Earnings Call Transcript - GROY Q3 2022

Operator, Operator

Another great Gold Royalty town hall forum. Thanks for tuning in today from wherever you are. That's the great thing about these town hall forums. You can join in from wherever you are in the world and have direct access to management. And of course, here with us today, we welcome David Garofalo, Chairman and CEO; and John Griffith, Chief Development Officer. Welcome, gentlemen. It's great to see you again and know that your shareholders appreciate the direct communication. After their presentation, we'll have a moderated Q&A session. David and John will now provide you with an update. Gentlemen, over to you.

David Garofalo, Chairman and CEO

Thanks, Joanne. Good morning, everybody. I'm delighted you’re able to join us to talk about our fiscal third-quarter results, which were a record, by the way, and we'll get into a bit more detail a little later on in the presentation. So record revenues and a very catalyst-rich quarter as you can imagine, with 700,000 meters of drilling or the equivalent of about $300 million of exploration being invested in our various properties. We have a lot of exploration news to share, a lot of growth in reserves and resources on the horizon, which will only enhance the value of our royalty portfolio. Before I get into that, though, I thought I would just point out our disclaimer. We are making forward-looking statements at your leisure. Please visit our website where this presentation is posted if you'd like to read this disclaimer in a bit more detail. Before I get into the presentation and talk about our results, what I thought I would do is talk about the macro environment as is customary in these presentations on a quarterly basis. I was looking for a unique perspective on the gold price and the macro variables that drive it. I got that yesterday reading a newsletter from Brian London, one of our supportive shareholders and somebody I frequently interview with if you watch his YouTube channel. What he discussed was the debt service costs the U.S. government is facing, which only emphasizes the need for the Federal Reserve to pivot in the short term and start to lower or at least stabilize interest rates. He pointed out that in this very short tightening period that we've already experienced with interest rates going up on a nominal basis, debt service costs in the U.S. have more than doubled to about $1 trillion per annum. These are still relatively low nominal rates and that represents more than $1 out of $7 in the U.S. government budget. So you can imagine with a small tightening in interest rates, what that could do to debt service costs. That’s the biggest economy in the world. So if it's walking back on thin ice, you can imagine what's happening in the developing world and smaller economies around the world as interest rates go up on a nominal basis, and debt service costs increase at a greater proportion of government revenues get devoted to servicing those costs. To further emphasize what’s happening in the economy, debt as a percentage of GDP is over 325% globally right now. That’s more than 3x what it was in the last big inflation cycle back in the 1970s. There was a lot more latitude for the central banks back then to raise nominal rates. In fact, nominal rates went up to almost 20% at the time, well in excess of what inflation was, which was double digits back in the 1970s. There certainly isn't the same scope for the Federal Reserve or central banks generally to raise interest rates dramatically, certainly not in excess of inflation, to tame inflation. So what I think will happen in the short term, which emphasizes our call on gold, is that we do see the Federal Reserves and central banks globally starting to slow their tightening cycles and probably reverse course, which will only exacerbate the inflationary cycle we are experiencing. So we’re likely to be in this longer with inflation expected to be higher than what the headline numbers have been recently, and that’s daunting for the gold price. It’s likely to result in gold prices achieving all-time highs well in excess of $3000 in today’s dollars back in the early 1980s. We’re not even close to where the cyclical high in real terms is for gold. We’re also not nearly nearing the cyclical hyperinflation anticipated given the limited latitude that central banks have globally to raise interest rates. As I’ll discuss later, the best place to be to play that gold bull cycle is in the royalty and streaming business. In this inflationary environment, where mining companies are not immune from cost inflation, we’ve seen a steady line of mining companies report higher costs, re-guiding their costs multiple times this year upwards as a result of inflation. That emphasizes the pressure on their margins, while royalty and streaming companies provide insulation from cost inflation as our exposure is entirely to the top line. So we get optimum exposure to the gold price while protecting you, our shareholders, from cost inflation in the industry generally. The unique part of our story is we have sector-leading growth of revenues, only emphasized with our record revenues in the last quarter and likely to achieve a 60% compounded average growth over the next several years as a number of our assets come into production. We have 8 producing currently, another 20 in various stages of development and construction, which underpins our already sector-leading revenue growth. Beyond that 5-year horizon, we have a number of very large assets coming into production, including the Odyssey underground extension of Canadian Malartic, the largest producing gold mine in Canada. What we offer is diversification, a quality that no producing company can offer to the same extent. We have 198 royalties, and that number continues to grow. When we last spoke, we had several royalties smaller than that; about 195. So we continue to add additional royalties at a cost-effective basis as we generate our own internally and look for new acquisition opportunities in the sector. That kind of diversification simply doesn’t exist in operating companies. Even the biggest mine operating companies in the world can’t operate more than 12 to 15 mines across their entire portfolio. If there’s a problem in any of the assets, that’s likely to impact their share price quite negatively. We offer diversification, top-tier exposure, insulation from cost inflation, and exploration for which we pay nothing. Our operating partners are investing $200 million this year and 700,000 meters of exploration drilling in