Earnings Call Transcript - TFPM Q1 2023

Operator, Operator

Thank you for joining us. My name is Bailey, and I will be your conference operator today. I would like to welcome everyone to the Triple Flag Q1 2023 Results Call. All lines have been muted to reduce background noise. After the speakers finish their remarks, we will have a question-and-answer session. Now, I will turn the call over to CEO, Shaun Usmar. You may begin.

Shaun Usmar, CEO

Thanks, Bailey, and good morning, everyone, and thank you for joining us to discuss Triple Flag's First Quarter 2023 Results. Today, I am joined by my CFO, Sheldon Vanderkooy; my Senior Vice President of Corporate Development, James Dendle. And I'll also be joined by our Vice President of Talent and ESG, Katy Board; and our Vice President of Finance, Eban Bari, in the Q&A section. Turning to Slide 4. The first quarter of 2023 was the first since completing the acquisition of Maverix Metals, which contributed to another record quarter for Triple Flag. This includes sales of 26,599 gold equivalent ounces, resulting in revenue of $50.3 million and operating cash flow of $38.9 million, which are new quarterly records. We have also seen a more than 10-fold increase in trading liquidity with the addition of many new quality investors to our register as well as inclusion to the GDXJ, S&P and TSX Global Gold and Solactive Global Silver Miners indices. Our portfolio continues to perform well, and the assets that we acquired from Maverix have shown great progress and continue to reinforce our investment thesis. Operational performance at Camino Rojo and exploration success at Beta Hunt are two highlights. I'm also grateful to my team and the former Maverix management team who worked well together to deliver the integration of the two businesses to a high standard and enabling us to achieve the anticipated run-rate of $7 million in annual synergies. Finally, I'm very pleased to report that as we celebrate our seventh anniversary as a company and second anniversary of our initial public offering, our share price is up 31% in U.S. dollars and 45% in Canadian dollars with a lot of room to continue to close the gap with our senior peer valuations as we continue to focus on delivering value to our shareholders. I'll now turn it over to Sheldon to discuss our financials for Q1 2023.

Sheldon Vanderkooy, CFO

Thank you, Shaun. Turning to Slide 5. We have a record first quarter, realizing over 26,500 gold equivalent ounces, reflecting the addition of the Maverix assets to the portfolio. Operating cash flow in the quarter was also a record at nearly $39 million. Adjusted net earnings in the quarter were $0.07 per share. Adjusted earnings were impacted by the step-up in value of the Maverix assets on acquisition as well as additional costs in Q1 due to the Maverix acquisition. We remain on track to realize identified synergies of at least $7 million annually from the transaction. I also want to highlight that we recorded a non-cash cost of sales of $5.6 million relating to gold sales from prepaid gold contracts. This equates to $0.03 per share. This is purely accounting as this is a non-cash expense moving to the income statement. Our cash flow in the quarter was $0.20 per share, a 15% increase over the corresponding period in 2022 at $0.17 per share. Our asset margins in the quarter were 88%, slightly lower than the 90% levels we have traditionally experienced. This figure was impacted by acquisition accounting as metal inventory on Maverix's balance sheet on the acquisition date was recorded at fair value and then sold during the quarter. Going forward, we forecast asset margins to return to the 90% levels. We also declared our $0.05 per share dividend. On payment of that dividend, we will have paid over $65 million in dividends to shareholders since our 2021 IPO. I'd also like to comment on our strong balance sheet. Our total cash outlay on the Maverix acquisition was $146 million, consisting of cash consideration paid to Maverix shareholders, cash paid to retire the Maverix's credit facility, and transaction costs incurred. At quarter-end, we owe $80 million on our revolving credit facility. Subject to new investments we may make, at current metals prices, we forecast that internal cash generation will allow us to be debt-free by year-end. I'll now turn to Slide 6. Slide 6 highlights three very important aspects of our portfolio: asset diversification, precious metals focus, a portfolio which is predominantly centered in the Americas and Australia. Our revenue diversification meaningfully increased with the addition of the Maverix portfolio. Cerro Lindo was our biggest contributor in the quarter with approximately 28% of quarterly revenues, and no other asset accounted for more than 15% of revenues. In the past quarter, gold and silver accounted for 95% of our revenues among the highest precious metals percentages in the sector. And by geography, the country with the greatest contribution to our revenues was Australia. After Australia, our portfolio was predominantly located in mining-friendly jurisdictions in the Americas. I'll now turn to Slide 7. Triple Flag went public in May of 2021, so we are approaching our two-year anniversary as a public company. Looking back, I'm proud of the progress the team has made in these two years and I'm excited about the future possibilities. First, I'd like to look back on our share price performance since the IPO. I think it is a fair comment that many IPOs disappoint on share price performance. Our IPO investors have been well-rewarded for their trust in us as our share prices increased over 30% from IPO, well in excess of our peer group and the GDX performance. In addition, we have declared dividends of over $65 million since our IPO. We have increased the scale of the portfolio meaningfully. We are guiding for 100,000 to 115,000 gold equivalent ounces in 2023, compared to 63,000 in 2020. We see this increasing to over 140,000 in the next five years. Our portfolio now totals 229 assets, increased from 75 at our IPO. We now have 29 paying assets compared to 15 at IPO. Our ESG practices have been recognized by Sustainalytics as we are ranked fourth out of 114 companies. We expect this to continue in the future. In 2022, we increased our dividend and our cash flow continues to grow. In 2022, we also listed our shares on the New York Stock Exchange, increasing access to U.S. investors. In 2023, our shares were added to three indices. Triple Flag has made much progress since our IPO, and we are well-positioned to continue our track record of creating shareholder value. I'll now ask James to speak to some of our portfolio highlights.

