Earnings Call: Q4 2020

Aug 6, 2020

Good morning, and welcome to the Royal Gold Inc. Fiscal 2020 Full Year and Fourth Quarter Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like to turn the conference over to Alistair Baker. Please go ahead. Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's 4th quarter fiscal year 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 Heisenbuttel, President and CEO Paul Livner, CFO and Treasurer and Mark Istow, Executive Vice President and COO. Dan Breeze, Vice President, Corporate Development of RGAG and Randy Sheffman, General Counsel are also available for questions. During today's call, we will make forward looking statements, including statements about our projections or expectations for the future. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties are discussed in today's press release and our filings with the SEC. We will also refer to certain non GAAP financial measures, including adjusted net income, adjusted net income per share and net debt. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures are available in today's press release, which can be found on our website. Bill will give you an overview of the fiscal year, followed by Mark with an update on our operating results. Paul will then provide a financial update for the quarter, and Bill will wrap up the call with some closing comments. We'll then open the line for Q and A session. Now, I will turn the call over to Bill. Good morning and thank you for joining the call. Before beginning, I would like to note that the Royal Gold team continues to manage its business remotely, and as such, our participants are in separate locations. We'll do our best to respond in a coordinated manner to any of your questions. I'll begin on Slide 4. Fiscal 2020 was a very strong year for Royal Gold. Despite the most challenging external circumstances that any of us have seen before, we realized annual records for revenue, operating cash flow and earnings. Our revenue was $499,000,000 up 18% from fiscal 2019. Gold equivalent ounce volume was $320,000 was down slightly from the prior year due mostly due to the reduction in revenue at Andacollo that we have discussed previously and impacts from COVID-nineteen related production disruptions. However, this volume reduction was offset by the significantly higher realized gold price that drove our revenue increase. Our gold weighted revenue stream was a significant beneficiary of the market fundamentals for our most important metal. Earnings for the year were robust at $199,000,000 or $3.03 per share. After adjustments, earnings were $162,000,000 or $2.47 per share. Paul will go into more detail on the GEO volumes and earning adjustments in his remarks. Operating cash flow was $341,000,000 up 35% from fiscal 2019. This strong financial performance provided the funds to reduce net debt by $115,000,000 contribute $136,000,000 to the Khoemacau project and pay dividends of $71,500,000 all without raising equity and diluting shareholders. As of June 30, our cash of $319,000,000 exceeded the $305,000,000 of debt outstanding under our revolving credit facility, leaving us in a very favorable net debt position. We also undertook a leadership change in January and the transition to the new leadership team has gone very well, especially in light of the highly unusual operating circumstances we have all found ourselves in during the past few months. Our entire team has operated with great professionalism and dedication, while managing the innumerable personal and family challenges everyone has had to deal with during the pandemic. All told, our business performed very well and we're in a great position as we start fiscal 2021. With that, I'll turn the call over to Mark for a discussion of Comecao and a few other notable properties. Thanks, Bill. On Slide 5, I'd like to start with an update of the Khoemacau project in Botswana, currently under development by Khoemacau Copper Mining or KCM. As I mentioned in our last quarterly call, a 6 month state of emergency had been declared by the government of Botswana and travel restrictions came into effect on April 2nd to help prevent the spread of COVID-nineteen. However, mining was declared in the central service. The restrictions remain in place through May 21st and while construction and mining development continued during that period, some activities were curtailed, particularly with respect to the process plant refurbishment. Since then, construction manning and the activity level has largely returned to normal. However, after a review of the project schedule, KCM now expects that shipment of 1st concentrate will be pushed out from mid year to later in Q3 of calendar 2021, a delay that is not unexpected in today's environment. The delay notwithstanding, KCM has done an excellent job of advancing underground development and construction completion reached approximately 54% at the end of June with 81% of the capital committed. Slover progress in the quarter reduced our funding requirement below previous expectations and we made our 4th contribution to the advanced stream payment on July 5 of $11,100,000 We have now advanced approximately $147,000,000 towards the project. The photo on the slide shows an aerial view of Zone 5 looking Northeast with the South box cut in the foreground. The following three slides will provide a view on construction progress across the site. On Slide 6, the photo on the left shows the South box cut in early July, a view of the underground development and a photo on the lower right shows construction underway on the central box set infrastructure. All three box cuts are the subject of active