Royal Gold Inc Q3 FY2023 Earnings Call

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. I will now pass the conference over to Alistair Baker, Vice President of 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 reasonable 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. Moving on to the third quarter revenue, we reported total revenue of $139 million, with a volume of 72,000 gold equivalent ounces. Our Royalty segment generated $40 million in revenue, reflecting a 21% year-over-year increase. This increase was fueled by higher metal prices and additional revenue from the Cortez legacy zone, as well as new contributions from the Cortez CC Zone and King of the Hills royalties. However, this was somewhat offset by Peñasquito, which recorded no Royalty revenue this quarter due to a production suspension that began in early June. Peñasquito is a key property for us, so we are pleased the strike has been resolved, operations are resuming, and we anticipate Royalty contributions to restart before year’s end. Our Stream segment revenue remained stable at $99 million compared to last year. Key differences came from higher revenues from Khoemacau, Rainy River, and Andacollo, which were counterbalanced by lower contributions from Mount Milligan and Pueblo Viejo. Regarding operational developments, at Mount Milligan, production was affected by mine sequencing as some residual waste material was mined, alongside lower recoveries due to the pyrite to chalcopyrite ratio influenced by mining low-grade gold and high-grade copper ore from different phases. Consequently, Centerra adjusted its 2023 gold production guidance to between 150,000 and 160,000 ounces, and expects copper production to be at the lower end of the 60 million to 70 million pound range. Centerra anticipates that medium-term recoveries will mirror those of 2023 and is conducting metallurgical reviews to enhance recoveries. For 2024, higher gold and similar copper production levels are expected compared to the 2023 guidance. Additionally, Centerra has initiated an asset optimization review to explore productivity and cost efficiency improvements along with mine optimization, aiming for operational enhancements by 2024. At Pueblo Viejo, equipment design issues hampered the expansion ramp-up this quarter, and gold production was affected by lower ore grades and reduced mill throughput recoveries during commissioning. Barrick is actively addressing these challenges. During the quarter, approximately 81,000 ounces of silver were deferred, totaling 698,000 ounces by the end of September. We do not anticipate any substantial deliveries of deferred ounces for the rest of the year while the expansion is commissioned and ramps up to full capacity, which may take several quarters to resolve fully. At Cortez, Barrick shared results from a conceptual preliminary economic assessment indicating a potential gold production profile of 300,000 to 400,000 ounces annually, alongside the Cortez Complex’s projected output of 950,000 to 1.2 million ounces per year over the next decade. Ongoing drilling shows promise for enhancing the grade and size of this project, with work underway to evaluate an underground exploration decline to aid a pre-feasibility study. Our Royalty acquisitions from last year on the Cortez Complex position us well to benefit from this development. Lastly, we continue to see positive advancements at smaller assets, including substantial reserve and resource growth at the King of the Hills mine in Australia, first gold from the Bellevue Gold project, ongoing construction at Côté in Ontario with first production anticipated in early 2024, and first production expected at Mara Rosa in Brazil in the first half of 2024, along with strong quarterly output at Rainy River in Ontario and progress on first ore production in the latter half of 2024 for the new underground mine zone. I will 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 of 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 with a 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 from $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. Our first question today comes from 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, 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 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 timeline, 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, and those conditions were not satisfied. The assets still remain with the seller, so I would 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 sounded like they were still working on it, but I was – I don't know. It was just my poor reading of the text. I think it would 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 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 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'd 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 yours 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. Our next question today comes from Brian MacArthur from Raymond James. Please go ahead, Brian. Your line is now open.

Hi. Good morning. I have a question about the deferred Silver Stream at PV. Can you remind me how the trigger works when we finally get this up and running? I understand that once they reach the fixed rate of 70%, you're entitled to 75% of the silver. But to catch up, do you go straight to 100% of the silver when the trigger activates, or is there a scaling function? You mentioned it would take several quarters going forward. Any details you could share on that would be helpful.

Yes. Brian, what comes to mind is that if the recovery exceeds approximately 52.5%, we will begin to reclaim the silver. It's a gradual process, not an immediate jump to a specific number. The deferred silver situation arises because we cannot require Barrick to provide more than their 100% share of the silver, so we are limited in that regard. That 52.5% is the key figure for me; once we surpass that threshold, we should see progress, and at that point, we can likely provide you with a clearer timeline for when it might materialize.

Okay. Just to clarify, you receive 75% at the Stream rate, and you cannot exceed 100%. However, once you trigger it, you can collect all the silver that is generated in any quarter, theoretically. Does that sound accurate?

Theoretically, their share.

Okay. I think I've got that. I just noticed that last year you made some progress, but then it shifted the other way. I am trying to determine how quickly this will become a significant amount going forward. Great. Thanks very much, Bill. That was my question.

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.