Royal Gold Inc Q2 FY2024 Earnings Call

Hello everyone. And welcome to the Royal Gold 2024 Second Quarter Conference. My name is Seb, and I'll be your operator for the call today. I'll now hand the call to Alistair Baker to begin. Alistair, please go ahead. Thank you, operator. Good morning. And welcome to our discussion of Royal Gold's second quarter 2024 results. This event is being webcast live, and a replay of this call will be available on our website. Speaking on the call today are Bill Heissenbuttel, President and CEO; Paul Libner, Senior Vice President and CFO; Martin Raffield, Senior Vice President of Operations; and Dan Breeze, Senior Vice President, Corporate Development of RG AG. Randy Shefman, Senior Vice President and General Counsel is 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, adjusted net income per share, adjusted EBITDA, and net cash. Reconciliations of these measures 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 an overview of the quarter, Dan will provide an overview of our most recent acquisition, Martin will give some commentary on the portfolio, and Paul will provide a financial update. After the formal remarks, we'll open the lines for a Q&A session. I'll now turn the call over to Bill.

Good morning, and thank you for joining the call. I'll begin on Slide 4. We had strong financial performance during the quarter with near record revenue of $174 million, a 21% increase over the same period last year. Operating cash flow of $114 million and earnings of $81 million or $1.23 per share. After minor adjustments, earnings were a record $1.25 per share. Revenue was 74% gold and over 56% of our revenue was generated from the US, Canada, and Australia. Our adjusted EBITDA margin remained strong and steady at 81% for the quarter. And despite a 21% increase in revenue, our cash G&A was flat, providing further evidence of the scalability of our business model. Solid portfolio performance and the strong gold price helped us generate significant cash flow during the quarter that we allocated in line with our long held strategy, which included payment of our regular quarterly dividend with $26 million, repayment of $100 million of the balance outstanding on the revolving credit facility. We ended the quarter with $50 million of debt outstanding and we have now returned to a net cash position. After quarter end, we made a further repayment of $25 million. And so far in 2024, we have repaid $225 million of debt. And finally, we reinvested in the business with the acquisition of two more royalties on the Back River Gold District, which increases our exposure to the Goose Gold Development Project in Nunavut, Canada. We'd like to give you a brief overview of this acquisition, and I'll turn the call over to Dan to review the asset.

Thanks, Bill. I'll turn to Slide 5 and spend a few minutes on the Back River royalty purchase. In late June, we completed the acquisition of two royalties that cover the entirety of the Back River District for cash consideration of $51 million. Back River is an 80-kilometer gold belt in Nunavut being developed by B2Gold. Most of the development activity underway is at the Goose project, and the deposits to the north, including the George Project, are at an earlier stage. The royalties we acquired cover all reserves, resources, and potential extensions thereof in the district. The first royalty is a 0.7% net smelter return or NSR royalty that starts paying immediately and declines to a 0.35% NSR royalty after CAD5 million of revenue has been delivered. The second royalty is an approximate 1.3% gross smelter return or GSR royalty that begins paying after about 780,000 ounces are delivered. The first royalty is a deduction against the second, so while we have acquired two royalties, the interaction between the royalties allows us to account for the purchase as one asset. Together, the royalties are equivalent to an approximate 1.1% GSR royalty. If you recall, we already had exposure to the Back River project through ownership of other royalties that we acquired in 2008. So these royalties complement and add to that existing position. Turning to Slide 6, I'll give a brief overview of the Back River project. B2Gold is currently advancing construction of the Goose project, which will be a combined open pit and underground operation completing a 4,000-tonne per day conventional gold leach process plant. B2 currently expects first gold production in the second quarter of 2025 and they are estimating production of between 120,000 and 150,000 ounces in 2025, increasing to over 310,000 ounces per year from 2026 to 2030. B2 is forecasting total production of 3.3 million ounces over a 15-year mine life. Total measured and indicated resources contain approximately 6.3 million ounces of gold, which includes approximately 3.6 million ounces in proven and probable reserves. Inferred resources contain an additional 2.9 million ounces. And according to B2Gold, the average historical resource conversion rate from inferred to measured and indicated has been 73%. The area is highly prospective and B2 has an extensive exploration campaign underway to add to this resource base. Royal Gold's exposure to the Back River district increases significantly with this transaction. And the summary royalty rates on Slide 6 should help you understand how the royalty rates on the Goose project change as various production levels are achieved. We expect that the threshold for the first royalty rate increase will be reached in 2026, and the threshold to reach the GSR royalty rate of 3.3% will be reached in 2028 based on B2Gold's production forecast. We are pleased with this transaction as it increases our exposure to a very attractive project in a stable jurisdiction being developed by an experienced operator. I'll now turn the call over to Martin.