underground development, which has been advancing ahead of plan with a high level of quality being achieved by Farminko, the mining contractor. Turning to Slide 7, the photo on the left shows progress on the administration area and the photo on the right shows the Zone 5 man camp area. Moving to the Bassetto Mill facility on Slide 8, the photo on the left shows the secondary and tertiary crusher facilities and refurbishment work underway for preparing to sandblast and paint. The photo on the right shows an area of new construction activity in the concentrate regrind area with progress on the regrind mill at Jameson Cell Foundations. Overall, the progress is progressing well and the project is taking shape nicely. Moving on to Slide 9, I'd like to highlight a couple of recent developments at Mount Milligan and Penasquito. Starting with Mount Milligan, Centerra reported that operations return to plan levels during May after reducing throughput at mining rates in April due to COVID-nineteen manpower reductions. It reported the process plant operated at approximately 60% of target throughput and mining operations were partially shut down for approximately 4 weeks during April with reductions in gold and copper for the quarter. Centerra also reported that a wet spring and a substantial snowpack allowed Mount Milligan to pump water starting in April. By the end of June, they pumped more water than in the entire 2019 pumping season and have over 6,000,000 cubic meters of water in storage. They also reported continued efforts to explore for groundwater sources around the existing infrastructure and will continue to so for the remainder of calendar 2020. Centerra continues to look for a long term water supply solution and is working with regulators and several stakeholder groups. Turning to Penasquito, Humana announced that operations ramped up after government imposed COVID-nineteen related shutdown was lifted and production in the process plant reached pre COVID production levels of about 110,000 tons per day by mid June. Recall that operations were placed on care and maintenance for about 35 days from April 12 through mid May. According to Newmont, now that operations are restarted, they will continue to apply their full potential program to eliminate constraints, reduce costs and increase productivities with the goal of extending mine life to resource conversion. Newmont also provided updated production guidance for calendar 2020 of 510,000 ounces of gold, 20,000,000 ounces of silver, £360,000,000 of zinc and £190,000,000 of lead. I'd like to briefly touch on Golden Star's announced sale of Prestea to FGR, while negotiations for the separation of the stream between Wassa and Prestia are ongoing and completion requires final board approval, we think that this is a good development for all parties. The sale of Prestea allows Golden Star to focus on exploration in the various phases of growth management as outlined at Wassa and management of Prestea will become the sole focus of a new owner who will be motivated to invest and improve the operations. Wassa has the potential to become a world class operation and Golden Star has done a commendable job of adding mineral resources and improving performance. We look forward to seeing focused advancement at both Wassa and Prestea. I'll now turn the call over to Paul to discuss our financial results. 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 4th quarter fiscal 2020 to the prior year quarter. We recorded revenue of $120,000,000 on volume of 70,100 gold equivalent ounces or GEOs. While revenue was up about 4%, GEOs were down nearly 21% quarter over quarter, primarily due to lower anticoil sales resulting from the strike in October November, an impact we have discussed with the market for a few quarters. The decrease was also attributable to lower stream sales from Mount Milligan and Pueblo Viejo. The lower stream sales, however, were somewhat offset by higher royalty contributions from Cortez and Penasquito. Despite lower volumes, metal prices had a significant positive effect during the quarter, with gold and silver prices up 31% 10% respectively, while copper was down 12%. Gold continued to be the most significant driver for our revenue and accounted for 84% of our total revenue for the current quarter, up slightly from 80% in the prior year quarter. G and A expense for the quarter was $6,500,000 in line with $6,300,000 in the prior year quarter. Our DD and A expense for the quarter was $45,400,000 or $6.48 per GEO, down slightly from our previous guidance range, but up from $4.95 per GEO in the prior year quarter. As I discussed in our last call, recent reserve reductions at Mount Milligan and Rain River have caused our depletion rates on those interests to increase. Interest expense decreased to $2,000,000 this quarter from $6,100,000 in the prior year quarter due to overall reduced debt levels. Earnings were $49,000,000 or $0.75 per share, up 85% compared to the prior year quarter. There were several adjustments to our earnings specific to the quarter, which included a $0.17 gain due to the release of an uncertain tax liability, which resulted from a settlement with the foreign tax authority specific to withholding tax, a $0.10 gain due to the increase in the fair value on our equity holdings, a $0.02 charge due to complete impairment of our royalty interest at El Toki and a $0.03 reversal for the combined tax effects of these adjustments. As Bill mentioned, we also saw some relatively large adjustments to the full fiscal year earnings, which included a $0.61 tax benefit, which combines the release of the uncertain tax liability I just mentioned and the