Earnings Call Transcript - RGLD Q1 2022

Operator, Operator

Good day, and welcome to the Royal Gold September Quarter 2021 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Alistair Baker, Vice President of Investor Relations and Business Development. Please go ahead.

Alistair Baker, Vice President of Investor Relations and Business Development

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's September Quarter 2021 Results. This event is being webcast live, and you will be able to access a replay of this call on our website. Participating on the call today are Bill Heissenbuttel, President and CEO; Paul Libner, CFO and Treasurer; and Mark Isto, Executive Vice President and COO of Royal Gold Corporation; Dan Breeze, Vice President, Corporate Development RGAG, and Randy Shefman, General Counsel, 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 net cash. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in yesterday's press release, which can be found on our website. Bill will give you an overview of the quarter, followed by Mark with an operating update. Paul will then provide a financial update, and Bill will wrap up the call with some closing comments. We'll then open the lines for a Q&A session. Now I will turn the call over to Bill.

William Heissenbuttel, President and CEO

Good morning, and thank you for joining the call. Turning to this quarter's results, I'll begin on Slide 4. This was another great quarter for Royal Gold. Performance was excellent once again across the portfolio, and we recognized revenue of $174 million, gold equivalent ounce volume of 97,400 and operating cash flow of $130 million, all of which are quarterly records for the company. Earnings for the quarter were $70 million or $1.07 per share. We had net cash of $60 million at the end of the quarter and subsequently paid down $50 million on our revolving credit facility. We now have $50 million of debt outstanding and access to $950 million of available liquidity under our credit facility. We received our first silver deliveries from Khoemacau. And after the end of the quarter, we increased our stream percentage to 90% of the payable silver. Mark will share more details on his recent visit to Khoemacau, and we're looking forward to increased contributions as the mine continues to ramp up. We have also seen recent positive news from the acquisitions we announced last quarter. Newcrest published a positive block cave pre-feasibility study at Red Chris. I would like to compliment our technical team for its work on our acquisition due diligence. Our team's estimate of cumulative GEO production for the next 2 decades was in line with Newcrest's study. And this study clearly demonstrates a long mine life with good future optionality. Ero Copper released further positive exploration results at NX Gold, which confirms exciting near mine and regional exploration potential and construction progress continues at the Côté project and it is on track for first production in the second half of 2023. And we continue to progress our work on ESG initiatives. At Rainy River, we entered into contribution agreements with the Riverside Foundation for Healthcare and the Mikinaak Center for Wellness, supporting our partner, New Gold, and its community outreach efforts and helping to bring new medical equipment and wellness programs to the communities that surround the mine. We have also achieved net zero carbon emissions for our direct corporate operations during fiscal 2020 with the purchase of carbon credits. And we received further recognition of our corporate ESG practices with an upgrade in our MSCI ESG rating to AA, which places us in the top tier companies in our sector. Finally, I'd like to comment briefly on the transaction announced earlier this week between Golden Star and Chifeng. We have been aware of this transaction for several months and have had direct communication with Chifeng during that time. Chifeng is a $4 billion company with several operating assets in China and Laos, and they plan to apply their financial and operating resources to the potential Golden Star has identified at Wassa. Closing of the transaction won't occur until the new year. And in the meantime, we're looking forward to further building our relationship with Chifeng. With that, I'll turn the call over to Mark for an update on our portfolio.

