Earnings Call: Q2 2020

Feb 6, 2020

Good day, and welcome to the Royal Gold Fiscal 20 2nd Quarter Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Alistair Baker. Please go ahead. Thanks, Elisa. Good morning, and welcome to our discussion of Royal Gold's Q2 2020 results. This event is being webcast live, and you will be able to access a replay of the call on our website. Participating on the call today are Bill Heisenbuttel, President and CEO Mark Istow, Executive Vice President and COO Paul Libner, CFO and Treasurer Dan Breeze, Vice President, Corporate Development of RGAG and Randy Sheffman, Vice President and General Counsel. This discussion falls under the Safe Harbor provision of the Private Securities Litigation Reform Act. A discussion of the company's current risks and uncertainties is included in the Safe Harbor and cautionary statement in today's press release and slide presentation and is presented in greater detail in our filings with the SEC. Bill will give you an overview of the quarter, followed by Mark with an update on our operating results. Paul will then provide a financial update, and Bill will wrap up the call with some closing comments. We'll then open the lines for a Q and A session. Now, I'll turn the call over to Bill. Good morning and thank you for joining the call. I'll begin on Slide 4. This was another solid quarter for Royal Gold. We had a 27% increase in revenue to a record quarterly figure of $124,000,000 which was attributable to higher volume, up 5% from last year's quarter to 83,500 gold equivalent ounces and much higher average realized precious metal prices. Earnings for the quarter were a healthy $41,300,000 or $0.63 per share. We saw strong operating cash flow of $78,000,000 and we were able to make our initial $66,000,000 advance at Comacao, pay our quarterly dividend and reduce our revolving credit balance without any significant change in our available liquidity. At the end of December, we had $865,000,000 of capacity on the revolver available and combined with working capital, we had approximately of liquidity for new business opportunities. We saw positive developments at Andacollo at the end of a workers' strike and the signing of a new labor contract and the end of the blockade at Penasquito. We also saw operational improvements at Mount Milligan, which were announced at the end of Centerra's Q3 and Rainy River, which saw gains over the course of calendar 2019. Finally, construction continued to progress at Comacao and we made a second payment of $22,000,000 yesterday. Mark will bring you up to speed on that project and a few other notable properties. I would like to note that this is the one reporting period in which we are reporting a quarter end while our key operators are working on a full year disclosure timetable. If our comments appear somewhat less detailed, it is due to the fact that our operators have yet to disclose their year end operating results. I would like to welcome Paul to our quarterly call, his first as a participant in his 15 years with Royal Gold. But first, I'll hand the call over to Mark. Thanks, Bill. On Slide 5, I'd like to start with an update on the Khoemacau project in Botswana, currently under development by Khoemacau Copper or KCM, a subsidiary of Cupra Canyon Capital. Construction activity continued to advance nicely with more than 1600 people working on-site, up from the 800 reported at the end of September, and progress made over the past quarter is very evident, with construction completion estimated at 26% and 77% of the capital committed. KCM is continuing to target 1st concentrate shipments in mid-twenty 21. Our engineer visited the project site for the quarterly review prior to making our second payment. Construction is focused on 4 main areas: finalizing the box cut excavations in preparation for underground development construction of the 35 kilometer access road between the ore body at Zone 5 and the Bassetto Mill, advancing the Zone 5 infrastructure and starting the Bassetto Mill refurbishment work. The initial underground mining fleet, some of which are shown in the photo, has arrived at site in Barmico, the mining contractor is actively commissioning the equipment and preparing to start mine development. Turning to Slide 6, the central box cut shown in the left photo is scheduled for handover to Barminco in early February, followed by the south box cut and then the north box cut. The handover schedule has been slightly delayed since our last call due to slower than anticipated excavation advance. However, the project overall schedule remains unchanged. The access road between Bassettto and Zone 5 shown in the right hand photo has reduced travel time across the project site from over 90 minutes to 35 minutes. The ore haul road will be adjacent to this access road and construction is underway. Turning to Slide 7, you can see some of the progress on the infrastructure at Zone 5, which is focused on workshops, accommodation, power, water and sewage. The large photo on the left is an aerial view of the Zone 5 with accommodation units in the foreground, the mine office and change houses in the