effect of Swiss tax reform from earlier in the fiscal year, a $0.05 charge due to the onetime non cash employee compensation expense we recognized in the March quarter as a result of recent senior management retirements a $0.02 gain due to the increase in fair value on our equity holdings and a $0.02 charge due to the full impairment of our Elkoke royalty interest. After elimination of these adjustments, our adjusted EPS was $0.53 per share for the quarter and $2.47 per share for the fiscal year. Cash from operations was approximately $91,600,000 for the quarter, up significantly from $72,300,000 in the prior year quarter. The increase is primarily due to an increase in revenue proceeds, lower income taxes paid and a decrease in the amount of interest paid on our outstanding debt. At the end of June, we held approximately 25,000 GEOs in inventory, which was higher than the guidance range I provided during our last quarterly call. The increase was primarily due to an Endoqua delivery that was received earlier than forecasted. Looking forward to the September quarter and absent any potential new operational impacts due to COVID-nineteen, we expect Stream segment sales to be in the range of 53,000 to 58,000 GEOs and inventories for the quarter end to be in the range of 25,000 to 30,000 GEOs. With respect to our fiscal 2021 DD and A and effective tax rate guidance, it is a bit too early for us to provide this information at this time, but I expect we can provide this guidance on our next quarterly call. I'll now turn to Slide 11 and provide a summary of our financial position. Our liquidity remains strong and we ended the year with cash of $319,000,000 working capital of $320,000,000 and with our credit facility, we had access to just over $1,000,000,000 of total liquidity. You will remember from our last call that we drew $200,000,000 on our credit facility in early April. This was a precautionary measure and we did it to ensure cash is readily available to support our current commitments in the event COVID-nineteen operational impacts worsened. While the environment appears to have stabilized and revenue contributions have largely returned to normal across the portfolio, we remain cautious on the outlook. Although there is no immediate requirement for the funds, we will keep the draw proceeds on our balance sheet for the time being. Company will revisit this position as the overall operating environment returns to normal and as we continue to further meet our investment commitment at Khoemacau, which also includes establishing a better understanding of KCM's ultimate financing needs at Khoemacau. At the end of June, we had an outstanding revolver balance of $305,000,000 with $695,000,000 undrawn. We remain committed to reducing our debt and absent any funding required for new business opportunities, we expect to manage our debt levels accordingly. In line with that approach, we paid down $30,000,000 on our revolving credit facility in early July, leaving us with $725,000,000 of undrawn capacity. During the fiscal year, we contributed $136,000,000 towards the Comacao project, including a $48,000,000 advance payment in the current quarter. As Mark noted earlier, we also made an $11,000,000 advance payment in July and now have contributed $147,000,000 towards the project. We expect to contribute a further $35,000,000 to $45,000,000 during the remainder of calendar 2020. In calendar 2021, our remaining contribution will be between $25,000,000 $78,000,000 depending on whether KCM exercises its option to increase the stream rate and raise the advance payment from $212,000,000 up to $265,000,000 We expect remaining payments to be made 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. That concludes my comments on our financial performance for the quarter, and I'll now turn the call back to Bill for closing comments. Thanks, Paul. 2020 was a year of significant change for Royal Gold. I took over the CEO role at the beginning of January and a new generation of leadership was appointed at the same time. All of this internal change occurred shortly before the onset of significant global challenges in a very uncertain business environment. I am very pleased to say that the team looked past the challenges and remains focused on all key aspects of our business. Our company remains healthy and despite COVID related revenue impacts during fiscal 2020 at several operations in our portfolio, the bulk of our asset base continued to generate revenue and cash flow, highlighting one of the main benefits of our business model. In addition to a portfolio of 187 assets, 41 of which produced revenue of almost $500,000,000 our cash overhead remained low, representing about 4% of revenue. It is this combination of revenue diversification and high cash margins that should allow us to withstand the potential uncertainty of future COVID-nineteen impacts. We increased our dividend year on year by 6%, improved our net debt position by $115,000,000 and funded $136,000,000 towards our Come Macau stream, all without diluting our shareholders by issuing equity. We ended the year with a healthy balance sheet and our access to liquidity positions us to act on new business opportunities. While we are encouraged by the recent strength in the gold price, we are also mindful of long term returns and we'll continue to pursue new business opportunities with a disciplined approach. I think we are in a great position and I look forward to using these advantages to continue to deliver accretive growth and results for all shareholders. Operator, that concludes our prepared remarks. I'll now open the line for questions. Speakers, your lines are