Thanks, Dan. Turning to Slide 7. I'll give some comments on second quarter revenue. Overall revenue for the quarter was near record $174 million with a volume of 74,500 GEOs. Higher prices were the primary driver for the increased revenue. Our royalty segment contributed $51 million, about 29% of total revenue for the quarter. Royalty revenue was up about 34% from the prior year quarter with higher contributions from Peñasquito and Robinson and approximately $2 million in new revenue from Mara Rosa, Bellevue, and Northern Star's Wonder Underground. These increases were partially offset by lower from the Cortez legacy zone. Revenue from our Stream segment was $123 million, up by about 16% from last year with increased contributions from Mount Milligan, Xavantina, Wassa, and Andacollo, partially offset by lower revenue from Pueblo Viejo. I'll turn to Slide 8 and give some comments on notable developments at our principal properties. At Mount Milligan, Centerra reported last week that they're on track for completion of a PEA in the first half of next year to evaluate opportunities to extend the mine life beyond 2035. They also reported progress on the site-wide optimization program with significant reductions to date on milling costs and improvements in mining costs expected in 2025. At Pueblo Viejo, Barrett reported in mid-July that production in the second quarter was flat compared to the prior quarter and a shift to recovery rate optimization will occur in the second half of the year as throughput is ramped up. Silver recovery remains lower than target. And while we received deliveries of 333,000 ounces, we saw a further deferral of 143,000 ounces in the second quarter. At Andacollo, Teck reported an improvement during the second quarter in the drought conditions that have caused water restrictions and limited throughput rates. Teck expects the improvement to continue in the second half of the year. Turning to Slide 9. At Peñasquito, second quarter production was strong, driven by high gold and zinc production resulting from higher grades in the Chile, Colorado pit and good mill throughput and recoveries. Newmont expects production levels to remain steady in the third quarter with an increase in gold production in the fourth quarter as mining returns to the higher gold grade Peñasco pit later in the year. At Khoemacau, MMG reported the first full quarter of results at the Zone 5 mine since the ownership transition. Production was impacted by equipment availability and high turnover of skilled labor. MMG reported that it is hiring and training a significant number of replacement workers. There are also measures being taken to reduce dilution with the expectation of achieving better ore grades in the coming quarters. In addition, MMG reported their intention to complete an expansion of Khoemacau by 2028 with the target of producing 130,000 tonnes of copper per year. Recall that Royal Gold's Silver Stream interest covers expanded production from the Zone 5 mine and the Mango Northeast deposit. We're pleased to see progress at some of our newer assets in the portfolio and note the initial gold pour at Manh Choh and the achievement of commercial production at both Côté and Mara Rosa. And finally, it's worth noting some positive developments at a couple of our Australian royalty properties. At Bellevue, a five-year plan was announced to significantly grow production by increasing underground ore movement and processing capacity. Bellevue has a June 30th fiscal year end, and gold production levels are expected to increase steadily from 165,000 to 180,000 ounces in fiscal year 2025 to 240,000 to 260,000 ounces in fiscal year 2029. And at Wonder Underground in Western Australia, we received our first royalty revenue in the quarter from high-grade development ore being blended into the Thunderbox mill. Northern Star is referring to an initial reserve containing approximately 455,000 ounces and expects the underground ramp-up to continue with production stoping to start later this year. I'll now turn the call over to Paul for a review of our financial results.

