Earnings Call: Q2 2021

Aug 11, 2021

Good morning, ladies and gentlemen, and welcome to Triple Flag Precious Metals Corp. Q2 2021 Results Conference Call. I would like to remind participants that today's presentation contains forward looking information, and we refer you to the cautionary statements in the presentation. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. I would now like to turn the conference over to Sean Usmar, Founder and CEO of Triple Flag. Good morning, everyone, and thank you for joining us to discuss Triple Flag's inaugural quarter as a public company. I'm really excited to be sharing this moment with you and my team today. It really does represent the culmination of years of great work and dedication by the Successor team. I'd like to start by thanking all of the investors in our IPO in May. We placed the utmost value in their support and trust and are significant owners of this business ourselves. We We're truly aligned in ensuring Triple Flag's continued disciplined growth and value per share. The Q2 of 2021 Seth, yet another record of gold equivalent ounce sales and operating free cash flow. Just over 22,500 gold equivalent ounces were up 40% over the same period in 2020, delivering a remarkable 100% increase in net earnings. Will share more detail on our financial results shortly. For the first time, we're publishing our 5 10 year average annual gold equivalent ounce outlook, demonstrating that Triple Flag's portfolio is projected to continue our sector leading GEO growth from the past 4 years. Supporting this is our strong near term organic growth, backed by stable, high quality production profile over the next decade and beyond, with a portfolio average mine life in excess of 20 years. Having built Triple Flag from the ground up since 2016 with sector leading growth in gold equivalent ounces, over this period, we're proud to demonstrate the the ongoing growth and duration of our existing portfolio by showcasing our expectation of sustainable average production of 105,000 GEOs over the next 5 years and the next 10 years. We see this profile as a solid high margin Strong cash generating foundation from which we will continue to grow net asset value, free cash flow, GEOs and reserves and resources per share, while providing us with the financial strength to return capital to our shareholders through meaningful dividends. On this topic, Our Board has approved our 1st dividend of $0.045 per common share. This equates to a dividend yield of approximately 1.7% and allow us to directly share the benefits of Triple Flag's cash flow with our shareholders on an ongoing basis. We believe this is a robust dividend yield, which we intend to continue growing over time without compromising our disciplined growth story. Our focus will remain on delivering reliably strong results and returns as we pursue our strategy of disciplined and accretive growth through the acquisition of precious Turning to Slide 5. From the outset, we've been relentlessly focused on asset quality. Over time, this focus has translated into a portfolio that compares favorably on key portfolio quality metrics alongside the largest, most valuable peers in the sector. Each of our assets boasts compelling geology and the potential Significant exploration and production upside, capable and responsible operators working to high ESG standards are prerequisites for each of our investments. A high proportion of our assets by net asset value are in production and operated by senior mining companies. Additionally, beyond the operating mines, we have a large portfolio of exploration and development properties that will provide organic growth in the medium to long term. We have very deliberately structured a portfolio with a long average mine life leading to assets with good track records of reserve replacement, social license and proactive environment management, which we believe ultimately leads to longer and more sustainable mines. This in turn provides investors with long term visibility Future cash flows and exposure to multiple commodity price cycles in addition to the optionality that comes from future ounce additions through the drill bit. The vast majority of our producing assets are situated on the lower half of their respective industry cost curves. This is an important characteristic In an inflationary environment, it's rising materials and labor costs that we have seen early evidence of and have historically put pressure on mining companies' margins. As a streaming and royalty company with low cost position assets, we have broadly insulated from these headwinds, particularly sectoral margin compression. As the Precious Metals Royalty and Streaming business, we've remained true to the model in our portfolio construction, avoiding exposure to equity positions and similar financial instruments and limiting our activities to overwhelmingly focus on acquiring precious metal streams and royalties. We believe that is what our investors are seeking from us and we remain disciplined in executing on this model. Turning to Slide 6, Triple Plagues current valuation provides significant potential For a rerating to metrics that would be more typical for our senior and intermediate peers, particularly in the context of the quality and longevity of our As we have done in building this business over the past 5 years, I'll now ask Sheldon to comment on our Q2 results and to provide some further context. Thanks, Sean. Turning to Slide 7, I'd like to first review some of the highlights I will start with the record that Triple Flag set in the quarter. First, we set a quarterly record for production, Recording over 22,500 gold equivalent ounces in Q2. This represents a 40% increase over the corresponding quarter last year and a 14% increase over Q1 of 2021. For H1, we have realized over 42,000 gold equivalent ounces, a 50% increase over H1 last year. We have enjoyed Particularly