James Dendle, SVP of Corporate Development

Thanks, Sheldon. Overall, portfolio assets are performing well. We expect deliveries from Northparkes to be back-end weighted with open pit mining of E31, which holds a higher gold grade than the current run-of-mine. In Peru, unusually heavy rainfall caused by Cyclone Yaku affected the region in which Cerro Lindo is located, resulting in the suspension of production for approximately two weeks during March. Next, it expects to increase production in the coming months and have maintained its 2023 guidance. Also, drilling in the Southeast area of the mine is continuing to extend mineralization, which benefits upstream. Camino Rojo, a gold mine operated by Orla Mining and acquired as part of the Maverix asset transaction, is performing to plan and is on track to meet its 2023 guidance of 100,000 to 110,000 ounces. Fosterville reported its fourth million quarter since beginning the sulfide project in 2005, which is particularly impressive considering that the mine had a reserve of around 1 million ounces at the time. Agnico Eagle has reported that the abatement trials of the new low-frequency noise were completed in the first quarter of 2023. I believe that the results are promising, and they are now being considered by the EPA concerning the current prohibition notice. Agnico has reaffirmed its guidance for the year between 295,000 and 315,000 ounces. Karora announced record quarterly results and strong exploration results for Beta Hunt, an Australian gold mine we acquired as part of the Maverix transaction. From our perspective, the expansion to 2 million tons per annum delivers near-term growth, and the strong exploration results position Beta Hunt for a long future. I'll turn it back to Shaun.