background towards the upper right. The photo on the top right side of the slide shows the mining contractors workshop. In the bottom right photo, you can see diesel gensets which are providing temporary power for all infrastructure until grid power is connected later in the first half of this year. Turning to Slide 8, you can see a photo of the Poseto processing plant where refurbishment work has started. Since our last quarterly call, initial deliveries of mechanical equipment have been received and the mechanical contractor started work. The civil contractor for the plant refurbishment is also mobilizing to site. We're pleased to see the progress KCM is making on the project and look forward to giving you updates in our quarterly call. Turning to Slide 9, I'd like to discuss some recent developments at several of our other key properties starting with Mount Milligan and Rainy River. At Mount Milligan, total stream sales were higher than the prior quarter due to a significantly higher copper contribution. Deliveries of both gold and copper for the quarter were strong and significantly higher than a year ago, driven by the timing of concentrate shipments. Centerra reported that work continues on the preparation of an updated 40three-1 101 technical report, which will incorporate changes due to long term gold recoveries, operating cost, optimization studies and exploration drilling. Although Centerra has not yet provided a specific date for publication of this report, we look forward to reviewing the report when it is available to understand any potential impacts to the carrying value of our stream interests. As a reminder, our depreciation rates for our Mount Milligan stream investments are $402 per ounce of gold $0.81 per pound of copper. At Rainy River, New Gold reported gold production for the calendar year of 253,800 ounces within the annual guidance range of 245,000 to 270,000 ounces. Mill throughput for the quarter averaged 22,500 tons per day and for November December averaged 25,000 tons per day, which exceeded both the target of 24,000 tons per day and the original design of 21,000 tons per day. Gold recovery was within line within plan at 91% for the quarter. The increased throughput was offset by expected mining of lower grade material as the operation moved into Phase 2 of the mine plan. New Gold reported that it is advancing the Rainy River Optimization Study and expects to release the results on February 13. We will review these results to understand the impact of changes to the mine plan on our stream investment and update the market accordingly. Depreciation rates for our stream investments at Rainy River are $5.91 per ounce of gold and $6.34 per ounce of silver. Moving on to Slide 10, I will provide some comments on Andacollo and Penasquito, where we saw some positive developments during the quarter. At Andacollo, we were pleased to see operations restart on December 5 after a new 36 month collective agreement was reached between Teck and the Workers Union. As a reminder, the operations were suspended for about 8 weeks from October 14 due to strike action by the workers union. We expect the strike impact to be reflected in our fiscal Q4 as we generally receive gold deliveries from Andacollo within 6 months of concentrate shipment. We were also pleased to see the positive developments at Penasquito with the immediate shipment of concentrate after the blockade was lifted on October 8 and a restart of operations on October 22. Newmont reported that dialogue with the trucking contractor and members of the Cedros community was continuing after the blockade was lifted. And on December 13, Newmont announced a 30 year agreement had been reached with the Cedros community to address concerns with sustainable water availability. While we understand there are some remaining issues resolve with the community, Newmont believes that this agreement is a significant milestone and an important step in the ongoing negotiations between the parties. Gold, silver and lead production attributed to our royalty interest at Penasquito was up significantly over the prior year quarter, offset slightly by gold or zinc production as a result of increased grades from the Penasco pit. For calendar 2020, Newmont expects a full year of operations at Penasquito with higher grades leading to production of 575,000 ounces of gold, 30,000,000 ounces of silver, 425,000,000 pounds of zinc and 200,000,000 pounds lead. This level of gold production would be the highest they've experienced since 2015. I'll now turn the call over to Paul to discuss our financial results. Thanks, Mark. I'll turn your attention to Slide 11 and provide an overview of the financial results for the quarter. For purposes of this discussion, I will be comparing the Q2 fiscal 2020 to the prior year quarter. As Bill mentioned at the beginning of the call, we had record revenue this quarter of $123,600,000 on volume of 83,500 gold equivalent ounces or GEOs. GEOs were approximately 5% higher year on year and the most significant reason for the change was higher sales from Andicoil, primarily due to shipment timing. This increase was partially