strong performance from Cerro Lindo in 2021 as they have delivered stronger than expected silver grades. It is very gratifying to see the production growth that the portfolio is delivering. And as we have a number of ramping assets, There is still further growth to come. Sean will speak to the duration of our production profile later on in the call. The second record is perhaps the most important to our shareholders and that is the record operating cash flow of over $32,000,000 in the quarter, representing a 48 percent increase over the corresponding quarter last year. In H1 2021, we realized over $61,000,000 in operating cash flow. A strength of the streaming and royalty model is that all of our operating cash flow is also free cash flow as we do not have the sustaining capital expenditures that mining companies do. Bottom line earnings doubled over the corresponding quarter last year to over US18 $1,000,000 The share count was higher in 2021 than it was in 2020, both due to the shares issued on the IPO and shares issued in 2020 as part of the funding of the NorthPark Transaction. Nonetheless, we still realized earnings per share growth of over 40% over Q2 2020. Adjusted net earnings saw even more dramatic growth, increasing over 10 fold in the quarter, and adjusted earnings per share increased over the same period last year. I'll now turn to Slide 8. Slide 8 sets out some of the measures in graphical form With revenues, operating cash flow and adjusted EBITDA increasing by 48% or 49% and net earnings doubling year over year. The strength of the royalty and streaming model is that the revenue increases from increased production and higher prices are directly translated into free cash available to shareholders without the drag from margin compression and sustaining capital expenditures. We believe that it is important to directly share the benefits of this cash flow to shareholders through a robust dividend. Sean has already touched on our 1st quarterly dividend of $0.475 per share. This quarterly dividend represents less than 23% of Our free cash flow in the quarter. Turning now to Slide 9. We set out our consistently high margins over the past 5 quarters. We have also set out the average gold price in each of those quarters, illustrating our resilience Against cost inflation and margin compression at different gold prices. I'll now turn To our 2021 guidance on Slide 10. With a strong Q2 in the books, we are reaffirming Triple Flag's Full year 2021 production guidance of 83,000 to 87,000 gold equivalent ounces. We are also providing guidance on 2021 depletion of between $53,000,000 to $57,000,000 on a full year basis. I'll now turn matters over to Sean, who will introduce our long term production guidance. Sean, over to you. Thanks, Sheldon. The team and I are proud of the business we've built and we're working hard to not only continue our growth through accretive acquisitions, To help provide the market with a richer and deeper understanding of the distinctive quality of our portfolio, Triple Hags portfolio builds on our sector leading GEO growth Over the next decade and beyond. Production over the next 5 years is expected to average 105,000 GEOs per year, A significant increase over current production levels, primarily due to continued production growth from Beridica, Pumpkin Hollow, Gamison, Dogs And ATO. Over the next 10 years, we expect average production of 105,000 GEOs per year As we project the mining of the high grade E-twenty two block cave at North Parkes, which is expected to commence production in 2026. Above and beyond the 5 10 year production outlook, we believe there is considerable optionality related to potential life of mine extensions, Expansions and exploration from our 15 producing mines and 60 exploration and development assets in the portfolio before factoring in likely future accretive transactions that would add to our growth profile. Turning to Slide 12. Triple Flight's portfolio has a strong balance of well established core operating assets and assets in the ramp up phase providing near term growth. Both parts expansion and had a strong quarter for Triple Flag, contributing over 4,700 DEOs in the quarter. Sir Lindo, as Sheldon has mentioned, has driven very strong performance in 2021 with higher than expected silver grade. RB class is performing well despite the ongoing challenges of COVID in South Africa. And Fosterville was a pleasant surprise in Q2 The year to date production is currently tracking ahead of Kirkland's full year guidance at Fosterville. And Yonge Televitin is reaping the benefits of its earlier And has announced that they expect to attain long term rates of 8,000 tonnes per day in the Q3. Additionally, we've seen encouraging exploration results outside of the existing resource. On Slide 13, we set out the 5 assets in our portfolio that are currently ramping up to full capacity. ATO achieved commercial production in 20 20 despite the impact of COVID. COVID is, however, affecting the 2021 production due to supply chain issues impacting the China Mongolia border. These challenges unfortunately led to shortages of critical reagents during Q2, but they expect to recommence leaching in Q3 And have been mining and stacking all throughout the year. So the supply chain issues are a matter of production delays that are expected to be made up in future periods, essentially a timing impact. Notably, 100% of the stiff workforce is vaccinated, so they're well positioned to build on their impressive start up and attainment commercial production during the early stages of the pandemic last year once they received their reagents. Dogs, Viridika, Gunnison and Pumpkin Hollow all continue to progress their development, each Are currently contributing cash flows and are expected to gradually increase their production contributions going forward. Turning to Slide 14. As you're aware, we recently made the decision to take