Shaun Usmar, CEO

Thanks, James. So turning to Slide 9. Triple Flag transitioned from a private to public company two years ago with a concentrated shareholder register with limited liquidity. Our portfolio characteristics compared favorably with our targeted peer set in terms of duration, cost position, precious metals concentration, our focus on royalties and streams, and our jurisdictional concentration in good mining regions. The impediment to our valuation potential was dominated by a limited liquidity profile. Our focus remained on being substantial owners of this business and continuing to build value for our investors in a disciplined manner as we have done in the prior five years since founding the business. We're now very happy to see our shareholder base expand since the Maverix acquisition as we welcome many new investors into our stock. As shown on this chart, our three-month average daily traded volume in the first quarter of 2023 increased by over ten times compared to Q4 of 2022, all while continuing to exemplify our belief that strong management and insider ownership are critical for a successful business. This dramatically improved liquidity profile has been a primary driver of this enhanced investor interest and bodes well for the future as we seek to broaden our investor appeal and ownership, removing an obvious obstacle to closing the valuation gap with our senior peers. We view our alignment with our shareholders as a differentiating part of our business strategy, acting as owners and being prudent shepherds of our capital. So moving to Slide 10. We embarked on a journey seven years ago to build the next senior precious metal streamer and provide competitive structured finance to an underserved mining sector, while seeking to add value to our mining partners beyond the competitive cost of funding via our approach to ESG, our commercial and technical capabilities, and our global networks. I believe our track record reveals the quality of this team and the ability to execute against our strategic objectives. As major shareholders ourselves, our focus remains on disciplined deal execution and value creation, pursuing sensible and accretive deals in a patient manner rather than pursuing growth at any cost. We appreciate the support and trust of our stakeholders, and we look forward to providing further updates soon. Thank you. With that, Bailey, happy to answer any questions.

Operator, Operator

Thank you. And your first question will come from the line of Cosmos Chiu. Your line is open.

Cosmos Chiu, Analyst

Great. Thanks, Shaun and James for the presentation and taking my questions here. Maybe my first question is on accounting. Just want to dive a bit deeper into the $5.6 million in the non-cash adjustment to cost of sales related to prepaid contracts. Has there been a change in accounting policies? Is this related to contracts coming from Maverix? I'm just trying to get a sense in terms of what happened here, if there are any changes and how we should look at it on a go-forward basis?

Sheldon Vanderkooy, CFO

Hi, Cosmos. This is Sheldon. I can answer that.

Cosmos Chiu, Analyst

Hi, Sheldon.

Sheldon Vanderkooy, CFO

As a technical matter, it's not an accounting change. However, it may be seen as similar to an accounting change due to the revenue from the prepays, which includes the prepaid contract. We had a small prepay on our Q4 statement, but this amount has increased, making it more noticeable. The cost of sales impacts earnings, but most of it relates to the acquisition cost of the prepaid contract that we acquired. Previously, Maverix adjusted this out as an adjusting item when moving from earnings to adjusted earnings. However, after consulting with the accountants, we determined that it was inappropriate to treat it as an adjusting item. It's important to clarify that there is no issue with the actual contract; it is purely an accounting matter, and the cash flows are fully reflected since it is a non-cash charge.

Cosmos Chiu, Analyst

I agree because I think earnings came in lower than consensus, but your cash flow came in bang on. So I agree it's an accounting thing. But on that, like, is this recurring? Like how do we look at it in Q2, Q3, and Q4 coming up?

Sheldon Vanderkooy, CFO

Yeah. So the prepays get revalued as they are considered a financial instrument. And then the cost of sales will basically be what the marked-up cost is. So when you look at our prepaid volumes, in order to determine what that non-cash charge would be, it would be the per ounce value on the latest quarterly mark. And so we should be able to work through quite well with that to understand what the cash flow impact flows directly with what the EPS impact is.

Cosmos Chiu, Analyst

Okay. Great. Maybe switching gears a little bit. Shaun, as you mentioned, strong start to Q1 on track to hit your full year guide in the 100 to 115. I know in the past, you never really gave us kind of any indication in terms of quarter-over-quarter, but I'll try anyways. It sounds like there's a Northparkes shipment that didn't make the cutoff in Q1 could come in, in Q2. It looks like RBPlat, with the implementation of operation strategies, could improve in future quarters. So are we looking at like Q2 that's going to be stronger than Q1? And how does it kind of look quarter-over-quarter?