and around their existing deposits. This means that their reserves are likely to grow, and we will enjoy that upside completely without exposing our shareholders to those exploration expenditures. There are companies in the royalty space that are a bit hybrid; they provide royalties but also invest money in exploration. We believe that completely undermines the value proposition of a royalty company. If they’re spending money on exploration, they’re exposing their shareholders to cost inflation, which exploration companies face in this environment. We don’t do that. We have state exploration claims, but before any dollars are required on the ground, we farm those properties to the explorers and developers and take a royalty back. We don’t invest capital meaningfully in the ground. We let our operating partners do that and insulate our shareholders from that cost exposure and the risk that exploration brings to the table. We still have a strong balance sheet, solid trading liquidity, with $17 million of cash and marketable securities. We have a $25 million credit facility, including a $15 million accordion with Bank of Montreal. As our cash flow gets enhanced, we'll have increasing access to that facility, and watch this space, we’ll likely extend the maturity of that facility, with negotiations currently underway. We frequently mention our management team and board; collectively over 400 years of experience, particularly in operations and mine development, offering a unique value proposition. We understand our operators and developers because we’ve been in their shoes, enabling us to appropriately price the risk underlying the assets they're trying to develop. Let’s briefly discuss the inflation cycle I touched on earlier. As seen, interest rates continue to dive deeper into negative territory on a real basis. Yes, nominal rates are going up; the Central Bank is raising rates monthly. Yet inflation continues to accelerate, and real rates go deeper into negative territory. Given that the Federal Reserve and central banks globally are likely to pivot and reduce nominal rates to avoid overwhelming their governments with debt service costs, we expect real interest rates to drop further into negative territory. The gold price hasn’t responded as it has historically when real interest rates decreased. In previous cycles, we saw gold prices increase by 300% to 400%. We haven’t even approached previous cyclical increases. Thus, we expect a prolonged bull cycle and the need for Central Banks to continue lowering interest rates to maintain reasonable debt service costs will only accelerate inflation and rise the intrinsic value of gold, which is the only currency you can’t print. We’ve seen inflation impact our economy, with goods up about 16%, transportation and warehousing up 21%, and energy increasing 36% to 37%. This trend is expected to continue, positioning gold as a safe haven against inflation because of its finite quantity. While other currencies we’ve observed continue to increase in volume, gold is becoming more challenging to mine. Supply decreases annually as reserves have dropped by 40% from peak levels seen in 2012. Royalty companies again provide a unique value proposition, exposing you to the top line. We take a percentage of the revenue but do not expose our shareholders to operating and capital cost inflation, all with a very small employee count. We have only 7 full-time equivalent employees, as opposed to Barrick with over 20,000 employees, Newmont with over 14,000, and other companies with over 11,000 employees. We have a highly scalable model, and I am confident we could manage our business even if it were 10 times larger with the same number of employees. We contract expertise for due diligence on opportunities, ensuring those costs are transitory, not permanently part of our cost structure. That means as revenue grows, we provide increased dividends. Currently, we maintain over a 1% yield at today’s share prices, forecasting further revenue growth in coming years. This has translated into historical performance for royalty and streaming companies in the sector; despite fluctuations, they consistently provide a low-risk approach to investing in gold. Following the recent surge in gold prices, we observed royalty and streaming companies vastly outperforming mining producers because producers had to deal with input cost inflation. We think we are at a similar point now. The value of Gold Royalty is immense; we are rapidly achieving scale through consolidation efforts in the sector. We’ve evolved from 14 to nearly 200 royalties since our IPO 1.5 years ago. We are still significantly discounted relative to peers. We intend to scale and increase relevance to institutional investors. This could result in our valuation re-rating. Historically, market leaders in this space typically trade at about 3x the underlying net asset value of their business. As we trade around 0.5x our net asset value, scaling and revenue growth can position us for a similar re-rating over time. We’re paying you to wait with a dividend yield exceeding 1%. This is the value of owning a rapidly growing smaller cap company like Gold Royalty compared to larger streaming royalty companies that don't have the same rerate potential, given their higher current valuations. Rapidly going about achieving scale, we absorbed Ely Gold, Abitibi Royalties, and Golden Valley last year. We financed the Beaufor Mine’s construction with Monarch in partnership while acquiring a royalty on Cote, IAMGOLD's latest gold mine, set to produce in 2024, which will become Canada's second-largest gold mine. This is not just about the quantity of royalties; we have significant diversification and essential, foundational assets in Canadian Malartic, Cote, and REN – with multi-decade relevance providing revenue and growth potential for many years to come. Briefly touching on the quarter, we achieved record quarterly revenue of $1.9 million, with $3.1 million over the nine months, up from zero last year; upon our IPO, we had 14 development-stage royalties. Through our consolidations and financing efforts for Beaufor and Cote, we introduced rapidly growing revenue streams. With over $17 million of cash and marketable securities by the end of the quarter and access to $15 million upon certain conditions, we estimate our ability to raise capital for further royalty opportunities. With this, I will hand it over to John to discuss specifics in our portfolio, and after that, I would be delighted to address questions. Thank you so much for your attention this morning.

