Earnings Call Transcript - RGLD Q3 2020

Operator, Operator

Good day everyone, and welcome to the Royal Gold 2020 Third Quarter Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Alistair Baker, Vice President of Investor Relations and Business Development. Sir, 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 third quarter 2020 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; Mark Isto, Executive Vice President and COO; Dan Breeze, Vice President, Corporate Development of RGAG; and Randy Shefman, General Counsel. This discussion falls under the Safe Harbor provision of the Private Securities Litigation Reform Act. A discussion of the company's current risks and uncertainties is included in the Safe Harbor and cautionary statement in today's press release and slide presentation and is presented in greater detail in our filings with the SEC. Bill will give you an overview of the quarter, followed by Mark with an update on our operating results. 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.

Bill Heissenbuttel, President and CEO

Good morning and thank you for joining the call. Before beginning, I would like to note that all Royal Gold participants on this call are doing so remotely. I ask for your understanding if our responses to subsequent questions are perhaps less coordinated than usual. I'll begin on slide 4. Despite the current situation with COVID-19, which I will touch on in a moment, this was another solid quarter for Royal Gold. We had a 24% increase in revenue over last year's quarter to set a new record for quarterly revenue of $136 million. Although gold equivalent ounce volume of 86,200 was up relative to the prior year quarter, the main driver of the record revenue was a significantly higher realized oil price. Earnings for the quarter were a healthy $38.6 million or $0.59 per share, which were $0.68 per share after adding back a $0.05 noncash mark-to-market loss on our equity securities and a one-time noncash charge of $0.04 related to noncash employee stock compensation. Paul will go into more detail on both of these items in his remarks. We saw strong operating cash flow of $99.7 million, which allowed us to make the second advance of $22 million at Khoemacau, pay our quarterly dividend at the new higher rate of $1.12 per share per calendar year, and make a further payment on our revolving credit facility of $30 million. We paid down the balance on our revolving credit facility to $105 million, and with a combination of $101 million of working capital and $895 million of revolver capacity, we maintained approximately $1 billion of liquidity for new business opportunities. Turning to the effects of COVID-19. Our employees have been working remotely very successfully for almost two months, and I want to recognize our team's efforts in adapting so well to the unusual challenges we face in this environment. With respect to our operations, our large diversified and gold-focused portfolio has helped mitigate the impact to Royal Gold of many of the operational suspensions we have seen across the industry. Only three of our principal properties have publicly announced impacts of varying degrees from the virus, and two of these, Mount Milligan and Rainy River, continue to operate and are returning to normal production levels. Only Peñasquito remains suspended due to a nationwide shutdown decreed by the Mexican government. The remainder of the interruptions were at smaller royalty assets in our portfolio. Obviously, we do not know how long the situation will continue and whether new suspensions will arise or if suspensions will be reinstated. Therefore, it is unclear what the long-term impact may be. Because the near-term business environment is unclear, we decided to draw $200 million on our revolving credit facility after the end of the quarter as a precautionary measure in order to ensure sufficient liquidity to meet our funding commitments for the foreseeable future. This advance was done out of an abundance of caution and not for any specific purpose. We remain committed to reducing our debt levels and we will manage the revolver balance as the business environment becomes clearer. That said, we recognize the significant impact the COVID-19 pandemic is having in the communities where we live and work, and we have made donations to charities in Colorado, Toronto, Vancouver, and Lucerne to help address a variety of needs. We have also increased our ongoing community support of the Tetlin tribe at the Peak Gold joint venture. Our team is pleased to have made an impact in this time of significant need and urgency. With that, I'll turn the call over to Mark for a discussion of Khoemacau and a few other notable properties.