Mark Isto, Executive Vice President and COO

Thanks, Bill. I'll start on Slide 5. The portfolio continued to perform well, achieving record yield deliveries this quarter. Our Royalty segment generated $58.5 million in revenue, a 45% increase from last year, and accounted for about 34% of our total revenue for the quarter. This growth was primarily driven by Cortez, where mining operations have improved after previous pit wall stability issues affected production late last year. Additionally, enhanced grades and leach recoveries contributed to better production results for the quarter. Significant increases also came from royalties from Penasquito, Robinson, and Kurnalpi, our NPI in the South Laverton Mine in Australia. On the streaming side, revenue grew by 9% compared to the last year, including our first contributions from both Khoemacau and NX Gold. We also received our first delivery of deferred silver ounces from Pueblo Viejo. Barrick had deferred these deliveries during the March and June quarters due to equipment problems that lowered recoveries below the agreed levels. These issues have been resolved, leading to Barrick delivering about 18,700 deferred ounces this quarter. The remaining deferred ounces are now approximately 418,300, and we anticipate these will be delivered over the next few quarters. From our perspective, this is primarily a cash flow timing matter and should not significantly affect silver revenue. Moving to Slide 6, I want to update on Khoemacau and Botswana. I visited the site in mid-October and was impressed with the progress in moving from construction to operational status. As mentioned in previous calls, mine development commenced in March 2020. Production began in September, with ground conditions, orebody widths, and grades aligning with our expectations. The slide features a photo of a stope slot drill at work during my visit. Mine development has encountered some delays, influenced by factors such as COVID-19 travel restrictions for the Barminco crews traveling to and from Australia, delays in receiving key drilling equipment, and challenges with drilling and blasting in the initial stopes. We have addressed equipment delivery issues, and we are systematically tackling the operational challenges faced. By the end of October, the mining rate reached about 40% of the goal of 10,000 tonnes per day, with stope ores currently contributing about 50% of the mill feed, and development is complete to support six months of mining. Regarding ramp-up plans, KCM aims to increase the operating rate to reach the target of 10,000 tonnes per day over the forthcoming four quarters. If there are no further COVID-19-related issues, KCM anticipates achieving approximately 75% of the target by the end of March and steadily moving toward full production by the September quarter. The plant has made significant progress while processing stockpiled ore, successfully achieving the target processing rate of 10,000 tonnes per day. Recovery rates for October were around 85% for copper and 81% for silver, with expectations to reach target recoveries of 88% for copper and 84% for silver. Concentrate quality has consistently met offtake specifications. Despite the slightly slower ramp-up leading KCM to reassess their working capital forecast, they opted to draw an additional $15.9 million on the option silver stream in early October, increasing our stream interest to 90% of payable silver. KCM expects this to be the last draw from the silver stream unless there are any changes to the ramp-up plan mentioned earlier. If further funding becomes necessary, the final 10% of the option silver stream remains available, which could provide an additional $26.5 million. On Slide 7, I have included photos from my recent visit. Starting from the top left and moving clockwise, you can see recently delivered mining equipment on the surface, one of the three completed box cuts, the maintenance workshop, and crushed ore being fed into the primary crusher. On Slide 8, again moving clockwise from the top left, you can see part of the 34-kilometer sealed haul road between the Zone 5 mines and the processing plant, a haul truck arriving at the plant, flotation cells at the facility, and the area where concentrate bags are loaded onto trucks for delivery to the off-taker. These images depict a modern and well-constructed mine, and I am quite impressed with the advancements made since construction began in 2019, especially considering that much of the development took place during a global pandemic. Khoemacau is expected to significantly contribute to Royal Gold for the coming decades, and we are excited about increasing stream deliveries as production escalates. Now, I'll shift to our recent developments in our newest acquisitions, starting with Red Chris on Slide 9. Newcrest shared their pre-feasibility study on the block cave in early October, labeling it as Stage 1. We were pleased to find that Newcrest's production outlook aligns closely with our view of the mine's potential. They also highlighted various areas of upside and flexibility not captured in the PFS, such as the chance to enhance the plant and boost throughput, alongside potential production from areas still in the exploration phase. Specifically, I want to point out the oblique section on the slide. Newcrest identified near-mine opportunities, including a new higher-grade zone discovered southwest of the Main Zone and the East Ridge target. Red Chris is a permitted operating mine located in a Tier 1 jurisdiction with a leading operator. Our Royalty secures us continued revenue as Newcrest advances exploration and studies, which should significantly benefit Royal Gold for many years. Finally, turning to Slide 10, exploration at the NX Gold Mine is ongoing, with nine drill rigs currently in operation. In mid-October, Ero Copper reported encouraging results within the mine's area and the surrounding land, all falling under our area of interest. The drilling on the Santo Antonio vein, the current mining zone, has extended mineralization downwards by 115 meters beyond the current resource boundaries, confirming the continuity of the high-grade mineralization, which remains open at depth. Drilling at the Matinha Vein is also elongating the known mineralization limits, revealing apparent thickening at depth and a second parallel structure. Ero noted that the Matinha Vein could serve as an additional source of mill feed, which is currently underutilized. They plan to incorporate these exploration results into their year-end mineral reserve and resource updates. We are pleased to see that the continued positive results reinforce our investment rationale for this highly prospective and underexplored region. Now, regarding the Côté Gold Project, IAMGOLD is progressing with construction, which was about 36% complete by the end of September. IAMGOLD announced plans to release an updated technical report by the end of this year, which will reflect the outcomes of mine plan optimization since the 2018 report. The project is on track for initial production in the second half of 2023, with IAMGOLD anticipating an output of 489,000 ounces annually for the initial five years of the 18-year mine life. I'll now hand the call over to Paul to review our financial results.

