Earnings Call: Q3 2022

Nov 8, 2022

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Triple Flag third quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Shaun Usmar, CEO, you may begin your conference. Thanks very much. Good morning, everyone, and thanks for joining us to discuss Triple Flag's third quarter results. Today, I'm joined by my CFO, Sheldon Vanderkooy, and our Vice President of Evaluations and Investor Relations, James Dendle. We're pleased to report solid results for this quarter. Our results from the third quarter were broadly in line with expectations, and we're anticipating our full-year GEO sales to be towards the low end of our guidance range of 88,000-92,000 GEOs, due principally to the impacts of delivery timing delays and a higher gold-silver ratio. Gold equivalent ounces sold declined compared to the prior quarter, largely due to a lag in deliveries of silver GEOs from Cerro Lindo, which we will speak to later in the presentation. These timing impacts weigh on our revenues and GEOs for the year towards the fourth quarter and move some 2022 ounces into 2023. The shares of Triple Flag began trading on the New York Stock Exchange under the ticker TFPM during the quarter, which is the same ticker under which we trade on the Toronto Stock Exchange. We enjoyed ringing the opening bell at the New York Stock Exchange on October 21, a recording of which can be viewed through our social media. This listing is another step in Triple Flag's value creation journey that we're happy to have achieved. As previously announced, the increase to our annual dividend from $0.19 to $0.20 a share took effect during the quarter. This was made possible due to the underlying delivery of our portfolio, and we believe it's important to return capital to our shareholders as we continue to grow our business. A number of assets experienced positive catalysts during the quarter, of which a select few are listed here. Cerro Lindo had strong silver and concentrate production. Northparkes reported record mill throughput during the quarter. Nevada Copper announced the successful closing of a restart financing package for the Pumpkin Hollow underground mine. Exploration results at Fosterville continue to highlight the world-class nature of the mine. The Tamarack project not only increased their contained indicated nickel by 98% but were also selected as a recipient of the first set of projects funded by President Joe Biden's Bipartisan Infrastructure Law to expand domestic manufacturing of batteries for electric vehicles, highlighting not only the quality of the project, but the strong domestic demand for the metals it produces. On the corporate development front, our team remains extremely active amidst the backdrop of tough equity and debt capital markets for the mining sector at large. With our newly upsized credit facility of $500 million and a $200 million accordion, plus our $80 million in cash, we will continue to remain disciplined in our analysis and only transact to grow value per share in keeping with our strategic focus as a high-margin precious metals investment vehicle. Deal pipeline is the most interesting I've seen since the start of the pandemic in 2020, and I believe the market to thoughtfully deploy capital in pursuit of growth and value per share while adding quality, scale, optionality, and diversification to our portfolio in the short and medium term is unusually attractive. I'll now turn it over to Sheldon to discuss our financials for Q3 2022. Thank you, Shaun. We had a solid third quarter, realizing just over 19,500 GEOs. Our adjusted net earnings of $0.09 per share was identical to that of a year ago, and our asset margins remained over the 90% level. Our cash flow in the quarter was over $25 million, despite the headwinds of a lower gold price and a lower silver price in the quarter, showing the resilience of the streaming model. In the quarter, we paid aggregate dividends of $7.8 million, continuing to directly share our cash flow with shareholders. Turning now to the next slide. The global economic environment has been exceptionally difficult the past three years. From the once-in-a-century global pandemic and then a major land war, the economic and financial impacts thus far include supply chain disruptions, reoriented trade flows, inflation, interest rate increases, and foreign exchange disruption. Many businesses are struggling with supply shortages or input cost inflation. In times like these, the strength of the royalty and streaming model is especially apparent as we continue to benefit from margins of over 90% despite the ever-changing metals prices. Our model is very much a safe harbor in difficult times. Turning now to slide 7. We see the benefits of the high margins being the robust cash flow. Our cash flows will vary with metals prices, but the combination of high margins and low overhead result in consistent and dependable cash generation. Cash belongs to shareholders, and I am proud that we have paid out over $37 million in dividends since our IPO. Better yet, the current dividend