offset by lower royalty revenue, mainly from Cortez. As we announced at the beginning of January, stream segment volume for the quarter of 60,000 GEOs was in line with the expectations discussed during our last earnings call in November. Metal prices had a positive effect as gold and silver were up 21% 19%, respectively, while copper was down 5% year on year. Gold accounted for 74% of our revenue for the current quarter, which was comparable to the prior year quarter. During the quarter, we did see a higher percentage of revenue attributable to copper, which was due to higher copper sales from Mount Milligan. G and A expense for the quarter was $6,700,000 down slightly from $7,400,000 in the prior year quarter. Our G and A expense each quarter includes non cash compensation expense and generally averages $1,500,000 to $2,000,000 per quarter. As a result of recent retirements, we anticipate incurring additional non cash compensation expense during our March quarter of approximately $3,000,000 to $4,000,000 Our DD and A expense for the quarter was $40,100,000 or $4.80 per GEO. We still expect full fiscal year 2020 DD and A to range between $4.50 $500 per GEO. Although a change to the reserves at either Mount Milligan or Reene River could impact our depletion rates. If there are significant reserve updates at either Mount Milligan or Reene River, we may update this range later in the fiscal year once additional information is available. Earnings were $41,300,000 or 0.6 $3 per share, up 75% compared to the prior year quarter. We did not have any significant mark to market changes to the value of our equity holdings during the quarter. With respect to our effective tax rate, we continue to expect our full year fiscal 2020 effective tax rate, absent any unusual items, to be in the range of 19% to 23%. Cash from operations was approximately $78,300,000 up significantly from the prior quarter and mostly due to higher revenue. At the end of December, we held approximately 39,000 GEOs in inventory, excuse me, which was higher than the guidance range provided during our last quarterly call. The increase was primarily due to deliveries from Mount Milligan and Andicoil that were received earlier than previously expected. Looking forward, we anticipate Stream segment sales for the March quarter to be similar to the guidance we provided last quarter, which is 60,000 to 65,000 GEOs and inventories for the quarter and to be in the range of 30,000 to 35,000 GEOs. I'll now turn to Slide 12 and provide a summary of our financial position. Our liquidity remains strong and we ended December with cash flow of almost $81,000,000 and working capital of $92,000,000 During the quarter, we paid down $35,000,000 on our revolver and our only outstanding debt is the $135,000,000 drawn on this facility. The $865,000,000 remaining undrawn on this facility combined with our working capital provided approximately $1,000,000,000 of total liquidity at the end of December. During the quarter, we made our initial contribution of $66,000,000 towards the Khoemacau project development. And after the $22,000,000 contribution we made yesterday, we expect to make further contributions of approximately $103,000,000 in calendar 2020. In calendar 2021, our remaining contribution will be between $21,000,000 $74,000,000 depending on whether KCM exercises its option to increase the size of the advance payment from $212,000,000 to $265,000,000 We expect all these remaining payments to be made on a quarterly basis in proportion to the total capital spend at the project, and we anticipate making these payments from our available cash resources. That concludes my comments on our financial performance for the quarter. I'll now turn the call back to Bill for closing comments. Thanks, Paul. In addition to the solid financial and operating performance for the quarter, we also experienced a seamless transition to a new generation of leadership with the appointment of some new members to the management team. Although some may still be new names to you, they have all been with the company for many years and have been integral in the development and execution of our strategy. As a team, we work well together and our day to day approach has been the same these past few weeks as it was for the past several years. I've also spent some time traveling and meeting with shareholders, analysts and other stakeholders recently. And my key message in all those discussions is that our strategy is proven and well established and I don't intend to change direction. My priority is to continue to build on our success, which means seeking out disciplined growth opportunities in precious metals with a focus on gold and measuring that success on a per share basis. I'm confident we have the right team in place to continue executing our strategy. And for any of those of you on the line who aren't familiar with the team, we look forward to meeting with you over the coming months. Operator, that concludes our prepared remarks. I'll now open the line for questions. Thank you. We will now begin the question and answer session. The first question comes from Adam Graf of