Shaun Usmar, CEO

Yeah, Cosmos, I know we'd all like the more sort of metronomic and reliable quarterly timeframe. But I think it was interesting seeing both comments in his earnings recently where you talked about just the variability, particularly associated with streams of business and streamed deliveries, and you mentioned Northparkes. We've got several of those sorts of things, where within the period of a year and beyond, you have a pretty good line of sight to that. But quarterly shipment windows are just not things that I want to opine on. Just for example, you came from New South Wales on rail to port, then all the way crossing the hemisphere to either China or Japan. And there was always room for slippage around a quarter. So I think we feel very comfortable with what we put for the year. James' comments as well on things like Northparkes and even things like RBPlat and that with the start of the year that should be back-end weighted. But I think you're still going to see some of the variability around windows or periods. And you saw that last year, right? I think within the fullness of the year revealed itself, but you still get the variability on quarter-to-quarter.

Cosmos Chiu, Analyst

Maybe one last question about Nevada Copper. They announced a bought deal yesterday, and I want to understand the situation. It seems they have over $100 million committed. My question has two parts. First, how much more is Triple Flag committed to in terms of further capital injection? It appears there's $10 million in Tranche A, along with a third from Triple Flag for up to $15 million in metal deliveries or promises that will be reinvested, and potential increases from $25 million to $35 million for the credit facility. What is Triple Flag's total commitment moving forward? Also, with their capital injection totaling over $100 million, is that enough for the underground restart?

Shaun Usmar, CEO

We're really pleased with the announcement and the strong support from key investors like Pala and Mercuria, who are contributing equity alongside us. Randy and the team have made significant progress. The funding announced late last year aligns with the raises we expected for the ramp-up completion. It should be sufficient for success in that ramp-up. They've finished work on the vent fans and have crossed two or three critical dikes. As far as I can see, they're on track for the Q3 mill start, which is crucial. We haven't included any ounces from this in the 2022 guidance, as we typically don't include ramping assets in our forecasts. I'll provide that context. Our commitment remains strong, and I'll let Sheldon comment on his effective negotiations on our behalf. This is a manageable timeframe consistent with our business model, and we have a secure position in the capital stack, having minimized our cash contribution during this period. Sheldon, do you have any comments?

Sheldon Vanderkooy, CFO

Nevada Copper put out a pretty full release yesterday, and there's a lot of components of the package. But with respect to us, it's actually quite a bit simpler. It's a $115 million package in total, and our commitment under that is just over $21 million, and it comes in really two pieces. One is there are a couple of tranches of A2 debt, and that's senior debt. It's only junior. It's only subordinated to the KfW project financing, but it sits in second lien position. Of the total of 20, we're committing to a third of that. So that will be $6.6 million. And then the other thing that we've committed to is subject to certain conditions. We will reinvest net stream cash flows of up to $15 million in 2023 and 2024. And so what that means is deliveries that are made under the stream would be made to us. We realize our net proceeds after the ongoing payment, and then we lend them an equivalent amount of money, and that lending would actually come in at the A2 level. So that's nice and secure from our standpoint. But that is capped at the $15 million. It's only if Nevada Copper needs the funds. And it's also limited to the net cash we need on stream delivery. So there is no net new fresh cash outflow on us for that component. So we thought that was quite reasonable from our perspective.

Shaun Usmar, CEO

And Cosmos, I think just one thing to add, which is worth highlighting is the package, which was announced really does a lot to clean up the balance sheet for investors coming in. There's I think over $80 million of pile of debt that is being equitized, which I think is a welcome development.

Cosmos Chiu, Analyst

Great. Thanks again, Shaun and team, and those are the questions I have. Thank you.

Shaun Usmar, CEO

Thanks, Cosmos.

Operator, Operator

And your next question comes from the line of John Burke. Your line is open. John, if you're speaking, we can't hear you right now. You may need to unmute locally. All right. The next question comes from Shane Nagle. Your line is open.

Shane Nagle, Analyst

Thanks. Maybe, Sheldon, best for you. On the global minimum tax rate. If I recall correctly, Maverix didn't have any foreign streaming income and they would have had some tax loss carry-forwards in Canada that you can hopefully use to shelter some income as well. But maybe just remind us of what the impact is that you would see from that global minimum tax rate and maybe other proxies impact on your net asset value if legislations enacted before, I guess, next year?