Unidentified Company Representative, Company Representative

Thanks, Dave. As David mentioned, our expected revenue growth over the next 3 years is approximately 60% on a compound annual growth rate basis – and this is all based on analyst consensus estimates. We're currently 8 producing royalties, and we forecast this figure will increase to 12 producing royalties by 2025. The additional royalties anticipated would be from the Odyssey project, Cote, South Railroad, and Gold Rock. Beyond 2025, we expect significant further growth as additional key development assets come online. The ramp-up of Odyssey, coupled with anticipated development of world-class assets such as REN and Fenelon, will facilitate our revenue growth into the latter half of the decade. Key royalties such as Odyssey, Cote, and REN are cornerstone development assets within our portfolio, providing not only near-term revenue growth but also longevity. These are generational assets that will sustain cash flow to Gold Royalty and our stakeholders for decades. Regarding the Odyssey project, over which we maintain a 3% NSR royalty, Yamana disclosed on July 7 that permitting on the project remains on schedule while construction is on track and on budget. First production from Odyssey South is expected in the first quarter of 2023. On July 27, Yamana announced positive exploration results, which could significantly expand the project’s inferred resource. For the Cote Gold project on which we hold a 0.75% NSR, IAMGOLD announced a project update on August 3, including updated costs projected in a new technical report for Cote. The updated mine plan outlined an 18-year mine life, with initial production expected in early 2024 and an average annual production of 365,000 ounces, with average all-in sustaining costs of $854 per ounce gold sold. Costs to complete have increased to just over $1.9 billion. However, Gold Royalty, as an NSR holder, is insulated from this cost escalation. Moving on to REN, for which we hold both a 1.5% NSR and a 3.5% NPI, Barrick announced on August 8 that resources at REN are expected to grow in 2022 as the project advances towards feasibility. The geological continuity shows potential for further mineralization from drilling results. We also saw the commencement of production and the first gold pool at Beaufor, where we previously financed Monarch Mining’s planned restart. It's gratifying to see Monarch's success, and we trust their operating team will ramp up production at Beaufor. We’re also pleased to confirm royalty payments from the Borden Mine, which has produced over 100,000 ounces yearly for the past two years and currently extends until 2027. Beyond key developments and producing assets, the exploration upside in our portfolio is exciting yet underappreciated. Across nearly 200 assets, we expect over 700,000 meters of drilling to be completed in 2022, providing significant catalysts for our portfolio in upcoming years. Notably, this $200 million exploration investment comes at no cost to Gold Royalty. Moreover, our robust geopolitical profile allows for assets located within some of the best mining jurisdictions worldwide. In summary, we had another stronger quarter as our company continues to grow. The fundamentals for gold are strong, and historically, the royalty and streaming model has been the best way to gain exposure to rising gold prices. Our portfolio focuses on world-class assets, and our revenue growth is peer-leading. The exploration investment by our operating partners will help fuel strong growth through the back end of this decade and beyond. Our balance sheet remains healthy, and our team continues exploring multiple opportunities to effectively grow the portfolio. Thank you for your time, and we're happy to address questions.