Paul Libner, CFO and Treasurer

Thanks, Mark. I'll now turn to Slide 11 and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended September 30, 2021, to the prior year quarter. Revenue reached a record of $174 million for the quarter, a 19% increase over the prior year period. We also had record volume of 97,400 gold equivalent ounces, or GEOs, which was a 27% increase over the prior year period. As metal prices are mixed, most of the increase in our revenue was driven by strong operating performances, as Mark mentioned in his remarks. Deliveries from our newly acquired NX Gold Stream also contributed to our record revenue and contributed approximately $4.4 million during the quarter. With respect to metal prices compared to the prior year quarter, the average price of gold was down 6%, the silver price was flat and the copper price was up 44%. Gold remains our focus and continues to be dominant in the portfolio at about 73% of total revenue. The higher copper prices increased the percentage of copper revenue to 14% and silver came in at about 10% of revenue. Cost of sales, which excludes DD&A and is specific to our streaming segment, increased to $27.2 million from $21.9 million in the prior period. The increase was due to higher gold and copper sales from Mount Milligan and higher overall copper prices. Gold sales from the newly acquired NX Gold Stream also contributed to the overall increase during the quarter. Our DD&A expense was $50.6 million, up from $46.3 million in the prior year quarter. The increase was primarily due to higher gold and copper sales from Mount Milligan, higher gold production at Cortez and gold sales from the newly acquired NX Gold Stream. These increases were partially offset by lower gold and silver sales from Pueblo Viejo and lower gold sales from Andacollo. Our DD&A expense on a dollars per GEO basis was $519 per GEO compared to $600 per GEO in the prior period and below the $520 to $570 per GEO guidance we provided during our last quarterly call. The lower DD&A per GEO, when compared to our earlier provided guidance range, was largely due to the better-than-expected contributions from our royalty portfolio. As most of our royalties have been in the portfolio for many years, they then have lower overall carrying values and lower depletion rates. Earnings were $70.2 million or $1.07 per share, a decrease of 34% from the prior year. The decrease in our earnings was primarily due to a one-time gain in the prior period of $34 million attributable to the sale of our interest in the Manh Choh project, formerly known as Peak Gold. Excluding the one-time gain on the sale of our interest in the Manh Choh project and other discrete tax items in the prior year, our prior period adjusted earnings were $53.8 million compared to adjusted earnings of $70 million in the current year or a 30% increase. We reported operating cash flow of $130 million this quarter, which was another record for Royal Gold. Our operating cash flow was up nearly $36 million from the prior period, which was primarily due to the higher proceeds received from both our royalty and stream interest. Moving on to Slide 12. I'd like to provide some comments on guidance. As we mentioned during our last quarterly call, we are moving to calendar year-end reporting effective this coming December 31. The 6-month period between July 1 and December 31, 2021, will provide a transition period for us to move to the new calendar year reporting, and we will start our calendar 2022 reporting on January 1, 2022. As part of this change in year-end reporting, we expect to begin providing 1-year guidance for total portfolio GEO sales, DD&A per GEO and our annual effective tax rate early in the second quarter of each calendar year. This will replace the quarterly stream sales and inventory guidance that we previously provided. To help with your transition over to our new guidance process and reporting, last quarter, we provided total GEO sales and DD&A guidance for the 6-month stub period ended December 31, 2021. And today, I will provide stub period effective tax rate guidance. For the 6-month stub period, absent any potential operational impacts from COVID, we are increasing our total GEO sales guidance range to between 180,000 and 190,000 GEOs. The increase in our GEO sales guidance is driven by the strong operational performances as we already discussed. With respect to our DD&A guidance, we expect DD&A to range between $525 million and $575 per GEO for the stub period, which is a slight increase over our previously provided guidance. This assumes the metal prices as shown on Slide 12, which are unchanged from our previous guidance. Regarding our stub period effective tax rate guidance, we expect this to range between 18% and 22%, absent any unusual or discrete items. I would also like to make a few comments on some of the recent news regarding global minimum tax, which could impact the broader streaming sector. In October, a group of 136 OECD countries agreed to a blueprint to implement a 15% global minimum tax with a targeted effective date of 2023. However, I would like to again remind everyone that the U.S. and Royal Gold already has the minimum tax on our streaming segment as embodied in the global intangible low tax income, or GILTI regime, which was implemented in 2017. On our GILTI, our stream segment, which accounts for nearly 70% of our total revenue, is currently subject to an effective tax rate of 13.125%. Further, the proposed global minimum tax is not being discussed or suggested to be added on top of the 13.125% effective GILTI rate. As such, given the small difference between the current GILTI rate and the proposed global minimum tax, we do not expect significant impact to Royal Gold if the global minimum tax is ultimately implemented in the U.S. One final note on our fiscal year-end change. We plan to issue a press release in late November that will include further details on the fiscal year-end change, including historical calendar year results for key financial metrics, such as revenue, adjusted EBITDA and operating cash flow. This information should help establish a new basis for financial comparisons as we move over to the new calendar year reporting.