B. Riley FBR. Please go ahead. Thank you. Just a quick question regarding Mount Milligan and Rainy River. So I understand that there's a study ongoing by Centerra at Mount Milligan. Is there a similar study ongoing on Rainy River? And if the underlying operators take reserve numbers down significantly, I presume that, that will also be a significant impairment to them. And would that also correspond to similar proportional impairment on those assets to on the carrying value of those assets to you guys? Yes. So Adam, the first part of your question, yes, Rainy River, New Gold is conducting a new technical report on Rainy River and they have announced that they are going to release the results of that study on February 13. So we look that's the one date that we do know. I think when Mount Milligan Centerra has already taken an impairment at Mount Milligan. They did that at the end of October. At that point, I think they said their technical report would be done in the coming months. So we don't we have less certainty in terms of a timetable. With respect to the second part of your question, in terms of impairments, an impairment by an operator does not directly result in an impairment with respect to our interest. We're going to wait for the data to be released. We will analyze that data. Our impairment analysis starts with an undiscounted valuation of our position using the new mine plan. But beyond that, at this point, we really can't comment on whether or not there will be impairment. We need the the reserve the reserve the new reserves and new mine plan outlined by both Mount Milligan and Rainy River. Are you required to also use the same metal price assumptions that the underlying operators are assuming? Paul, do you want to answer that? Yes. No. So the company's policy is generally to use consensus prices. So the operator may use a different methodology, but as part of our analysis, we will look to consensus prices. So just in regard to that, if you're using a different price deck, it's effectively it could be the underlying operator if they were using that same price deck would have a different mine plan. I'm trying to understand how you would reconcile using potentially a different price deck versus the underlying operator that generated the mine plan that you're going to be using. Yes. And I don't think consensus pricing and what operators are currently using in the market are all that different. I think what Paul is saying is that our policy is to use consensus pricing and the operators forecast. I can't imagine a situation where the prices are so different that the mine plans end up being so different that we come up with the wrong analysis. Thank you. Thank you. The next question comes from Tanya Jakusconek of Scotiabank. Please go ahead. I wanted to ask you, Bill, just on and thank you for your comments on the strategy portion. Definitely wanted to discuss the gold focus. With this higher gold price scenario, again, what sort of opportunities are we seeing in the market, maybe sort of size, deal type, that would be great? Sure. Size and deal type really hasn't changed much in the last quarter. I still think you're going to see most of the transactions somewhere between $200,000,000 $500,000,000 I think in terms of the use of proceeds that you're going to see, you will probably see a bit more project development and perhaps a bit more M and A. Obviously, I don't think you're going to get a lot of balance sheet restructurings at these prices. And one of the things that I'm pleased with is that when we were doing a number of transactions a few years ago, we actually did a number of gold streams on gold properties. So we've proven that you can use this product even though you may be streaming the primary metal. So I think the gold price going up will be beneficial to the number of opportunities we see. Okay. And then another question just on Crossroads and we appreciate that Barrick has yet to report. We just noticed that Crossroads was a small contributor to your production profile in calendar 2019. Do you expect significant production uptick from Crossroads for the remainder of fiscal 2020? Well, we should see a new life of mine plan at the end of this quarter. We usually get it at late March or early April, which would be our next information point. We would anticipate and we have anticipated that production would continue to increase, although it may be lumpy in its profile. So seeing up and down between quarters at this point, I think would be what we would expect, But we can't really provide any more information until we get the new Lifeline plan for next quarter. Tanya, I know we frustrated you a little bit with that request, but I think hopefully by the next quarterly call, we may have something to talk about. Okay. I appreciate that. Great. Thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Bill Heidenbuttel for any closing remarks. Thanks, operator, and thanks, everyone, for taking the time to join us today. We appreciate your interest, your continued support of Royal Gold, and we look forward to updating you on our progress during our next quarterly call. Thank you.