Mark Isto, Executive Vice President and COO

Thanks, Bill. On slide 5, I'd like to start with an update on the Khoemacau project in Botswana, currently under development by Khoemacau Copper Mining or KCM. Construction continues to advance well. Overall, project construction completion reached approximately 43% at the end of the March quarter, with 80% of the capital committed. We made our third contribution to the advanced stream payment on April 3rd of $47.9 million, and we have now advanced approximately $136 million towards the project. The photo on the slide shows an aerial view of Zone 5 taken in April, where activity is evident across the site. Underground development was initiated in early February and saw four of the five declines located in the Central and North boxcuts advancing by the end of the quarter, while the fifth portal in the south boxcut was initiated in early April. Turning to slide 6, I selected a few progress photos of the central boxcut, which is the most advanced of the three boxcuts. The photo on the left from early February shows the access ramp down to the portal face when handover to the mining contractor Barminco occurred. The photo on the right shows a close-up of the portal face marked off for drilling and blasting. Turning to slide 7, you can see progress on the central boxcut portals on the left, and the photo on the right shows ventilation fan installations in the same portals. A similar sequence of activity is occurring at each of the south and north boxcuts. Good progress occurred elsewhere on the project during the quarter. However, many activities were curtailed starting on April 2 due to the COVID-19-related travel restrictions imposed by the Botswana government. Although a six-month state of emergency has been declared by the government of Botswana to help prevent the spread of COVID-19, mining has been declared an essential service and construction of mining activities at the site are continuing with mine development currently at planned rates, but construction at reduced scale. KCM is evaluating risk to the project schedule and has not advised of any changes to the mid-year 2021 date for the first concentrate shipment, although this is dependent on the evolution of the global COVID pandemic. Turning to slide 8, I would like to discuss some recent developments at several of our other key properties, starting with Mount Milligan and Rainy River, both of which delivered new life-of-mine plans this quarter. Starting with Mount Milligan, Centerra filed an updated 43-101 technical report on March 26, supporting an updated reserve and new life-of-mine plan that included changed metallurgical recoveries, operating costs, and an updated resource model. I'll reference you to our press release of the same date for details, but the main impacts of this new plan to Royal Gold are a shorter mine life based on lower proven and probable reserves, but higher near-term metal production due to the mining of higher-grade material. Centerra estimates a nine-year mine life with average payable gold production of 161,000 ounces per year and average copper production of 81.7 million pounds per year. While this is a material reduction in reserve life, we do not need to take an impairment in the value of our stream interest. However, the depletion rates of our interest have increased to $764 per ounce of gold and $1.48 per pound of copper. Mount Milligan remains a significant asset for us, and we're pleased that the operations are expected to continue with healthy cash flow at current metal prices. We understand that Centerra is working on several initiatives to reduce operating costs, and we hope to see some of the remaining resource material move back into reserves in the next few years and extend the mine life. Centerra also reported last week that recent throughput reductions caused by COVID-19 considerations will not have a material effect on calendar 2020 production and annual guidance remains unchanged. Turning to Rainy River, New Gold announced the results of an updated life-of-mine plan for Rainy River on February 13, and they filed the corresponding 43-101 technical report on March 27. We issued a press release on February 13 with the details of the new plan. The main impact of the new plan to Royal Gold is a shorter mine life at a higher average gold grade, leading to higher annual gold production. New Gold's mine plan is focused on optimizing cash flow and considers mining from a smaller higher-grade open pit and a smaller, more selective underground operation. New Gold estimates that production from this new plan will average 289,000 gold equivalent ounces per year for the calendar 2020 to 2028 period, and stated that there may be potential increases to the mine life beyond calendar 2028, depending on gold price and exploration success. We do not need to take an impairment in the value of our stream interest at Rainy River. However, depletion rates of our interest have increased to $848 per ounce of gold and $11.27 per ounce of silver. Moving on to slide 9, I’ll provide some comments on Pueblo Viejo and Cortez. At Pueblo Viejo, Barrick provided an update on the progress of the studies and work ongoing to expand production and extend mine life, which Barrick expects will allow the mine to maintain average gold production of approximately 800,000 ounces per year after calendar 2022 and for over a further 20 years. Recent study work has advanced plans for the process flow sheet, resulting in preliminary operating and capital cost estimates and project execution plan and schedule. From a permitting perspective, the process expansion environmental impact study has been completed and is ready to be submitted, and environmental impact studies are ongoing for additional tailings and waste rock management. Based on all this work, Barrick is progressing engineering and evaluation work towards a feasibility study. Pueblo Viejo is a significant asset in our portfolio, and we look forward to hearing more details of this expansion and mine life extension as they become available. At Cortez, shortly after the end of the quarter, we received the updated reserve statement and life-of-mine plan from Nevada Gold Mines for production attributable to our royalty interests. Recall we have three sliding scale gross smelter return royalties and two net value royalties on the Cortez property, which includes the Crossroads deposit, and some of the areas covered by these royalties overlap. On average, above a gold price of $470 per ounce after the relevant deductions, the combined royalties are equivalent to approximately 8.2% gross smelter return royalty to Royal Gold. Year-end reserves were calculated at a gold price of $1,200 per ounce and contained 3.5 million ounces of gold over the property areas where we have royalty interest. The life-of-mine plan expects gold production from these areas of approximately 175,000 ounces in calendar 2020, increasing to approximately 425,000 ounces in calendar 2021. While there's variability from year to year, the 425,000-ounce level is expected to be maintained through calendar 2026. I'll now turn the call over to Paul to discuss our financial results.