Thanks, Martin. I'll now turn to Slide 10 and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended June 30, 2024, to the prior year quarter. Revenue was up 21% to $174 million for the quarter, which is the second highest quarterly revenue in the history of the company. As Martin covered in his remarks, one of the primary drivers for the near record revenue this quarter was higher metal prices as gold was up 18%, silver was up 20%, and copper was up 15% over the prior year. As Bill mentioned, gold continues to be the dominant revenue source, making up 74% of our total revenue for the quarter, followed by silver at 13% and copper at 10%. Royal Gold continues to have the highest gold revenue percentage when compared to our major peers in the royalty and streaming sector. Turning to Slide 11, I'll provide a bit more detail on specific financial line items for the quarter. G&A expense increased to $10.5 million from $9.1 million in the prior year. The increase was due to higher noncash stock compensation expense. Excluding noncash stock compensation expense, our cash G&A was $7.2 million, which was unchanged from the prior year quarter. Our cash G&A costs as a percentage of total revenue have remained low despite inflationary pressures that have impacted the metals and mining sector in recent quarters. Our DD&A expense decreased slightly to $36 million from $38 million in the prior year. On a unit basis, this expense was $4.80 per GEO for the quarter compared to $5.27 per GEO in the prior year. The lower overall depletion expense and DD&A per GEO this quarter was due to three primary factors: first, a decrease in our Khoemacau depletion rate from $17.41 to $15.21 per ounce; second, lower gold and silver sold to Pueblo Viejo; and finally, higher contributions from our royalty segment, specifically Peñasquito, which royalty has a lower overall carrying value and depletion rates. We continue to forecast that our total DD&A expense will be within our previously guided range of $141 million to $157 million. Interest expense decreased significantly to $2.5 million from $8.4 million in the prior year. The decrease was primarily due to lower average amounts outstanding under the revolving credit facility when compared to the prior year. The all-in interest rate for outstanding borrowings under our credit facility was 6.5% at the end of June. Tax expense for the quarter was $19 million, resulting in an effective tax rate of 18.9%. This compares to a tax expense of $2 million and an effective tax rate of 3.1% in the prior year. The lower tax expense in the prior year period was due to a discrete tax benefit of $8.5 million attributable to the release of a valuation allowance on certain foreign deferred tax assets. The 19% effective tax rate for the quarter was in line with our expectations for the full year. Net income for the quarter was up over the prior year to $81 million or $1.23 per share. The increase in net income was primarily attributable to higher revenue and lower interest expense. After adjusting for a small discrete tax item and other minor adjustments, net income for the quarter was a record $82.6 million or $1.25 per share. Our operating cash flow this quarter was nearly $114 million, up 5% over the prior year. The increase in operating cash flow was primarily due to higher cash receipts from stream segments when compared to the prior year period. I will now turn to Slide 12 and provide a summary of our financial position as of June 30th. During the quarter, we returned the balance sheet to a net cash position with a repayment of $100 million on our outstanding credit facility balance. As of June 30th, we had $50 million of debt outstanding and total available liquidity of approximately $1 billion made up of the undrawn revolver balance and our working capital. I will also note that our working capital at quarter end was abnormally low. The lower working capital this quarter resulted from the acquisition of the Back River royalties from our available cash and also from the reclassification of the remaining $50 million revolver balance from a long-term liability to the current liability. We reclassified this amount as a current liability given the $25 million repayment we made in early July and a final $25 million payment we intend to make early next week. With the repayment expected early next week, we will have zero debt outstanding. That concludes my comments on our financial performance for the quarter, and I will now turn the call back to Bill for closing comments.