William Heissenbuttel, President and CEO

Thanks, Paul. The portfolio performed exceptionally well again this quarter and delivered record revenue, cash flow and GEO volumes. With revenue from 44 operating mines, the breadth of our portfolio provides for consistent top line performance, and our discipline around maintaining low and stable G&A costs allows that top line performance to produce high margins. Our cost structure is designed to remove direct exposure to operating costs, and we are not subject to margin pressure caused by inflationary input prices. Our business offers inherent protection of margins from inflation, which seems to be creeping into the global economy. Looking forward to 2022, I think we're in great shape. We expect to see progress at several assets in the portfolio. And in particular, we're looking forward to higher production levels at Khoemacau, first production at King of the Hills, continued exploration success at NX Gold and continued advancement on the Pueblo Viejo expansion. In addition to this organic growth potential, we remain active in the pursuit of new business opportunities. Between our balance sheet, $950 million available on the credit facility and ongoing cash generation, we are well placed to act quickly on those opportunities that fit our criteria for investment, which include precious metals with the preference for gold and the potential for exploration and production upside. Operator, that concludes our prepared remarks. I'll now open the line for questions.

Operator, Operator

Our first question comes from Tyler Langton with JPMorgan.

Tyler Langton, Analyst

To start with Khoemacau, it seems that the deliveries this quarter were slightly higher than I had anticipated. Is it reasonable to expect that your deliveries will increase in line with the production ramp at Khoemacau? Or should we be aware of any delays or other factors?

William Heissenbuttel, President and CEO

Thank you for the question. Contractually, I don't expect any delays. This is not like the contracts for Andacollo or Mount Milligan, where deliveries happen months after the final settlement. We receive payment very soon after reaching a provisional or final settlement. I'll ask Mark if he has anything to add, but I see the ramp-up between now and the third quarter as moving towards the goal of reaching 100% capacity. Mark, would you like to add anything?

Mark Isto, Executive Vice President and COO

No, no. I think, here, it's a good description.

Tyler Langton, Analyst

Okay. I understand that over the life of the mine, production is expected to average between 1.8 million and 2 million ounces. Is it reasonable to think that production in the initial years will be somewhat below that average?

William Heissenbuttel, President and CEO

I don't have the information right in front of me, but if you look back at the 2019 presentation we conducted on the project, we provided an estimated production profile. One interesting aspect is that both copper and silver remain relatively constant, with no significant variability throughout the 20 years of the mine's life. I'll turn it over to Mark. Are you aware of any change?

Mark Isto, Executive Vice President and COO

Yes, you're absolutely right, Bill. There's very little change. I think from a modeling perspective, using the average numbers is a very accurate way to do it.

Tyler Langton, Analyst

Okay. That's helpful. And then just a final question. In terms of deals, one of your peers mentioned this morning that they are still focused on precious metals but are also open to base battery and bulk materials. Are you still focused on precious metals? Are most of the deals you are considering primarily on the precious metal side, or are you also exploring opportunities outside of precious metals?

William Heissenbuttel, President and CEO

We're going to maintain our focus on precious metals. As I've mentioned before, if we come across a particularly attractive base metal opportunity, we will definitely consider it. Currently, our revenue from precious metals is at a level that could allow for some involvement in other metals. However, I want to emphasize that we have a strong understanding of the precious metals markets, as well as a good grasp of most base metals. Venturing beyond those areas and engaging with industries we may not fully understand could pose challenges, and we would need to carefully evaluate whether entering those sectors is the right decision.

Operator, Operator

Our next question comes from Cosmos Chiu with CIBC.