Paul Libner, CFO and Treasurer

Thanks, Mark. I'll turn your attention to slide 10 and give an overview of the financial results for the quarter. For purposes of this discussion, I will be comparing the third quarter of fiscal 2020 to the prior year quarter. As Bill mentioned at the beginning of the call, we had another record revenue quarter with revenue of $136.4 million on a volume of 86,200 gold equivalent ounces or GEOs. GEOs were approximately 2% higher year-on-year. As we announced at the beginning of April, stream segment volume for the quarter of 62,000 GEOs was in line with the expectations discussed during our last earnings call in February. Metal prices had a positive effect during the quarter, with gold and silver prices up 21% and 9%, respectively, while copper was down 9% year-on-year. Gold continues to be the most significant driver of our revenue and accounted for 79% of our total revenue for the current quarter, up slightly from 77% in the prior year quarter. G&A expense for the quarter was $9.6 million, which is up from $6.8 million in the prior year quarter. Our G&A expense each quarter includes noncash compensation expense and generally averages $1.5 million to $2 million per quarter. As highlighted during our last earnings call in February, we expected to recognize additional noncash compensation expense this quarter due to a couple of recent senior management retirements. During the current quarter, we recognized approximately $3.3 million in additional noncash compensation expense attributable to retirement or $0.04 per share net of tax. The additional noncash compensation expense recognized was a one-time item, and we anticipate our quarterly G&A expense to be between $6.5 million and $7.5 million going forward. Our DD&A expense for the quarter was $51.2 million or $594 per GEO. As Mark mentioned in his remarks, recent reserve reductions at both Mount Milligan and Rainy River have caused our depletion rates on those interests to increase. We now expect our DD&A for the fourth fiscal quarter to range between $650 and $675 per GEO, as our revenue mix shifts towards streams with the ongoing COVID-19 impacts largely limited to a few royalties. Earnings were $38.6 million or $0.59 per share, up 34% compared to the prior year quarter. After excluding the $3.8 million mark-to-market loss on the value of our equity holdings and the $3.3 million one-time noncash stock compensation expense items, adjusted earnings net of tax were $44.3 million or $0.68 per share. With respect to our effective tax rate, we continue to expect our full year fiscal 2020 effective tax rate, absent any unusual items, to be in the range of 19% to 23%. Cash from operations was approximately $99.7 million for the quarter, up significantly from $77.4 million in the prior year quarter. The increase is primarily due to an increase in proceeds received from our stream interest, net of cost of sales. At the end of March, we held approximately 27,000 GEOs in inventory, which was lower than the guidance range we provided during our last quarterly call. The decrease was primarily due to deliveries from Mount Milligan, which were received later than previously forecasted and after our quarter end. Looking forward, and absent any potential new operational impacts due to COVID-19, we expect stream segment sales for the June quarter to be in the range of 50,000 to 55,000 GEOs, and inventories for the quarter end to be in the range of 18,000 to 23,000 GEOs. As we have discussed on our previous calls, sales in the June quarter will be negatively impacted due to the strike that occurred at Andacollo back in October and November of last year. I'll now turn to slide 11 and provide a summary of our financial position. Our liquidity remained strong, and we ended March with cash of almost $94 million and working capital of $101 million. During the quarter, we paid down $30 million on our revolving credit facility and ended the period with an outstanding balance of $105 million. The $895 million remaining undrawn on this facility combined with our working capital provided us approximately $1 billion of total liquidity at the end of March. As noted earlier, we made our second contribution of $22 million towards the Khoemacau project during the quarter. After the $48 million contribution we made in April, we expect to contribute approximately $65 million during the remainder of calendar 2020. In calendar 2021, our remaining contribution will be between $11 million and $64 million depending on whether Cupric exercises its option to increase the size of the advanced payment from $212 million to $265 million. We expect remaining payments to be on a quarterly basis in proportion to the total capital spend of the project, and we anticipate making these payments from our available cash resources. As Bill noted earlier, we drew an additional $200 million on our credit facility in early April as a precautionary measure to help ensure cash is readily available to support continued business activity during the unprecedented and uncertain environment caused by COVID-19. We believe we have sufficient liquidity to adequately cover our G&A expenditures, commitment to Khoemacau, and expected dividend payments for the foreseeable future. We remain committed to reducing our debt, and absent the requirement to fund any new business opportunities, we expect to manage our debt levels accordingly once the operating environment returns to normal. That concludes my comments on our financial performance for the quarter, and I'll now turn the call back to Bill for closing comments.