Triple Flag public on the TSX in May of this year. Part of the consideration in coming to market It was our firm belief that the company had reached a critical scale sufficient to allow us to compete for and originate streams and royalties of meaningful scale as a public company And broaden our ownership base. We currently have available liquidity of over US600 $1,000,000 Deals in the region of the Scale could represent material growth to a company of our size and you've seen our track record. As we look to new acquisitions, we will maintain our discipline in ensuring strategic alignment, of the Stitch Experience management team that together have earned over 5% of the equity through the returns we've generated over the past 5 years, uniquely aligning our interests with those of our fellow owners. So turning to Slide 15. Our sustainability and ESG are now receiving the prominence they deserve. These topics are obviously not new. I've been fortunate enough to I've spent much of my career in companies like Xtrata, where sustainability was a deep end brand value. Subsequently, The team and I have embedded principles of sustainability and good ESG practices in Triple Flag from day 1, and we look forward sharing our perspectives and approaches in more detail in our upcoming sustainability report, which we'll publish in September. The role of the mining sector in the climate change challenge is one of the most important in our time. As providers of capital to the We feel we have a duty and ability to help influence outcomes, but we must also take our share of responsibility for the impact of the metals that generate our revenues. We've done this by estimating and offsetting the attributable greenhouse gas produced We estimate a combined scope 1, 2 and 3 output of just over 11,000 tons of CO2 equivalent for 2020, the majority of which relates to our share of metals production. We're proud to have partners with ClimateCare and Native Energy to ensure the purchase of high quality, independently verified carbon offset credit. While carbon offsets are far Perfect. Each project we have invested in makes a measurable difference protecting the environment as well as providing secondary benefits that align with the UN Global Compact 10 Principles and Sustainable Development Goals that are material to our business. In response to the COVID-nineteen pandemic, Triple Flag partnered with Avi Platt to develop a distance learning initiative in consultation with and approved by the South African Department of Basic Education to be implemented in 2021. The virtual classroom distance learning solution will assist in delivering daily lessons to grade 712 learners on personal smart devices. The infrastructure and technology will be sustainable beyond the COVID pandemic. This initiative will directly benefit over 7.75 teachers and learners in 6 In 2020, Triple Flag also supported 6 students through the university academic studies, which we're very proud Now turning to Slide 16. We're excited and grateful to begin our journey as a public company this year I have truly enjoyed welcoming and speaking with our new shareholders with whom we look forward to a long and rewarding future. We have positioned Triple Flag as an emerging senior We believe we have all the key ingredients to drive Triple Flag's growth and trading multiples. We have a distinctive portfolio that objectively stacks up with the larger, most valuable peers in the sector and all the important metrics And the ability and track record to continue to grow this company further in a manner that creates value for all our stakeholders. In the near term, an organic and sustainable increase in gold equivalent ounces, the payments of our inaugural dividend, Potential early index inclusion and news flow from assets in the portfolio are catalysts we see on the immediate horizon. Thank you again to all who've attended this call. And I'll now ask the operator to please begin the Q and A session. Your first question is from the line of Greg Barnes. Thank you. Sean, just looking at the longer term production plan or GEO plan out beyond 2026, you say 105,000 ounces. We have E22 at North Products and M Model. I'm wondering what else you're included to get up there because we're A bit short of that 105,000. Craig, look, thanks for the question. Good to chat to you. So Included in there over and above, I think the things that you would sort of naturally project in there, we've got the APO Fresh Rock Projects included in that sort of timeframe. We've also included Tamarac. And you'll see in that box in the bottom, We've got just a handful of names that you'll see a sort of incremental. So you'll see Tamarac in there. Yes, and Kemess is the other one So marginal incremental ounces and as you know what you'd expect over time, we're seeing Potential for extension as we've seen with the same ounce reserves ahead of us now and things like Cerro Lindo's when we did The deal 4 years ago, so those sorts of things I think we can sort of expect with time, but that's a first reasonable indication from us. Okay. And mine life extension with Sarah Lindo and other assets are included in that as well? I don't believe outside of what you would have Already covered in your estimates. Obviously, every analyst has their views. I mean, we've got a good indication. So we're not assuming things ahead of Yes, additional news at this time. Okay. And just on the balance sheet, obviously, no debt, dollars 600,000,000 credit facility. Let's assume you come up with a big transaction, dollars 500,000,000 plus. How do you anticipate funding that equity debt? What do you think the split will be? Yes. Greg, I think the overarching point rather than giving you sort of The committed formula at this time is, this team owns over 5% of this business and we are not about to engage in things that are Either going to go against the interest strategically in the longer