Sheldon Vanderkooy, CFO

Yeah. Thanks, Shane. It's something that we, along with a lot of other companies are monitoring closely. First of all, just on the Maverix portfolio, all of their income was effectively subject to Canadian tax or tax in Australia or the United States. They didn't have the offshore structure that some of the streaming companies do, and we've maintained that. So we haven't moved any of their streams offshore. We've maintained the status quo there. In terms of global minimum tax, I mean the latest statements is that the Pillar 2 is scheduled to come into effect for 2024. The Canadian government has made statements that it intends to meet this timeline as well. We're still waiting for the legislation from the Canadian government, but we expect to see that, I believe, over the next few months. It's interesting because there's a minimum revenue threshold that's been put out by the G20, which is the €700 million threshold, and we're well below it. So if the Canadian rules are in accordance with the guidance that's been put out to date, we would actually fall below it, and we wouldn't be subject to it, which, of course, would be good. But if you could take the hypothetical that it does apply in 2024 and it does apply to us, the impact is fairly muted. It's a less than 4% impact on NAV on our calculation. So I prefer not to pay the global minimum tax, but it's not too large in quantum.

Shane Nagle, Analyst

Great. And then, Shaun, you didn't give out quarterly delivery guidance, I understand. But just on Cerro Lindo, we've seen a few moving pieces. Obviously, they increased their quotational period within the last year, had the heavy rainfall in Q1. Without, I guess, specific guidance to the quarter, when would you expect to get back to, I guess, a normal delivery run rate from that asset? Thinking the latter half of Q3, something like that?

Shaun Usmar, CEO

Firstly, I believe we have navigated through the QP changes that we discussed last year. It was a significant commercial shift for us. Although Nexa has confirmed the Cerro Lindo guidance for the year, the two-week delay will affect our delivery timing for the quarter. However, the annualized run rates for silver deliveries have been quite strong, and we anticipate the same for this year. In fact, our five-year outlook suggests a substantial increase by 2025. James?

James Dendle, SVP of Corporate Development

For the quarter, we have been consistent over the first three quarters of the year, and we are expecting increased deliveries towards the end of the year. Overall, it is anticipated to be weighted towards the latter half of the year, as we thought earlier this year. We will need to see if the cyclonic activity and the suspension they experienced affect that timing. Generally, it is expected to be heavier in the second half of the year.

Shaun Usmar, CEO

I want to mention that this is more of a philosophical perspective related to your earlier question about Cosmos. Having worked in mining companies where financial teams provide forecasts, I've noticed that many mining firms struggle with this aspect. What you're observing from us involves understanding the nuances that finance teams deal with, including uncertainties and variabilities. While it's quite obvious, we aim to maintain a balanced perspective when setting our sights. If you look back historically, you'll notice inherent quarterly variability. Our focus will continue to be on annual guidance. I understand the challenges of quarterly projections, but it's complicated to simply take the annual number and divide it by forward figures, as it rarely works out that way.

Shane Nagle, Analyst

Yeah, absolutely. Thanks, that's all for me.

Shaun Usmar, CEO

Thank you so much.

Operator, Operator

Our next question comes from John Tumazos. Your line is open.

John Tumazos, Analyst

Thank you. And just elaborating on the last discussion. Quarterly earnings are meaningless for gold companies because most of the fluctuations are almost measurement precisions in ore grade estimation to the tenth of the gram. So that it's good if you are not to waste your time on quarterly guidance. My question involves how you evaluate new investment opportunities as Triple Flag is so much bigger with Maverix with debt almost repaid and twice as many producing assets as the onset. How many professionals with the merged firm are evaluating new investments? Do you read submittals from third parties or investment dealers or whatnot? Or do you rely on your own historic relationships and proactively propose and seek deals? For example, Shaun would know all of the fraternity of ex-Barrick managers from different waves of regime change at Barrick. It's a big fraternity across the industry. Seeking out deals proactively is one allocation of time as opposed to reactively looking at proposals, please?

