of the producing Cozamin Royalty at the end of July. This royalty adds immediate cash flow from an established copper mine in Mexico and fits well with our current portfolio. Our team in Nevada has generated two new royalties through our proprietary royalty generator model, and we've created 37 new royalties since within the company since 2021. Our share and capital structure remained fairly consistent in the quarter, with the company continuing to generate strong trading liquidity of around $1 million of shares traded per day. We also had two new analysts initiate research coverage in the second quarter, Scotia Bank and National Bank, both with outperform recommendations and target prices above Gold Royalties’ current share price. Regarding the Cozamin Royalty, we acquired a 1% NSR on the Cozamin copper-silver mine in Mexico. It has generated roughly $1 million in royalty proceeds in the last 12 months, and we expect it to be additive to our near-term cash flow profile. The mine consistently operates within the first quartile of the copper cash cost curve, indicating strong defensibility in a volatile market. We see good potential for continued resource conversion and mine life extension through Brownfield exploration. Now for more information, encourage you to review Capstone Copper's disclosure on the Cozamin mine.

Peter Behncke, Manager of Corporate Development and Investor Relations

Thanks, Andrew. Continuing to speak to the recent acquisition of the Cozamin Royalty. This was a strong complementary fit to our existing portfolio. It's widely known that we have a development and exploration-heavy portfolio with a lot of very strong key assets coming down the pipeline and entering production in the near-term. However, Cozamin immediately stimulates our revenue and our free cash flow in 2023. With Cozamin being operated by Capstone Copper, it fits in well with our existing suite of operating partners that represent the largest gold mining companies in the world, such as Newmont, Barrick, and Agnico Eagle. An important point on the pipeline of exploration, development, and producing assets is that it's dynamic. We've seen several advanced exploration assets move toward development, and we expect several assets coming online over the next few years. Despite a lighter Q2 in revenue, our long-term outlook based on consensus estimates of revenue growth remains unchanged. We have several cash flow producing assets expected to increase in revenue over the next several years, including Odyssey Mine, Borden Mine, and Cozamin. Beyond 2026, towards 2028, we expect even more significant revenue growth as Odyssey fully ramps up as an underground operation. Our royalty over the Whistler project in Alaska has a fully permitted and funded two-year exploration program driving toward a PEA next year. We've made a commitment to sustainability across our business, and we've published our inaugural sustainability report this year. Overall, the investment we see across our 220-plus royalties will benefit Gold Royalty in the long-term, helping to fuel revenue growth.

David Garofalo, CEO

Thank you very much, Peter. We will open it up to Q&A first. But I thought I would summarize the compelling story behind Gold Royalty, the opportunity we see in terms of tremendous growth, but also deal head-on with the fact that our stock has been significantly underperforming over the last year or so. I think in the current market, growth is heavily discounted due to the rising interest rate environment. We've seen the bellwether stocks in the industry significantly underperform the general equity markets. The larger cap players in the gold universe are half the valuation they were back in 2020 when the gold price was last $2,000 an ounce. Our growth-oriented story expects 60% compounded growth through the end of the decade, positioning us to generate strong free cash flow. We've been able to control our cost structure significantly with a reduction over 30%. The revenue growth we anticipate will crystallize over the coming year, particularly with Cote coming on board next year. We will focus on delivering significant value to our shareholders, which we believe will attract the interest of investors, especially in better markets.

Joanne Jobin, Host

Thank you, David, and thank you for taking that question about being undervalued. That is one of the questions I was going to bring forward to as there have been a few shareholders or people on today that have been asking about that. So it's great to see you talking about that first and foremost. So let's get on to our first question, which has to do with the dividend. We're getting lots of questions about that. Are you going to reinstate it? Or are you just going to keep investing in the properties that you have or potential M&A that you see coming down the pipeline?

Andrew Gubbels, CFO

It's a suspension of our dividend for the time being. We do expect to be free cash flow positive next year. It's something that we're going to reintroduce at the right point, but we were faced with an opportunity to bring in a very high-quality asset into the portfolio in the face of a market where capital is very scarce. The smaller cap players in the gold universe, whether it's junior explorers, royalty companies, are not able to raise fresh capital. We added the Cozamin deal without any dilution to our shareholders. We've grown the value of our business by doing that, but also added cash flow per share growth. The main areas for cost savings include some consolidation of corporate entities and roles within the company. We've focused on decreasing consulting fees and professional costs by bringing administrative activities in-house. We've also negotiated sharper terms with our insurance providers, reduced marketing spending by focusing on the most value-add areas, and tightened general office and IT expenditures. With the team we have, we expect to operate the company in a very efficient manner based on the costs we've projected for 2023.

David Garofalo, CEO

In a rising interest rate environment, any growth-oriented stock, not only in the mining industry but more broadly, has been severely discounted. This market favors those offering free cash flow today, leading to significant valuation compression across the sector. Overall, there haven’t been many financial incentives for consolidation among royalty companies currently. We will continue to grow through our royalty generator model and will look at acquiring third-party royalties as we did with the Cozamin transaction. We will also consider project financing options for junior explorers and developers, especially as they experience capital scarcity. There isn't any formal protection from a takeover aside from our core strategy of adding value. We understand the frustration among shareholders regarding our underperformance. Our focus remains on driving growth, and we believe that over time, the market will respond positively to our efforts as we continue to build a strong portfolio. The dividend, buying back stock, and returning capital to shareholders in any form is something we will explore as we start generating free cash flow. As a royalty company, sharing our annuities with shareholders is a priority. Regarding the Monarch deal, we restructured the royalties to make them more attractive. If the buybacks are exercised, we will receive all our capital back from Monarch but retain the royalties on their operating mines.

Peter Behncke, Manager of Corporate Development and Investor Relations

We’ll have five cash-flowing royalties expected in 2024 with Cote entering production in addition to our existing cash-flowing royalties: Cozamin, Canadian Malartic, Isabella Pearl, and Borden.

David Garofalo, CEO

Thank you for your time and patience today. Please feel free to reach out to us directly through our website or contact methods provided; we're always accessible and happy to talk to you individually.

Joanne Jobin, Host

Thank you, David, and the team for the presentation. The recording will be on the website shortly. Please fill out the questionnaire as you exit. Goodbye, everyone, and thank you for tuning in.