represents only 30% of cash flow, leaving additional funds for reinvestment and the future benefit of shareholders. Turning to slide 8. Our cash balance continues to build, being $83 million at quarter end. At quarter end, we also had $700 million of undrawn capacity on our revolving credit facility. Supported by a lending syndicate of leading banks, we extended the term of our credit facility to 4 years, providing capital certainty into 2026. We are constantly looking for opportunities to build shareholder value through new investments. This credit facility provides us with the capacity to accretively deploy additional capital and new investments for the benefit of shareholders. These are difficult times, but with hindsight, it may well prove that this leads to opportunities to make investments that benefit shareholders for years to come. Slide nine highlights three very important aspects of our portfolio, being asset diversification, precious metals focus, and a portfolio which is predominantly centered in the Americas and Australia. No single asset accounts for more than 25% of last quarter's revenues, and we have a number of cornerstone assets, including Northparkes, Cerro Lindo, Fosterville, and RBPlat, as well as a larger number of smaller assets providing additional diversification. In the past quarter, gold and silver accounted for over 90% of our revenues, among the highest in the sector. By geography, the country with the greatest contribution to our revenues was Australia, with 5 assets contributing over 30% of our revenues. After Australia, our portfolio was predominantly located in mining-friendly jurisdictions in North and South America. James will now review asset highlights. Thanks, Sheldon. As Shaun mentioned, our portfolio continues to perform well. At Northparkes, record plant throughput was achieved in the third quarter, and ramp-up of E26 Lift One North Cave progressed slightly ahead of schedule. At Northparkes, the shipment was delayed from the third quarter to the fourth quarter, impacting sales during the period. Staying in Australia, Fosterville has delivered a strong performance year-to-date, and Agnico Eagle's exploration program continues to progress. Exploration drilling at Fosterville and the exploration leases has totaled over 118,000 meters year-to-date. Step-out drilling in Q3 returned high grades west of the Lower Phoenix Zone and identified a new mineralized structure in the hanging wall of Lower Phoenix. Visible gold intercepts from the Cardinal Zone included an interval of 365.5 grams per ton over 11.1 meters. Importantly, based on the expected timing of mining high-grade stopes, Fosterville is expected to have a strong fourth quarter. Cerro Lindo in Peru produced 1.1 million ounces of silver and copper and lead concentrates during the quarter. Exploration continued to focus on extensions of known ore bodies to the southeast of Cerro Lindo and at the Pucasaia target, 4.5 kilometers to the northwest of the mine. Cerro Lindo is producing silver in concentrates in line with our expectations for 2022. However, a combination of higher gold-to-silver ratios and changes in the quotational period associated with offtake contracts have impacted the timing of stream deliveries by around four months on average. I'll discuss this further in the next slide. At ATO Mongolia, production of gold during the quarter was up 28% from the second quarter to approximately 13,300 ounces. As at 30 September, the total estimated recoverable gold between the pit, run-of-mine pad, and leach pad is approximately 71,000 ounces. At Berezovka, production in September rebounded from reduced production in August, which was affected by an illegal blockade of the mine for a period of around 11 days. After a good result in the first half of 2022, Royal Bafokeng Platinum had a more challenging third quarter. Operations during the quarter were interrupted by regulatory stoppages, supply chain, and power supply issues, resulting in a 6.2% decrease in 4E production for the third quarter compared to the same period in 2021. Due to the timing of concentrate production, smelting, and refining, lower Q3 mine output will impact sales in the third quarter of 2023. Key operational focus remains geared towards reestablishing mineable face length, reduction of the tip to face tramming distances, and improved trackless fleet availability and utilization. These measures are expected to put RBPlat on track to deliver 230,000 tonnes a month from Styldrift. As Sean mentioned, Tamarack at Talon Metals was the recipient of the first set of projects funded by President Joe Biden's Bipartisan Infrastructure Law to expand domestic manufacturing of batteries for electric vehicles. The US Department of Energy will provide $114 million towards construction and execution costs for the battery minerals processing facility in North Dakota. Also during the quarter, Talon announced an updated mineral resource estimate for Tamarack, and contained nickel in the Tamarack resource estimate has increased 60% since Triple Flag's investment. Nevada