Operator, Operator

Hello, gentlemen. Thank you very much for that update. That was really great. So we're going to move to the Q&A portion. We’ve got some great questions lined up. The first one is, can you comment on the consolidation taking place now in the royalty space? Do you see Gold Royalty continuing to acquire other such companies?

David Garofalo, Chairman and CEO

John, why don't you handle that one?

Unidentified Company Representative, Company Representative

Yes, great question. I think we’d start by saying that we obviously feel like we kicked over the ant's nest with consolidation, having acquired three companies last year, and it’s gratifying to see that others are following suit. There are many companies competing for assets and capital, and we think that consolidation is the right way to achieve the scale that Dave discussed to attract the right kind of investors and see that increased multiple. We would also commend some transactions recently completed by others, as it's a sign of flattery that they follow our lead. However, I’d note we don’t believe we have a monopoly on consolidation. Some transactions have been executed to address structural challenges in our peer companies, reducing operating risks. In short, yes, we see more consolidation, and absolutely, we will continue pursuing accretive opportunities as they arise to grow our portfolio.

Operator, Operator

Excellent. Here's another M&A question. More specifically, with an increase in the M&A sector, is Gold Royalty still looking to acquire another royalty company? Would it be an attractive target given their assets in Ermitano in Mexico and Silicon in Nevada?

Unidentified Company Representative, Company Representative

What I would say is we would never comment on any specific company or opportunity. The best way to frame this question is to emphasize again the multiple prongs of our M&A strategy and growth strategy. We start off with the ability to generate royalties organically, which we have continued to do. We also look to acquire or write new royalties to provide capital for growth or reopening mines, for example, with Monarch Mining; Beaufor is a great example. Also, we pursue existing assets owned by third parties, such as the royalty we have on Cote Lake. Plenty of opportunities exist, and we continue looking to consolidate. Referring to the first question, we see more consolidation on the horizon, whether Gold Royalty participates or some of our peers.

Operator, Operator

Thank you, John. Next question is, when do you think your royalty stream acquisitions will level off relative to your cash flow, thereby enabling you to pay a more significant dividend?

David Garofalo, Chairman and CEO

Over 1% yield, we’re nearing the top of the heap in terms of return of capital to shareholders. Given our projected revenue growth over five years, about 60% compounded annually, we have considerable latitude to increase dividends over time. Our cost base is compact; we have 7 full-time employees. I'm confident we could run a much larger business with the same team. This means every increment in revenue essentially contributes directly to the bottom line, providing greater potential to increase dividends.

Operator, Operator

Thank you, David. What is Gold Royalty doing from an ESG standpoint? Is this something the company focuses on?

David Garofalo, Chairman and CEO

Yes, I can address this. We recently hired a Head of ESG from Deloitte, where she was a senior partner in their ESG practice, to work on filing and publishing our first ESG report in the coming year. We are diligently examining our ESG criteria regarding any new investment in royalty opportunities. We've passed on numerous opportunities due to substandard practices by operators, so we’re committed to scrupulous investments. Additionally, having a dedicated resource allows us to bolster our ESG expertise and provide updates to shareholders on our progress.