term, but certainly aren't going to dilute us. So, that credit facility in the immediate term provides us with apple pie pie. I think the nature of what we acquire will really determine how we choose to fund that. So for example, if you buy a shorter quarter term asset with high or significant amounts of GEOs and cash generation that can add to that Funding capacity, we may look to see if we incur additional funding sources. And at these valuations, As you'd understand coming out the gate, I think we're pretty low to go and sprinkle around equity at this time. Right. So some of your peers are low to carry debt on their balance sheets. They use it intermittently but pay it down quickly, Either by an equity issue or from cash flow, are you willing to carry debt on the balance sheet for any kind of period of time? We view it as So at the end of the day, if you think about the mining companies that have been in previously and you Thinking about net debt to EBITDA ratios where you've also got to factor in sustaining CapEx and other CapEx ahead of Those ratios can become pretty uncomfortable in certain pricing scenarios. In this model where we have essentially no Future obligations of any significance and 90% cash margins, we can comfortably pay the dividends that we We're paying now into the future and still service debt for some significant period until we feel that we've got an equity value that is reasonable for us Consider settling our debt if we don't already settle it from cash on hand and cash we're generating. So we're just going to be prudent rather than giving you Sort of a formulaic approach, right? Sure. No, that's fine. I just want to make sure you are willing to carry debt given the kind of cash flow that you can handle. Yes, absolutely. We're not afraid of doing that, but we don't see permanent leverage as people we think are investing in these sorts of businesses for low risk and Your next question is from the line of Tanya Jakusconek with Scotiabank. Great. Good morning, everyone, and thank you for taking my questions and congrats on your Q1 as a public company. Thanks. Can I just go back and circle on to Greg's question on what's included in the 10 year plan? Thank you for that information on some of the assets. I just want to follow-up. Is pumpkin hollow open pit included? No. No? And what about the Fosterville mine life? You have it extending more than just the known reserves? Yes. We model our mine life that's beyond the current reserves, We think it's pretty consistent with the majority of the sectors we see out there on that asset. We're certainly not modeling the most aggressive Mine lies out there, but there is some increase beyond the reserve. But as you'd expect, we show the production profile Reducing over time in line with Cootman's guidance to market. Okay. So it is in that 10 year period then? Yes. And then if I could just, okay, leave the tenure and I just wanted to circle back on just a couple of things. First, just on how you See the year shaping up and as we go into Q3 versus Q4, safe to assume that Q3 is going to be better than Q4 on a gold equivalent basis And sorry, Q3 is going to be better than Q2. And then Q4 is going to be a stronger quarter? You know, Tanya, like we've reaffirmed guidance. I think one thing when we look at the last 5 or 6 years and the I think what we try Focus on here is providing reasonable guidance that we have a pretty good degree of certainty of delivering on. We are ramping. So there is a reasonable expectation that over time, We should continue to see those ounces increase. I think the only thing that when we look at quarter to quarter and it's a weird construct for me Focusing on a business like this on a quarterly basis because you do get lumpy deliveries with assets, for example, at So I think we're in good shape for essentially what you're suggesting as we head into the back half of the year. And if you do the math In the first half of the year, we will set up to really meet guidance, right? But, yes, as I said, the areas of uncertainty are just periods for delivery, which is always a timing issue that we try and handicap on the guidance that we set. And it's always Call it timing uncertainty that we're really trying to factor in on deliveries. And I'd say the only other thing is, we did indicate APO in this quarter was Behind what we would have expected really because of reagent supply. So we're hoping they'll get that soon. Those ounces, I think they put out numbers saying that on the literally they got like 35,000 They've got in there in this sort of wrong pattern that and we hope to see that pick up quite well. And as they get those reagents soon, we should be very well placed And maybe just 2 other questions. Just again coming back on just Steel side, you mentioned that obviously you've got big cash on hand on the balance sheet to look at acquisitions. Can you just share with us what you're seeing out there, the types of deals and sizes that are coming your way? Yes. This is always it's always an important question I think everybody asks. And I suppose when you look at what everyone looks at in the sector, The proof of the pudding is ultimately what we end up doing. And by that, I mean, we are consistently busy With the collection of either development stage opportunities, I think particularly at this stage of the cycle, we're active on one exclusive situation we've already been to site on, but we've provided feedback and we'll see if that thing progresses the way that we'd like it to. We are seeing the usual set of call it orphan royalty portfolios, which we come across Quite frequently, which aren't always areas we find a lot of fundamental value on, but we are active in some of those situations. There's some transaction related financing. And so There are some things in the 1,000,000 of dollars through to 100 of 1,000,000 of dollars that we are active on at the moment. And