Bill Heissenbuttel, President and CEO

Thanks, Paul. The current operating environment has been challenging. Although we are able to continue our daily activities without disruption, we have seen revenue impacts from temporary suspensions at several operations in our portfolio. The impacts to revenue so far have been relatively minor, and the bulk of our asset base has continued to generate revenue and cash flow. This environment has highlighted one of the main benefits of our business model, which is that the combination of a large diversified portfolio and modest G&A and fixed costs allows us to absorb short-term revenue reductions at individual portfolio assets without affecting the sustainability of our business. Additionally, our portfolio is relatively unexposed to weak base metal prices, as approximately 80% of our revenue in the quarter came from mines that produced more than half their revenue from precious metals. We also believe our financial position will remain strong despite the current environment. We have no near-term debt maturities, and our revolver matures in June 2024, and our access to liquidity positions us to act on new business opportunities that may present themselves in the normal course and as a result of the challenging environment in which all companies now operate. Operator, that concludes our prepared remarks. I'll open the line for questions.

Operator, Operator

And our first question today comes from Josh Wolfson from RBC Capital Markets. Please go ahead with your question.

Josh Wolfson, Analyst

Thank you. Firstly, I appreciate that you lack annual guidance; however, the quarterly guidance is incredibly beneficial from our standpoint. Regarding Crossroads and the ramp-up now that we have adequate information from the Nevada partnership, including the mine plans and reserves, how do you foresee that ramp-up reaching the steady-state rate, which I believe, based on your 8% NSR, would be 35,000 ounces annually?

Bill Heissenbuttel, President and CEO

Josh, this is Bill. Thanks for the question. I think the best way to direct that question would be to Mark. Mark, are you able to touch on that one?

Mark Isto, Executive Vice President and COO

Yes. I guess the schedule that we were provided by the Cortez team is that it'll be fairly consistent to averaging the 175,000 ounces for the year. There's a very significant step-up going into calendar 2021. So the way I would look at it is really the 175,000 will be spread throughout the year with a modest increase towards the end of the year and with a significant step-up as you go into the new calendar year. So there'll be a bit of a lumpy profile. Is that helpful?

Josh Wolfson, Analyst

Yes, that helps. Over the period from 2021 to 2026, it seems reasonable to assume an 8% NSR based on the varying royalty rates by land tenements. Can I clarify if that's a fair assumption? Also, for 2021, can we assume a flat 8% across the 175,000 ounces, or will there be different rates that could significantly change the production for Royal Gold?