Copper is making progress at Pumpkin Hollow following the closing of the restart financing package with the completion of the second dike crossing. This provides access to high-grade stopes of the northeast zone that is expected to support full-scale stope mining during the second half of 2023. Nevada Copper has also secured the remaining long-lead items for the coarse ore bin and underground jaw crusher, which is expected to be delivered in the fourth quarter of 2022. Excelsior announced positive results from wellfield stimulation modeling, which is intended to inflate the preexisting mineralized flat fracture network in the wellfield to help CO2 gas bubbles escape. Excelsior expects field trials to commence in 2023, subject to EPA approval. The EPA is currently processing Excelsior's permit amendment to allow for wellfield stimulation, which is expected to be approved in the first quarter of 2023, with field trials planned shortly thereafter. Closer to home, Young-Davidson continues to perform well and is on track to meet 2022 guidance of between 185,000 and 200,000 ounces. Turning to the next slide. As previously mentioned, Cerro Lindo is producing silver and concentrate in line with our expectations for 2022, and in fact is producing more silver in the last two quarters than any other period since the beginning of 2021. Due to changes in the quotational period associated with offtake contracts, however, the timing of our stream deliveries has been impacted by several months on average. The chart shows quarterly production of silver and concentrate. What's notable is the gap that's opened up in Q2 and Q3 between streamable silver, in other words, silver produced at the mine in concentrate after accounting for the stream rate and payability and Triple Flag silver sales. This is a recent development in the concentrate offtake market, which we have reflected in our commentary and annual guidance. We expect that gap to close as silver concentrates work through the system during Q4 of 2022 and Q1 of 2023. This is a short-term timing impact in contrast with the robust underlying operational performance of the mine. On that, I turn the presentation back to Shaun. Thanks, James. The streaming and royalty business model rewards its investors over time, as good portfolio investments deliver organic cash flow growth and additional upside when embedded optionality comes to fruition, new mines come into production, existing mines add life through the drill bit, and operations expand their throughput. Our business is relatively young when compared to our well-established peers. Yet as we approach our seventh anniversary, our trailing cash flow yield compares among the best at around 10% based on trailing free cash of around $110 million and net invested capital of about $1.1 billion. We've outlined on this slide how a number of our key assets have created value in our short history before factoring in any valuation multiple on the NAV, which is typical of the sector. You'll see that investments in assets like Fosterville, Buriticá, ATO, and Cerro Lindo have either already recovered our full initial investment or are fast approaching that milestone, and have benefited from reserve replacements through exploration, mine life extensions and expansions that have added considerable NAV versus our initial investment case. You'll also see a mix of assets with shorter visible mine lives that have a good track record of reserve replacement, complemented by cornerstone assets like Northparkes and RBPlat that also have ample opportunity for reserve and life extension beyond their already long lives of multiple decades, along with expansion potential and future exploration prospectivity. These complementary asset characteristics add up to a compelling long life, high margin, diversified portfolio that has delivered high growth in ounces to our shareholders over the past six years, with more to come. That's before factoring in our ability to add growth through deals. We expect more of the types of value addition captured on this slide in the future as our mining partners continue to run their assets well for their shareholders and build on their demonstrated track records. The highest and best use of our capital is in value-accretive investment additions to our growing portfolio. We have nearly $800 million in available liquidity, but have demonstrated resolve and patience in our approach to deal making. There is not a quarterly or even annual cadence of activity driving our management team. It is necessarily driven by opportunity and the pursuit of growing value on a per share basis. We invest through the commodity cycle and attempt to behave counter-cyclically. We are large shareholders on this team, have built a high-quality portfolio through 21 deals now over the past 6.5 years, and have one of the more compelling deal pipelines ahead of us now since our founding in 2016. Turning to sustainability, this is a core value for Triple Flag. Our scholarship programs at ATO, Northparkes, and RBPlat continue to provide support for young people