Thanks, Paul. Our second quarter was strong, and we were diligent in sticking to our long-standing strategy of allocating capital to our dividend, the balance sheet, and new business. I'm particularly pleased with our progress on debt reduction. With the coming $25 million repayment that Paul noted, we will have repaid all the borrowings we incurred to fund some of our recent portfolio additions. Looking back two years, we have spent over $900 million to acquire royalties on Cortez, Great Bear, and Back River, and we did not dilute our shareholders by issuing equity to finance these transactions and a fully replenished liquidity available for future acquisitions. These are high-quality gold royalties in Tier 1 jurisdictions, and I expect them to offer significant upside over the coming decades. Our financing choices mean that our shareholders will enjoy the full benefit of that upside. As one considers the current state of political instability and market volatility, we are very well positioned for this uncertainty. We are tracking well toward our full-year guidance for overall sales, DD&A, and effective tax rate. Our balance sheet is solid, and we have excellent liquidity available to take advantage of business development opportunities that may present themselves. Operator, that concludes our prepared remarks. I'll now open the line for questions.

Maybe I will just start on Back River. I'm just interested in the royalties you purchased. Were they from existing individuals? I wasn't aware that other companies had a little royalty. So maybe just starting off with who is the seller of these royalties, individuals or companies…

Dan, do you want to take that one on?

The Hill royalty, Tanya, came from a private trust, and the CAM royalty was from a subsidiary of a US company, third party royalties, and it was a competitive process as well.

And are there more of these royalties then available on this property or are these…

So the property itself has a few royalties, Tanya. This is the bulk of the royalties. There are a couple of smaller royalties; I don't think they're available to purchase. But this is the bulk that we're talking about here in terms of our ownership now.

I know yours, and I know there's other companies as well that have exposure. I'm just always intrigued about how many pop up, and I wasn't sure whether this is the end of it. You said there are a couple of smaller royalties that are not available. Are those individuals as well?

Again, we don’t have all the detail in front of me here, Tanya. I believe that some or at least one is held by an individual and another is held by a company off the top of my head here. But I do agree with you. It's interesting that we see these things sometimes pop up, and sometimes they surprise us as well. I think what we're seeing right now in the market, Tanya, is a pretty robust market for these third-party royalties. There've been a number of transactions announced as you've seen already this year. And I think it's a combination of stronger commodity prices that are motivating sellers and then a pretty robust buyer market. So all of us in the sector have lots of capital to deploy; it's pretty competitive. So it's a good market to sell into. So in general, I wouldn't be surprised to see more.

Historically, we discussed a range of $100 million to $300 million. I need to confirm if that range still holds. You did accomplish something at $50 million, but it seems these royalties are smaller, and you're indicating an increase in their numbers. Could we potentially see the range adjust to $50 million to $300 million instead of $100 million to $300 million? This might make more sense given the current trends. I'm trying to clarify what you're observing. One of your competitors mentioned a significantly higher range on the upper end, so I'm curious if you're experiencing a broader range but on the lower end instead.

Dan, why don't you keep going…

I think the way we view the market right now is that the sub-$100 million level has been quite active for us. The Back River royalties exemplify this category of opportunities, showcasing good size and quality transactions that we're eager to incorporate into our portfolio. When we consider the $100 million to $300 million range, which remains relevant, we understand that our response might seem repetitive, but that is what we consistently observe. We're aware of a couple of larger opportunities outside of this range, but overall, it's fair to say that the $100 million to $300 million range remains robust in the broader context we see, particularly with some royalties and mainly on the streaming side.

Bill, could you explain the process from when you're approached about an opportunity or when you're actively searching for opportunities? We'd like to understand what it takes to announce a deal and the timeline involved, as we know there are many potential deals being discussed, but they won't all be finalized immediately.

When we discuss our business activity level, we are not trying to assess the probability of closing a transaction or signal anything about timing, whether it’s weeks or months away. We're simply informing you that we are busy and exploring opportunities, which may include several earlier stage prospects. There are numerous stages from our initial interest in a transaction to actually signing one. Ideally, this process could take six to eight weeks if everything is aligned and all necessary information is accessible, but that rarely happens. Over the past 18 months, we have been the preferred bidder on three transactions that did not close, one of which is publicly known, ACG. I'm not going to discuss the other two that aren’t public, but they illustrate what can derail a deal even when we have won against our peers. Factors such as changes in metal prices can affect valuations, for example, the gold price fluctuating from $1,900 to $2,400. However, the major challenge for us is the capital markets. The debt and equity markets can be significant competitors. If interest rates decline and the debt markets are favorable, companies may choose that route instead. The equity market can also be appealing, and we have seen scenarios where management and the Board have differing views on our proposed strategy. It can be very complex and unpredictable. Six months is a reasonable estimate for the timeline, although it can take longer or sometimes be quicker due to unforeseen circumstances. Dan, do you want to add anything?