Mark Isto, Executive Vice President and COO

Good question. The way we like to lay it out, and it was very consistent with the way we look at the royalties and for our budgeting purposes. So the 8.2% gross value royalty on the production that we just talked about is an excellent way for you to think about the production, yes.

Josh Wolfson, Analyst

Okay. Great. And then with regards to Khoemacau and the current timelines there, I understand that there was a reiteration of the timelines, but there was also a caveat that potentially could vary based on the impacts of COVID. Is there any sort of additional disclosure you can provide in terms of what sort of buffer exists and the implications of, I guess, the six months of restrictions in Botswana and what that means if it's extended or if the severity were to increase of the current situation?

Bill Heissenbuttel, President and CEO

Mark probably another one for you.

Mark Isto, Executive Vice President and COO

Yeah sure. Yeah, I can provide a little bit more color around Khoemacau. The underground development has been tracking on schedule. Effectively, it was an Australian contractor who remained at site during the shutdown period, whereas most of the service type construction activities, which are more locally driven with local manpower, tended to significantly reduce. The critical path has been the underground development, but as the reduction in manpower continues, the mill refurbishment will become the critical path item. Now, we understand that they should start loosening some of the restrictions here very shortly, but it's really very difficult for us to make any kind of projection of the impact. However, they've managed the COVID-19 situation very well so far and can continue underground development for at least another two to three months with supplies they have on site.

Josh Wolfson, Analyst

Okay. And then last question also related to Khoemacau. The deal that was structured with the additional option available was done in a lower price environment. Is it safe to assume that this will not be exercised by the operator at this point?

Bill Heissenbuttel, President and CEO

Josh, I don't think we can know one way or the other at this point. A lot of times whether or not you draw on some extra funding like that has nothing to do with the price environment at the time. It has to do with what your capital costs are doing and what's happened to the cost to build the project. So I think it's going to be more of a cash needs based issue than a strategic what's the price of silver right now decision. But we're really not going to know that probably for at least six months or so.

Josh Wolfson, Analyst

Okay. Those are my questions. Thank you.

Bill Heissenbuttel, President and CEO

Thank you.

Operator, Operator

Our next question comes from Brian MacArthur from Raymond James. Please go ahead.

Brian MacArthur, Analyst

Good morning. I just want to follow-up on Josh's question. You've given nice guidance here for Cortez, but the operator generally has a 10-year plan. Can we assume – like it looks like there's another one million-plus ounces that come out after that Crossroads. Does that – I get it; it's probably going to go down from 400,000 ounces, but is it kind of flat lined after that, or can you give us any guidance?

Bill Heissenbuttel, President and CEO

Brian, I'm going to make a brief comment and then I'll turn it over to Mark to see if he can add to it. But the information that we have provided to you is really what Barrick has given us permission to disclose to the market and the manner in which we can disclose it. So I think for right now, we're kind of limited to the years we're talking about. I do think it's probably more than we've ever given in the past. But Mark, do you have a different perspective on that?

Mark Isto, Executive Vice President and COO

No. No. That would have been exactly – you're exactly correct. Yeah.

Brian MacArthur, Analyst

Okay. Great. Thank you.

Operator, Operator

Our next question comes from Adam Graf from B. Riley FBR. Please go ahead with your question.

Adam Graf, Analyst

Hey, guys. Thanks for taking my question. Just real quick about the two assets you haven't – didn't speak about today. One is the Holt mine run by Kirkland Lake and your interest there. I think Kirkland announced, was it earlier this week that they're putting that mine on care and maintenance? And I wonder if you had some comments there? And then also at the Las Cruces mine by First Quantum, I understand that they are – they have to make a decision about going after the underground sulfides? And if you've gotten any update there.