interested in careers in the mining sector. We continue to be carbon neutral for all our Scope 1, 2, and 3 emissions since starting this business by purchasing offsets. Finally, we wanna highlight our target of 30% women on the board and 30% diversity in senior management by 2025, both of which are important milestones we look to achieve. Everyone who follows the mining sector knows that this has been a priority for serious mining companies for a long time now, and it's just good business in a capital-intensive long-term investment horizon business that has to strategically prioritize its privilege to operate. Similarly, it is sensible business practice to have an authentic, substantive approach to ESG practices in the streaming and royalty business. Our ongoing work in this area has been recognized as one of the finalists in the Mines and Money Excellence in ESG Awards, which will be decided in late November at their gala event in London. Turning to slide 14. In summary, we delivered financials in Q3 that were broadly in line with expectations as our portfolio continues to perform well against a volatile market backdrop, highlighting the quality and value of our growing portfolio. We're expecting our full-year GEO sales to be towards the low end of our guidance range of 88,000-92,000 GEOs due to short-term market and timing factors, partially offsetting strong underlying portfolio operational performances while we deliver on our ESG objectives. Our balance sheet remains clean with no debt and nearly $800 million in available liquidity to transact on deals as we see fit. 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. I believe that the current market is setting up nicely for an acute need for knowledgeable, patient, long-term capital in the mining and metals sector, providing attractive opportunities for us to pursue further value-enhancing acquisitions. We're well-placed in this environment to continue our track record of growing value for our investors. We sincerely appreciate the support and trust of our stakeholders, and we look forward to providing further updates soon. Thank you. With that, I'm happy to answer any questions. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from a line of Greg Barnes from TD Securities. Your line is open. Thank you. James, this quotational period adjustment issue at Cerro Lindo, it sounds like this is not just specifically related to Cerro Lindo, it's industry-wide, but what exactly has changed? Yes, it's a good question, Greg. I mean, we're seeing it pop up quite a bit. Like many mines, Cerro Lindo's offtakes are spread amongst numerous different off-takers with you know, contracts that are negotiated before the start of any given year. The off-takers contracts have different terms and also different points of delivery. Each contract you know, allows some flexibility in how the quotational period is handled, and the timing you know, varies between those. The other you know, sort of impact we see at Cerro Lindo is there's some variability between the copper and the lead concentrates. The silver is split between the two. Again, you know, depending on you know, how much silver's in one or the other results in different QPs. We're sort of seeing the blended effect of a few different dynamics at play. And then also there's a timing of delivery element, which has been quite stable at Cerro Lindo, but I think that's an issue that's sort of been popping up as well. The only thing I'd add, Greg, just to Sheldon, is a lot of streaming contracts, what happens is, and I think you probably know this, is the streamer gets deliveries as provisional invoices, and payments are made on the underlying offtake agreements. Our agreement with Cerro Lindo, our delivery entitlement is actually triggered off of the final invoice, the final step in the sales process. That might have a bit different impact than some other streaming agreements out there. Okay. It is purely timing. Okay. I just assume that the QPs have extended out. Is that what you're implying? That's correct. Yeah. It's not something I think we're seeing it extend out, Greg, to sort of the outer boundary of what we'd expect. Yeah. Okay. Just an update on Pumpkin Hollow and Gunnison. Do you expect any stream or revenue from either one in 2023 at this point? Greg, we're not gonna sort of comment on guidance for 2023 at this point. I think, you know, the work we've done in the last quarter, which took quite some time to achieve, I think between that, what the team on the ground has done through crossing the second dike, I think is all very positive for 2023. We'll look to provide very specific guidance. I think if you look at the company's latest guidance there, where they're talking about crossing the third and final dike, you know, early next year, the work on infrastructure. It's the exact sort of stuff that I think, you know, we've been hoping for with this investment for some time. I think we're quite encouraged by the trajectory for next year. Okay. Thank you. I'll pass it on. Thanks. Your next question comes from a line