Shaun Usmar, CEO

Yeah, John, it's great to talk to you. Look, I think as you probably appreciate, we've done most of our deals proactively. We get to see all the bank-led stuff, and it's not like we're not going to participate in a number of our sort of assets that we've added to the portfolio have come by that channel. But the vast majority have come via networks and essentially bilateral deal flow. Just this week, again, we've put out several proposals that sort of via that channel of generative work that we've done. We must be approaching 700 opportunities over the seven years. So you can figure out the amount of shoe leather that it takes to actually convert those into real deals on the other end. A huge number just go nowhere. Some have a gestation period, but occasionally when there's a use of proceeds or a good corporate need. And very often, that can be in the form of things like people looking as part of their capital stacks in an acquisition or otherwise for a partner that they know will help structure a deal in a very sort of reliable and tiny way in a competitive fashion because we often get the question from investors, well, why would the management team ever do that and not just go out and run a sort of competitive process? And the answer is, if you've got a limited execution timeframe, you want to go to a team that's knowledgeable, has a track record, and can actually get things done. And they know that you're not going to jam them last minute in order to squeeze out more basis points or do things that would not help them in the ultimate goal of, say, landing a deal on an acquisition. So that's the backdrop. The earlier part of your question, the Maverix transaction. As you'd appreciate, they added around 26%, where they've got about 20, call it, a quarter or so of the shareholders of the business. And there's a lot of duplication of effort. We're not adding another mining company. So really, what we've done with the integration is we've been fortunate to bring across Warren Beil, the General Counsel, that's the one net addition. Essentially, the team, the focus, and the capability on the deal-making front is the same as it's been for the last seven years. A lot of that has been predicated on where we ran M&A at Xstrata. I've worked in BHP Billiton and other places and deal teams and the way we ran these things. Certainly, Billiton and Xstrata to me was very effective. And that was limit the amount of time and effort you spend on internal processes, make sure that you've got a smaller, high-functioning team of individuals who are owners and are highly incentivized and very motivated, and utilize external expertise in a very surgical way when you need it for a particular, whether it's technical, commercial, tax, or regional capability. And we've done that, I think, to quite good effect over the last seven years. It allows us to get the information we need to essentially make the best decisions we can in the face of uncertainty. We always use that in coming up with underwritten cases. So hopefully, that answers your question.

John Tumazos, Analyst

Thank you, and congratulations on all the progress.

Shaun Usmar, CEO

Thanks, John.

Operator, Operator

There are no further questions. At this time, I will turn the call back over to Shaun Usmar, CEO, for closing remarks.

Shaun Usmar, CEO

Yeah. Bailey, thank you, and thanks, everyone, for the questions. I know that there's a number of participants as well who are having to try to do this on the flight and site visits. And I really appreciate the demands in this earnings period of people. Yeah, just by way of closing, look, it's been a great start. Most acquisitions, the MBA books will tell you often don't achieve their sort of anticipated benefits often due to poor integration. The team has done a great job on that. These are not complex businesses to integrate. I think you're really seeing the window outside of some of the accounting noise of why we went about this, and you're definitely seeing the benefits in terms of liquidity. And we've got some great new investors and names on the register as a consequence of this transaction. As I sit here today, pretty much our seventh anniversary, and I look at the opportunities that lie ahead, I still don't see a fire horse of new capital available from generalist sources for this sector. Everyone seems to have found religion more or less on the energy transition and other things. I just think there's a better opportunity going forward than we've seen to date, and I think there is a very exciting prospect for us to continue to deploy capital and really grow this business. So with that, just thank you all. Thanks to our shareholders, our stakeholders, and our mining partners, and a special thanks to my team. Thank you.

Operator, Operator

This concludes today's conference call. You may now disconnect.