Cosmos Chiu, Analyst

Maybe my first question is about taxes. Paul, as you mentioned, you're subject to the GILTI tax anyway, and the global minimum tax is not going to add to it. Could you confirm that? I believe I read something about the GILTI tax currently being 13.1%, and I thought that might increase as well. How does this relate to the global minimum taxes? Also, with the potential introduction of the global minimum taxes, does this impact your ability to repatriate funds from Switzerland?

William Heissenbuttel, President and CEO

Paul, can I turn that over to you?

Paul Libner, CFO and Treasurer

Thank you for the question. Regarding the Build Back Better legislation being discussed in the U.S., there are talks about the potential implementation of a global minimum tax, which could see the current GILTI rate of 13.125% increase to 15%. However, we don't expect this change to have a significant impact on Royal Gold. In terms of repatriating earnings, our Swiss earnings, which are also subject to the GILTI rate, can be brought back to the U.S. tax-free. The introduction of the GILTI regime in 2017 eliminated the taxation on repatriated funds, which previously resulted in double taxation. Therefore, there is no repatriation taxation under the GILTI regime.

Cosmos Chiu, Analyst

Great. Maybe switching gears a little bit on Khoemacau here. Reading the MD&A and also looking at the presentation, it seems like the ramp-up of the mill is slightly ahead compared to the ramp-up at the mining operation, the underground. Am I reading it correctly, Mark, or not?

Mark Isto, Executive Vice President and COO

Yes, the mill has ramped up effectively with the stockpile ore. They have successfully tested the 10,000 tonne per day rate, and the recovery rates are in line with expectations. However, the ramp-up of stoping has been slower than anticipated. Therefore, the bottleneck in operations will be at the mine rather than the mill, and that will be related to the ramp-up in stoping. You can anticipate the development generating around 60,000 tonnes a month, with the remaining portion coming from stoping ore, which will be the key focus for next year. As mentioned, you can expect to achieve 75% of the 10,000 tonne per day rate by the end of March, primarily focused on stoping.

Cosmos Chiu, Analyst

Great. And that's maybe one last question here for Bill. Bill, I appreciate that you, in answering the last question, your focus continues to be on purchase metals. And as Paul mentioned earlier, 73% of your revenue in the quarter was from gold, 10% from silver, 14% from copper. In an ideal world, Bill, are you happy with that mix? Or would you have wanted that to be a bit different?

William Heissenbuttel, President and CEO

Given our focus on precious metals, particularly gold, the ideal scenario would see a higher gold figure. People often inquire about minimums, and my perspective is that I would prefer the gold amount to be elevated. Currently, gold seems lower due to our significantly higher copper revenue in light of current prices. Strategically, if I had to choose among five projects—three in gold, one in silver, and one in copper—I would likely prioritize the three gold projects, though I am open to considering all of them.

Operator, Operator

Our next question comes from Scott MacDonald with Scotiabank.

Scott MacDonald, Analyst

Congrats on a good quarter. Bill, just wanted to follow up on your comments on the types of the business opportunities you're seeing. What are the types of deals you're looking at predominantly in terms of the counterparties use of proceeds? And what kind of range of deal sizes are you looking at?

William Heissenbuttel, President and CEO

Yes. I initially addressed the first question from a strategic standpoint, but I would like to invite Dan Breeze, our Head of Business Development, to share his insights on what we're observing.

Daniel Breeze, Head of Business Development

Thanks, Bill. It's Dan here. The environment has been quite favorable this year, 2021. The year-to-date transactions suggest it could be one of the best years in the last five years regarding dollar volumes. This is especially true for the first half of the year, which your firm has noted in your quarterly industry reports, and it coincided with our transaction with NX Gold. The royalty volumes have also been solid throughout the year, with many third-party royalty transactions. We participated in that with Côté and Red Chris. While some packages are still trading and operators are finding good markets for them, it has been a bit slower from July to September. However, we are seeing processes start to pick up now, and I believe we will finish the year strongly. The pipeline appears to be quite promising at the moment. In terms of how proceeds are being utilized, project development remains the primary focus, followed by strengthening balance sheets, as demonstrated by our Ero Copper and NX Gold transaction. The deal sizes are consistent with our discussions this year, ranging from $100 million to $300 million, similar to the transactions we are currently seeing in the pipeline. This size is significant for our company and adds value to our portfolio. As Bill mentioned, we are focused on gold, and that is predominantly what we are encountering, with a few silver opportunities on the streaming side. I hope this information is helpful.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Heissenbuttel for any closing remarks.

William Heissenbuttel, President and CEO

Well, thank you, everyone, 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, everyone. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.