now live. We will now begin the question and answer Our first question will come from Jim Stucker, who is a retired Board member. Please go ahead. Thank you. Well, Bill, Paul and Mark, great report. Glad to see that the new team has continued the tradition of the former team. So that's all shareholders have to like that. I'd just like to know if there's any comment relative to contango ore that you could reveal? Yes, Jim, nice to hear from you. Certainly appreciate all you've done for me over the years. So with Peak and with contango, COVID-nineteen has kind of put us on the back foot a little bit. We've had to be very mindful of the health conditions in the state. Beginning part of this year, I think the state was actually closed. We really couldn't do much. And we have to be really mindful with the village and take care of the community there. So there really hasn't been much going on. Strategically, we're it's consistent with what we've always said. It is non core. We're not going to build it. We're not going to operate it. And we'll look for the right time the opportune time to exit that investment. Okay. Well then as a follow-up, not for that particular property, but anything on Pascallama? Yes. I think with Randgold coming in, with Mark Bristow coming in, I'm encouraged. He seems to have breathed, put new breath into that project. With that being said, I think one of the things Barrick has said is that they're almost going back to square 1. They're going to go back and effectively, to my understanding, rebuild the geologic model and take a really fresh look at the project. So that's going to delay it a little bit. But I think the new management is really they're taking a more serious look, if you will, as to what to do there. Mark, I don't know if there's anything else you'd like to add to that? No, I think you've given a good description. Well, I certainly realize those 2 are long term projects and potentials and it's every now and then, I like to just hear if there's any upgrades. So that's super. I appreciate your comments. All right. Thanks, Jim. Our next question will come from Tanya Jakusconek with Scotiabank. Please go ahead. Yes. Good morning, everybody. I just wanted to circle back on the M and A opportunities that you're seeing out there. On your Q3 call, you mentioned that you were seeing opportunities from base metal operators, so streams from base metal operators in the $100,000,000 to $500,000,000 range with most of them available at the upper end. Has that changed? Ken, good afternoon. Thanks for the question. The one thing we don't get to do a lot here is let Dan Breeze talk a little bit about his area of expertise. So, Dan, can I turn that over to you? Yes. Thanks. Well, hi, Tanya. Thanks for the question. I hope you're well. Hi, Dan. Hi, Dan. You too. Yes. Look, the environment is really quite good for us right now. And you've heard from Paul about our balance sheet strength and cash generation. So we feel very good right now. And you're right, what's happening with the precious metals right now, there have obviously strengthened versus base metals. And so there are certain opportunities that we're starting to see now where those byproducts are looking to potentially get monetized in some way. So it's been interesting for us to look at those. We're obviously being very disciplined right now on that front. And I think the other part that we're seeing more of right now is in this higher price environment is projects starting to move forward and looking for financing as well, earlier stage projects. So we're encouraged by that development as well. In terms of the size, yes, the $100,000,000 to $500,000,000 range still holds. Obviously, that's the real sweet spot for us here at Royal Gold, just given our size versus the peer group. So that's great for us to see. There are some that maybe are a little bit bigger than that, but that's really where the focus is right now in that range. Hopefully that helps you. Okay. And what about completing your technical due diligence because of the current travel restrictions? How are you getting around that in terms of doing that technical due diligence? Has that opened up since Q3? Yes. I'm going to defer that over to Mark to speak to, but we certainly are finding creative ways to get things done on the desktop and remotely. But Mark, do you want to add some comments there? Yes, I can give a few comments. It's a good question and we've spent a lot of effort trying to figure out how we can effectively do it and get comfortable that we're getting the same experience that we would on a site visit, which is difficult to do as you might expect. But we've worked on, I think, 3 projects now where we've done things remotely. And we're using 3rd party video tools where possible. We've used drone photography to help us out to get a better picture of site. We're using interactive geological tools to create virtual course shed visits, which frankly has turned out exceptionally well. And we'll certainly use tools we're developing now on due diligence going forward regardless of COVID-nineteen. So, I think we're being successful at doing it. We have yet to go to the Board yet and get their blessing on it. But I feel very confident that we put up a very strong case with virtual diligence, not but it is very project specific. And are you seeing travel restrictions being lifted in areas that you're interested in or is it still pretty much locked down? Yes, we're pretty much still seeing things locked down and we're even obviously, we try to take a visit to our existing assets on an annual basis, the larger ones. And our view is we likely won't be doing any