Operator, Operator

Thank you, David. Another question. With the recent approvals of the USD 250 million and $50 million prospectus filings, can you comment on the quantity of deal flow you have investigated since Elemental and have you come close to any successful negotiations?

David Garofalo, Chairman and CEO

We’re in a perpetual state of due diligence regarding royalty opportunities. We are constantly generating our own royalties internally. Our team, including Jerry Baughman in Nevada and Glenn Mullan in Canada, are continuously staking exploration claims and generating royalty opportunities organically and at no cost. Those filings are not necessarily indicative of what’s forthcoming but serve as efficient avenues for raising capital once we identify opportunities for investment.

Operator, Operator

Thank you, David. Here is another question, which I believe you touched on in your presentation. Other than the strong U.S. dollar, what do you believe is holding the gold price back despite bullish macro factors like negative real rates, increased global tensions, and unprecedented debt levels?

David Garofalo, Chairman and CEO

There has been a flight to the U.S. dollar, and it’s an interesting point. If you look at gold prices in other currencies, whether it's the euro, Australian dollar, or other major currencies, gold has reached all-time highs in those terms. Gold is reflecting our current macroeconomic environment with high inflation and low real interest rates in other currencies. Eventually, it will reflect similar trends in U.S. dollar terms. The U.S. government is facing increasing debt service costs, with a doubling recently due to small nominal interest rate rises. This trend will likely overshadow other expenditures as the Federal Reserve tightens interest rates in the short term. Ultimately, I expect a devaluation of the U.S. dollar given declining yields. Also, we’re witnessing declining yields in a real sense, leading to inflation which erodes capital for those holding treasuries.

Operator, Operator

Thank you, David. Why did Gold Royalty file an ATM? Are you going to dilute shareholders?

David Garofalo, Chairman and CEO

Quite the opposite. We have been returning capital to shareholders, and 10 months post-IPO, we introduced dividends. These filings are designed to provide cost-efficient avenues for raising capital when we identify accretive opportunities. We won’t use these facilities unless it’s for acquisitions beneficial for our shareholders.

Operator, Operator

Thank you, David. I know you touched on the IAMGOLD Cote project in your presentation. The question is regarding capital cost increases at Cote and how this impacts Gold Royalty's NSR.

David Garofalo, Chairman and CEO

In fact, it does not. That is the beauty of the royalty model; we are paid a percentage of the revenue, and costs are absorbed by the operator. IAMGOLD must address the capital increases through other sources, and our model provides insulation from those risks. Typically, royalty and streaming companies outperform producers significantly during inflation because producers bear those costs, while royalty and streaming companies remain insulated from them.

Operator, Operator

Thank you, David. Clean energy and critical metals are hot sectors right now. Would you consider entering that royalty sector?

Unidentified Company Representative, Company Representative

Certainly, it’s an area of interest in the market. However, our goal is to provide our investors with exposure to precious metals concentrating mainly on gold. While the greening of the global economy is vital, it’s not an industry we will participate in; it’s not where our expertise lies. Our name, Gold Royalty, fundamentally reflects our strategy.

Operator, Operator

We have great assets for future earnings, but presently we are still burning cash. Why are we paying out more cash for dividends?

David Garofalo, Chairman and CEO

We’re poised to enter a position of positive free cash flow in the coming years with our growth trajectory. Given our revenue growth and growth projections, our cost structure is fixed, resulting in increased dividends since every dollar in revenue will directly benefit our bottom line.

Operator, Operator

Agnico and Yamana have directed exploration results on East and Odyssey South. Odyssey North and East Malartic have not been mentioned lately. Could you comment on the latest results and their implications for our royalties?

Unidentified Company Representative, Company Representative

The comments I made regarding progress at Odyssey are constructive. Production appears ahead of schedule, with existing resources expected to support multi-decade mine life. Expanding that resource will extend the mine life well beyond expectations without impacting near-term production. As I said, the partnership is making great strides, and we’re excited about the direction things are heading.