I think the key for us At this time, you'll see that again, the thing that's the greatest risk I think to this team is ultimately being transactions that just aren't good. And I think we're always we're in on the side of caution. And in some ways, frankly, if we didn't play golf for a while and didn't do another deal, The organic growth that's in there is really significant. So all that to say, our discipline, I think, is a really important Sure. Of this team, we're very busy, but we're not in a rush to do deals for the sake of it. Okay. And then maybe just a question for Sheldon. Can you just review or share with us your views on the global minimum tax proposal whether and when You will see that executed and sort of the impact to Triple Flag. Yes. Thanks, Tanya. Yes, we've obviously been quite aware of that initiative and we followed the various pronouncements on that. It's quite frankly, it's not causing us really any undue concern with the value of our business. We've modeled different scenarios basically coming in on what different dates that might come into effect, and we don't have any special insight there. But I will point out that I think people's experience usually with tax changes, especially very complicated multilateral tax changes, probably happen a little And in terms of the impact on us, in some ways, you're dealing with hypotheticals. You have to make Some assumptions, but reasonably, it wouldn't affect any of our royalties. All of our royalties are held in like fully taxable So you're kind of focusing then on the internationally held streams. And if you assume that there's going to be an upfront For the deposit amounts, which is I think a pretty reasonable assumption, you end up with and because our portfolio is so young and we still A lot of that tax shield still there. You end up with a pretty modest impact on value, kind of the low single digit territory. So we're going to continue to monitor these developments. I think there's a it remains to be seen whether the executive branches, which are the ones that are making these agreements, And have it carried through the legislative branches in the various jurisdictions. But we're going to follow with interest, but not causing any undue Okay, great. Thank you so much. I'll leave it to someone else to ask questions. Appreciate the questions. Your next question is from the line of Brian MacArthur with Raymond James. And sorry to go back to this, but mine is sort of around the same vein as Tanya and Greg. But can you just give us a little guidance on what you did for Jonathan, in the 10 year outlook, I guess, first of all, the buyback was there. And second, It looks like given the percentages of copper you give us, which I assume is the other in the 10 year, you assume that it does reach the 125,000,000 barrier in the back half. Any guidance on that would be helpful. Brian, look, this is good. Good morning and thanks for joining in the question. I'm going to ask James who's with us to just comment On the composition, he's put a lot of work into this with the team. So James, I don't know if you want to comment. Yes, Brian and Sheldon can also perhaps comment on Gunnison. But The way it's structured is that we have a pretty consistent rate of copper deliveries regardless of whether they proceeded the expansion or not because we have that Ability to buy up the stream rate and then the reciprocal ability to buy down. So the net effect is that the comp deliveries remain relatively So it's sort of independent of the company's expansion decisions, and that's reflected in the outlook, both in terms of the GEOs and Great. Thank you. That's very helpful. And maybe I see another Stream you have out there going forward is Renard and you have a loan receivable coming due next year. Can you just remind me how that And obviously it's being reinvested right now, but does that loan receivable just come into you next year if You know if diamond prices continue to do well, like how that all works going forward? Hi, Brian. This is Sheldon. I think I'll take that question. So the parties, kind of it's us and IQ and the case and Cisco that are kind of The parties involved in the Renard situation. And you're right, that loan is coming due. I think we'll have to come up With a solution to kind of look at Renard again and see what works well for that asset. But what's really been gratifying, I think, over Especially the last few months is the strengthening of the diamond prices and we've seen that in the publicly traded diamond producers. So everything's been strengthening and Renard I think been a pretty good news story for us this year. And then we'll see the We'll have to work something out with everyone as to how we deal with that going forward. But I think really the thesis on the restart of Bernard has actually played out Very well for both ourselves and our partners at Renard. And Brian, I think just to add to that, it's a very small part of our portfolio, about 1% I think it also just shows the strength of a model like this to maintain optionality, Work with the miners and we've got a good syndicate of partners there. So we've seen that play out, I think quite effectively. Great. Thanks very much. Thank you. At this time, there are no further questions. Operator, thank you. I think maybe we'll just give it another 30 seconds Lucerne, if there's nothing further, we just appreciate everybody's time and attention. We have a series of moments of first When you go public and this is obviously an important milestone for us. So really appreciate everyone joining And for the questions we've received. Operator, unless there's anything else, are there any other calls? There are no questions. Okay. Well, look, everybody, thank you very much for participating today. Thank you, Greg, Tanya and Brian for the full four questions. If there's any follow ups, you know where we are. And we're off to the races. So we're