traveling certainly for the calendar year and maybe well into next year. So we really have to be very diligent about these tools being effective. And can I ask just on, you mentioned opportunities on project starting to financing startups for projects? What about just royalty portfolios? Are those shaking out? Tanya, yes, it's Dan here again and I'll turn it over to Bill to add some comments as well. But certainly, the environment is such that we are seeing portfolios available right now. And I think it's just a function of the environment right now. So we're looking at those. We're pretty disciplined. Sometimes with these portfolios, the challenge is you try to find 1 or 2 of the core assets to really focus in on and you get a bunch of other things that you may not want. So there's a bit of a challenge there, but we're looking at those things as well. Okay. And can I just make sure that you're still focused on gold or gold and silver? Yes. We are. Yes. Are strategically, yes. Strategically, we're focused on precious metals. But as you can tell from the percentage of revenue, we're still weighted to gold and we like that. As I always say, if you're looking at 5 opportunities, some are gold, some are silver and some are base metal, we're going focus on the gold ones first and then move on, move down the list. Okay. Good luck. Thank you. Thanks for your question. Our next question will come from Carey MacRury with Canaccord Genuity. Please go ahead. Carey, your line is live. Your line may be muted on your end. Sorry about that. Good morning. Tony, last year mentioned that you guys were close to meeting the criteria being included in the S and P 500. Just given where gold prices are presumably that potentially has moved up. Just wondering if you have any thoughts on that? Yes. So I mean it is something that we have looked at very closely. As you probably know, there's not much you can do about it. We've made sure that the folks who are on the committee that make those selections know who we are. But beyond that, there is no lobbying you can do there. You can't go make a marketing presentation. You just have to make them aware of the company. I did find it interesting in the paper this morning that Barrick was thinking of moving to their primary listing at the NYSE. So I don't know what that would bring. But we've done all we can, quite frankly, and it's up to us to keep them updated as to what we're doing. But ultimately, that decision is theirs. And as of today, you meet the criteria and presumably if some names follow, that could be an opportunity? Yeah. I mean, when we look at it, we look at it on a market cap basis, but there are a number of other tests. So I don't I'm not in judge of the criteria, so I don't want to say, yes, we qualify, but we feel good about where we sit relative to eligibility. Our next question will come from Brian MacArthur with Raymond James. Please go ahead. My question comes has to do with the loss of Prestea stream structure. I'm just curious, I think this is interesting, it's being restructured. Were they 3 individual contracts there? Or how is the security set up? I mean, a little surprised they can just go sell it. And obviously, it's subject to your Board of Directors approval. But I'm just curious how that works. And it brings into the whole question of security in this industry as you set these things up. So I don't know if you can give any more color about how that's set up. Yes. So right now it's one contract. So we basically have 2 mines feeding into one contract. And what is being proposed is that we effectively separate those contracts into 2. It wouldn't change the security per se. I mean, we currently have security over the assets in both mines and where we'll ultimately get to, I think we'll be we'll still have security over both mines. So it's doable. And I will say in a lot of our streams, we often provide the operator with the ability to do things like bring a joint venture partner in where they can take over some of the obligations. So this is actually to us, it's not unusual. It's something that we contemplate in the streams all the time because these are life of mine contracts. So we have to build some flexibility for these guys to deal with changes at the mines where we have those streams. Because it's had 2 separate contracts going forward? Exactly. Okay, great. Thanks very much. I just wasn't entirely clear how that was being done. Thanks very much. Our next question will come from Kipp Kane with S&P Global Market Intelligence. Please go ahead. Yes. Thanks for taking the question. Just to circle back on M and A, are you seeing any opportunities sort of evaporate given financing markets in terms of some of the earlier stage projects are picking up? Or are you just sort of seeing all boats rising here? What's that look like? Dan, do you want to jump back in? Yes, sure. And thanks for the question. And so I'd say that, obviously the equity markets, we've seen the equity markets open up quite a lot here in the last 3 to 6 months or so. So that's obviously been something new here versus the last year or so. But we're actually quite happy to see that happen as far as the capital structure goes. These projects need equity, they need streaming, they need debt as well. So it helps the projects move forward in general. So I wouldn't say it's been a deterrent from our perspective. This concludes our question and answer session. I'd like to turn the conference back over to Bill Heisenbuttel for any closing remarks. I'd just like to thank everybody for their interest in Royal Gold, and we certainly look forward to updating you in the near future on our progress.