David Garofalo, Chairman and CEO

Additionally, having personally built and operated mines in that district, I can share that opening deposits underground for production also facilitates exploration. Better drill setups allow deeper potential resource expansions to be explored. As we get underground, infrastructure serves both mining and exploration purposes, enhancing the potential for adding resources benefitting our royalty coverage moving forward.

Operator, Operator

You mentioned you have 8 producing royalties and expect to have 12 by 2024. Could you tell us which royalties those are?

David Garofalo, Chairman and CEO

Certainly. Our 8 producing royalties include Canadian Malartic open pit, two on Jerritt Canyon (an NSR and a PTR), one for the Beaufor mine (an NSR), and another for Beaufor Mill (a per ton royalty), Borden (NSR), Isabella Pearl (NSR), and Marigold (NSR). The next four assets expected to come online by 2024 will be Odyssey, the underground expansion of Canadian Malartic, Cote Lake, the IAMGOLD project, South Railroad recently acquired, and Gold Rock acquired by Calibre.

Operator, Operator

I don't know if you have this information at your fingertips, but what is the estimated NAV of the 8 producing mines and the 20 mines in development?

David Garofalo, Chairman and CEO

On average, we're trading at around 0.5x to 0.6x net asset value, indicating analysts estimate our net asset value between $5 and $6 per share.

Operator, Operator

Where do you see Gold Royalty in the next 5 years?

David Garofalo, Chairman and CEO

Ultimately, our vision is to create a mid-tier company where none currently exists. The category leaders in our space, such as Franco-Nevada, Wheaton Precious Metals, and Royal Gold are all large companies with premium trading multiples of 2x to 3x net asset value. However, we see an opportunity to position as a mid-tier company of around $5 billion market cap, giving us the potential to attract large-scale institutional investors while maintaining meaningful growth. Companies of our size that currently trade at approximately $400 million market cap can see numerous growth opportunities via acquisitions and gold price momentum, making them susceptible to significant increases in value.

Operator, Operator

A question about EPS from a shareholder. Excellent results, David. My question concerns the negative EPS and the share price. Do you have a strategy focusing on raising the current share price of the company?

David Garofalo, Chairman and CEO

We are likely on track for meaningful positive EPS in the future as we start seeing revenue growth. Our cost structure is quite fixed, full-time equivalent employees mean that revenue will contribute directly to the bottom line dollar for dollar as it increases in the upcoming quarters due to several development-stage assets coming online.

Operator, Operator

Do you think the proposed Russian World standard will succeed as a viable alternative to the manipulated LBMA gold pricing, thus reflecting global pricing more realistically?

David Garofalo, Chairman and CEO

I can’t say I’m well-versed in that specific topic, but I will note that numerous currencies have emerged in the global economy over the past decade, including cryptocurrencies, which have attempted to capture investor interest. However, what they lack is scarcity. Gold has been the currency of choice for thousands of years precisely because of its finite nature and difficult extraction methods. All fiat currencies, whether traditional or crypto, face the temptation of expansion, resulting in inevitable failure, while gold remains unchallenged.

Operator, Operator

That wraps up today's town hall forum. Thank you, everyone, for participating. David and John, if you'd like to say a few parting words to your shareholders who dialed in, maybe a final note before we close.

Unidentified Company Representative, Company Representative

I’d like to say thank you for your time. We made a commitment to you when we IPO-ed in March 2021 to grow on an accretive basis, and we've successfully delivered on that consistently through acquisitions and royalty growth. We've gone from 14 to 198 royalties while significantly enhancing our revenue. We lead the sector in revenue growth projections, and as mentioned earlier, the market will reflect this in our share price over time. I appreciate your patience as we move forward. We’re also paying you to stay with over a 1% yield while you await the recognition of our business’s intrinsic value.

Operator, Operator

Thank you, John. And please remember to fill out the questionnaire before leaving. The feedback is crucial for Gold Royalty’s investor communications. Thank you again for joining us today. Have a great day, everyone.