Bill Heissenbuttel, President and CEO

Thanks, Adam. Let me first – I'll go to Holt, I'll give Mark a little chance to try to think about Holt and Las Cruces. I'm not sure we have a lot of detail on Las Cruces. But yes, we did see Kirkland Lake's announcement with respect to Holt. It's clearly a non-core operation for them. I don't know what plans they have for it. But it wouldn't surprise me if the asset eventually came up for sale. Beyond that, these things happen from time to time; we sit there with a royalty that does not burden the property. So I think we'll just have to see. Obviously, it's not core to Kirkland Lake, so we'll see what happens over the next few months. But beyond that, I can't really say anything about their management team's plans for the asset over the next few months. Las Cruces, I can't help you with. Mark, do you have any thoughts?

Mark Isto, Executive Vice President and COO

We don't have any new information on the underground project. But it would be worth pointing out that our particular royalty on Las Cruces is for copper only, whereas the underground material is polymetallic. So as you think about that with respect to Royal Gold, you should only be thinking about copper. But we really can't provide any additional details on their plan.

Adam Graf, Analyst

All right. Thanks. And maybe, if you guys can give us any kind of an update on production out of Robinson and Voisey's Bay because those companies are not all that transparent about what they produce?

Bill Heissenbuttel, President and CEO

Mark, do you have any comment there?

Mark Isto, Executive Vice President and COO

Our perspective on Robinson for this calendar year aligns with last year's. We don't have much new information, as it's been nearly a year since our last site visit. Regarding Voisey's Bay, they recently announced a three-month halt in mining, but we understand that the stockpiles in the hydrometallurgical smelter will be utilized during this time. Thus, we don't anticipate any significant changes in nickel and cobalt production, although there may be some future impacts on copper production. Overall, we expect the nickel-cobalt situation to remain stable due to the availability of stockpiled concentrate.

Adam Graf, Analyst

And that copper will impact this upcoming quarter or the subsequent quarter?

Mark Isto, Executive Vice President and COO

I think it will come in the fourth quarter of this year.

Bill Heissenbuttel, President and CEO

Yes. The sales aspect involves two products. It includes all the products from Long Harbour, as well as the seasonal third-party copper concentrate sales. This part of the royalty tends to be inconsistent, and it will likely be affected by the mine shutdown. Is that correct, Mark?

Mark Isto, Executive Vice President and COO

Yes. Correct.

Adam Graf, Analyst

Excellent. Thank you, guys. Appreciate the color.

Operator, Operator

Our next question comes from Tanya Jakusconek of Scotiabank. Please go ahead with your question.

Tanya Jakusconek, Analyst

Yes. Good morning, everybody. Just wanted to circle back on M&A, if I could and sort of what sort of opportunities are you seeing in the space right now?

Bill Heissenbuttel, President and CEO

Yes. Tanya, it's obviously a good period of time for us. I can tell you that our business development team is quite busy looking at opportunities. You obviously have some stress on the base metal side. We're starting to see some transactions that might be; they're still sort of in the range of the $100 million to $500 million that we always talk about, but maybe more towards the larger end of that range. Obviously, the challenge we've got with business development is that we can do a lot of things virtually. We can get to know operating teams virtually. We can do a lot of term sheet negotiations virtually. But when it comes to things like site visits and travel restrictions, that’s the thing, if this goes on too long, that would put a break on a lot of those types of opportunities. So I'm very pleased with the level of activity that we're seeing.

Tanya Jakusconek, Analyst

So would you do a transaction that would be obviously pending due diligence, if it came down to that, that you haven't been able to go on site?

Bill Heissenbuttel, President and CEO

Well, that's what we're actually looking at right now: the processes that are running. You do things out of sequence. Usually, these things go in a couple of phases and your site visit is early on in Phase II. Well, you don't necessarily need to do a site visit at that point in time. You could continue to negotiate a term sheet; you can work on documentation, you can do as much of the due diligence as you can and you just move the other stuff to the back of the process. That's something we are seeing in the market.

Tanya Jakusconek, Analyst

Okay. All right. Great. Thank you so much.

Bill Heissenbuttel, President and CEO

Great. Thank you for taking the time to join us today, and I hope you all stay healthy in the coming days and months. We appreciate your interest in Royal Gold, and we look forward to updating you on our progress during our next quarterly call. Thanks very much.

Operator, Operator

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.