of Brian MacArthur from Raymond James. Your line is open. Hey, good morning. Can I just follow up on Greg's question? Are there any other I mean, Cerro Lindo sort of has two concentrates, but I don't know, does ATO, I mean, Northparkes is delayed on a ship on a delivery. Are these just boat timing issues, or are we gonna get into the same issue to the same extent on things like ATO and Northparkes, I guess, would be the major ones? Because you've built up a lot of inventory at ATO, I mean, ATO has a fair bit of inventory too, right? Yeah. A couple of thoughts. They're all quite distinct. I mean, you know, you're describing ATO as a gold operation where essentially that's been, you know, reagent supply that's been well telegraphed, which has been an issue in the past. As you know, ATO is actually, I think it's 28% up on the prior quarter. So they've, you know, you've seen them being able to leach. I think they've got over 70,000 ounces already mined and crushed and waiting to be produced. So that's in pretty good shape. This is a very, you know, distinct feature linked to base metal concentrates. You know, I think the only other timing disruptions that we've sort of referenced in there have really been distinct to an operation like Northparkes, where they've been producing quite well. It's actually been more related to weather events and impacts on infrastructure and actual timing around periods. You know, I think what this should point out to you is despite sort of several assets experiencing some timing impact, I think it probably hopefully gives you a sense of just the level of, you know, let's say headroom we'd built into our original estimates for when we thought about guidance. Sheldon, I don't know what you'd add, if anything. No, I think that's all right. I mean, just Northparkes, you know, there's only 12 shipments a year, and that's the issue we talked about there. There's not that quotational period impact on Northparkes at all. When they unload the ship at port, that basically triggers the delivery requirements to us. It's not that same QP impact. We don't have some of the QP impact anywhere else in the. That's right. in the portfolio, just to be clear. Yeah. Just to comment on ATO specifically, Brian, you know, there was a pour very late in the quarter. You know, ATO is a doré producer, as you know, and so that you don't have that same, you know, refining timeline that one encounters with base metals. Just given how close the pool was to the quarter end, that effectively slipped from a sales point of view. Just to summarize, really the QP issue is really a Orlando situation in your portfolio. The others are what I would just call, you know, boats get delayed or shipments get delayed over a quarter, and which, you know, can happen to anybody over an average time period, basically. That is that kinda right, the conclusion? I think that's well put, and you know, to your point on the QP, I think it's a phenomenon in the market that we've seen really for the first time in our, I think, in our 6-year contract history now. Just can I ask, just with ATO, I mean, on the supplies issue, obviously you talked about supply chains. Right now you're sort of indicating they're in pretty good shape going forward, so we'll start to sell a lot of that inventory there. Because I mean, the inventory there is quite high still. Yeah. I think that's right, Brian, but if you look at the latest results that came out yesterday, I think you'll see headlines like site-level all-in sustaining costs at over $800 an ounce. You'll see the 28% up on the prior year. You'll also see them reference the seasonality. I mean, we're entering winter. Yeah. Obviously, these kinetics get impacted. They have installed a heat exchanger. I think this will be the first season where they're able to utilize that. You know, you will see a drop-off as a consequence of that. You know, they're up producing and, you know, I think their release should hopefully give you a good sense of how they're doing. Great. Thank you very much for answering my questions. Yeah. Thanks, Brian. Again, if you would like to ask a question, please press star then the number one on your telephone keypad. There are no further questions at this time. Mr. Shaun Usmar, I turn the call back over to you for some final closing comments. Yeah. Look, thanks very much. It's actually quite refreshing to have relatively few questions, I guess. Yeah, thanks so much. As I say, it's fairly straightforward, outside of timing for the quarter that has been a thematic. You know, despite that, I think you'll still see the highest, second highest gold production in our portfolio, even with these delays that have been experienced in different areas. I think the business as a whole continues to perform. We've got good firepower. We're very active on the deal front. Thank you for your time and your questions. We're available if there are any follow-ups. Thanks, thanks, operator, and thanks to those online. This concludes today's conference call. Thank you for your participation. You may now disconnect.