I would just add that we try not to make promises about what might come from our pipeline. This is why we tend to keep our business development comments at a high level, which I understand can be frustrating for analysts. It's a very fluid and uncertain part of our business, as seen in our recent transactions. For instance, we learned about the Khoemacau opportunity in early 2016, but we didn't finalize the transaction until early 2019 after the team conducted further technical studies. So, it could be years before we see anything come through. Looking at Red Chris, although we were aware of the royalty beforehand, the opportunity to acquire it arose very quickly, necessitating rapid action. With Cortez, after acquiring the Rio Tinto royalty in 2022, the additional Cortez idle royalty came unexpectedly as private sellers we had known for years decided it was the right time to sell. This surprised the market, which had no prior knowledge of that opportunity. It's difficult to make predictions, and as Bill mentioned, while we could potentially act quicker, two quarters is a reasonable general timeline to consider.

So two to six months sort of benchmarking, two optimistic, six on average. Just for ourselves to just benchmark when you hear about these things somewhere between two to six months of sort of a reasonable time range.

Yes, two months is an ideal world, six months probably closer to reality.

I wish I lived in an ideal world. Maybe I am living in one. If I could fit in one more project. Regarding the Back River, I haven't yet assessed the additional royalties that were acquired. As a reference, if we were to apply your suggested pricing to this project, would it be fair to assume that the interim rate of return would be in the double digits? However, I haven’t completed that analysis; I’m just trying to use it as a benchmark.

Dan, I think you've got that number. I think we looked at it on a spot price basis here.

Yes, I think the mid to upper single digits is a reasonable way to think about it at the moment.

Mid to upper single digit and that’s on spot pricing…

It sort of follows on Tanya's last one. So I thought I worked this out, but given your guidance on the slide, Slide 6, which is the Back River royalty. So if I read this from zero to 400,000 ounces, do you just guys get the 0.7% NSR and then from 400 to 780, you get the 2.5 less the 0.7 because you deduct it? And then after 780, you get 3.3 less the 0.7, which eventually goes down to 0.3 once you get $5 million royalty on that thing. Is that the way I'm supposed to think about it? And secondly, if that's true, I'm trying to figure out how we get to the 1.3% GSR that you comment on for KM post 780. And maybe it's easier offline but any guidance on how that works? Because when we're doing these IRRs, obviously, if this thing ramps up more over time, makes a big difference from what you get here.

Brian, let me try to address that, but we may want to discuss it in more detail later. What we aim to do with the chart, similar to our approach with Cortez, is simplify a complicated royalty situation that involves deductions and present you with a clear rate to apply to production for your forecasts. We are attempting to calculate the deductions for you and inform you of the effective rate. Dan, please feel free to correct me if I've misrepresented anything.

I think that's right. And Brian, it is fairly complicated, just to Tanya's question about royalties on the property and their deductions and things like that. So that's exactly what we try to do is just to make it as simple as possible. And just think about it in those three buckets, ultimately getting to that 3.3% GSR rate, and very early in the mine plan as well.

You mentioned that the figures equate to 1% GSR early on, which is quite different from reaching 2% or 3% at the start. I'm just trying to clarify whether I should use 1.1% for the entire duration or if it should be higher in the initial years and then decrease later. This also relates to Tanya's question.

So Brian, the 3.3% is the combined CAM and Hill royalties, so that's the 1.1% plus our existing royalty there, which is 2.2%. So that's how you get to the 3.3%. So just to step back, this chart is all of our royalties combined into one rate.

We have no further questions on the call, so I'll hand it back to Bill to conclude.

Thank you all for being here today. We truly appreciate your interest in Royal Gold and look forward to sharing updates on our progress in our next quarterly call. Take care.

This concludes the conference. Thank you all very much for joining.