Earnings Call: Q2 2019

Feb 7, 2019

Good day, ladies and gentlemen, and welcome to the Royal Gold Fiscal 2019 Second 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. At this time, I would like to turn the conference over to Alistair Baker, Director of Business Development. Please go ahead. Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's Q2 2019 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 Tony Jensen, President and CEO Bill Heisenbuttel, CFO and Vice President, Strategy Mark Gistow, Vice President, Operations and Bruce Kerkhoff, Vice President, General Counsel and Secretary. This discussion falls under the Safe Harbor provision of the Private Securities Litigation Reform Act. A discussion of the 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. Tony will give you an overview of the quarter, followed by Mark with an update on our operating results, Bill will then provide a financial update, and Tony will close out the call with some commentary on the current market environment. We'll then open the lines for a Q and A session. Now I will turn the call over to Tony. Thanks, Alistair. Good morning, everyone, and thank you for joining the call. I'll begin on Slide 4. Our revenue for the quarter was $97,600,000 down slightly from our previous September quarter of $100,000,000 Volumes were down slightly over the same period by about 3%, which is consistent with the guidance we provided in our last quarterly call. Metal prices were roughly in line with the quarter with the last quarter, with realized gold and copper prices up 1% and silver prices down 3%. Earnings for the quarter were $0.36 per share, which included a tax benefit of approximately $6,000,000 and a loss of $3,600,000 due to the mark to market on the value of equity securities. Phil will provide further details on these items in his remarks. Operating cash flow was $59,000,000 which comfortably allowed the payment of another $16,400,000 in dividends during the quarter. Consistent with previous years, our Board announced on November 13 that the dividend was increased from $1 to $1.06 per share for the calendar quarter of calendar year. Paying a growing sustainable dividend is one of our key strategic objectives at Royal Gold, and this increase continues our record of consistently raising our dividend since it was initially introduced in 2000. We have now returned approximately $460,000,000 to shareholders in the form of dividends over the same period. We are also continuing to strengthen our balance sheet during the quarter. With working capital of $167,000,000 and an undrawn revolving credit facility of $1,000,000,000 we now have approximately $1,200,000,000 of total liquidity and are well positioned for new investment opportunities. On Slide 5, I'd like to take a few minutes to give you an update on the Peak Gold project. As a reminder, this is the project that we've been working on in the Santina Gold Belt near Tok, Alaska, with our joint venture partner, Contango ORE. We own 40% and manage the joint venture, and Contango owns 60%. Last quarter, I gave some highlights of the preliminary economic assessment results we released in September and commented that with the PEA behind us, we would now turn our focus to maximizing the value of our interest in the project. The PEA gives an excellent starting point for the definition of the project, but a significant commitment will be required from here to advance the technical and permitting work to realize the full value of the project and the extensive property package. We believe that Peak Gold, with its relatively high grade and low cost, is a very attractive opportunity for an operating company to advance. As we consider our next steps and potentially bringing in a new partner, we would ideally like to convert our interest in the project to something that is closer in line with our core business, which could mean taking partial consideration for our interest in some form of stream on this or another asset in a new partner's portfolio. Remember that we already hold a royalty on the underlying ground. So an important consideration will be to make sure that any new partner will dedicate the resources to advance the project as a priority. We are also very cognizant of the importance of this project to the local community, a responsible development plan will be a key consideration before a change in management occurs. Scotiabank has been retained to assist in identifying interested parties in advancing Peak Gold. We expect that the process will continue over the next several months and will further will provide further updates as and when we are able. Now I'll turn the call over to Mark for a discussion on our operating results. Thanks, Tony. Starting on Slide 6, I'd like to discuss some of our recent developments at several of our operating key properties. At Mount Milligan, 2018 production was very good considering the constraints on water throughput constraints on throughput caused by water restrictions. Gold and copper production for calendar year 2018 achieved the high end of the revised guidance published in August. And gold production was 195,000 ounces compared to the guidance range of 175,000 to 195,000 ounces. And copper production was £147,100,000 compared to the guidance range of £40,000,000 to £47,000,000 During the December quarter, production from Mount Milligan was 60,000 ounces of gold and £11,800,000 of copper. Sufficient water supply has been an issue at Mount Milligan for several quarters. The operation was designed to use surface water runoff for makeup process water. But during the past 3 years, this area, British Columbia, has seen precipitation levels that are about half of what long term records indicate. As a result, process water has been in short supply in the past couple of years. As you can see on the graph at the bottom of the slide, quarterly average throughput has suffered since late 2017 when the issue became apparent. With respect to water sourcing and associated permitting activities at Mount Milligan, Centerra has reported that permitting applications process to draw additional flow during the spring melt period for the next 3 years from each of Philip Lake, Rainbow Creek and Meadow Creek. If these applications are approved, Centerra plans to store this additional water in the tailings facility for use during the remainder of the year, which will allow operations to continue at full capacity. In addition to this strategy, which is intended to bridge the need in the medium term, Centerra is also completing a regional water inventory to identify other long term sources that could provide additional water through the end of the mine life. For calendar year 2019, mill throughput at Mount Milligan is expected to be reduced during the remainder of the winter season to properly manage the water balance until water flows increase in the spring. Once the spring melt has commenced, which typically occurs in April, mill throughput levels are expected to return to full capacity. The second half of calendar twenty nineteen, Centerra expects to achieve an average throughput of approximately 55,000 tonnes per day. For the full calendar year, Centerra expects Mount Milligan's total payable gold production to be in the range of 155,000 to 175,000 ounces and payable copper production to be in the range of £65,000,000 to £75,000,000 Note that while the gold production guidance is lower than actual calendar 2018 production and copper production guidance is higher, Using current gold and copper prices and the midpoint of the 2019 guidance, net revenue to us for our gold and silver streams at Mount Milligan would be slightly higher than calendar 2018. Moving on to Slide 7, I'd like to provide some comments on Rainy River and Penasquito. At Rainy River, ramp up efforts by the new management team are continuing with good progress achieved through 2018. The December quarter was very good with mill throughput reaching a run rate of almost 26,000 tons per day, which is the 1st full quarter in which the mill averaged part to a 10 day suspension for mill repairs, which brought the average throughput down to 21,000 tonnes per calendar day. The higher run rate demonstrates good progress. In addition to the higher throughput, we saw higher grade for the quarter at 1.42 grams per tonne. All this contributed to a strong gold production, which was up 39% from the previous quarter to 77,000 ounces and full calendar year production of 227,000 ounces. As management has been improving the performance of the open pit, New Gold has decided to defer the underground development plan to 2020 and spend this calendar year reviewing the underground development scenarios. Turning to Penasquito, 1st gold production from the Pyrite Leach Project on November 29 and commercial production was achieved shortly thereafter in December. We are very pleased to see this project completed ahead of schedule as it is expected to recover approximately 35% of the gold and 42% of the silver currently reporting to tailings, which is expected to add 1,000,000 ounces of gold and 44,000,000 ounces of silver over the remaining life of mine. All of this additional production is subject to our 2% NSR. With respect to production, Goldcorp processed higher carbonaceous ore in December quarter from the Chile, Colorado pit, which had some negative impacts on gold recovery. During calendar 2019, Goldcorp expects grades and recoveries to improve as the mine benefits from the completion of the multiyear waste stripping campaign in the Penasco pit as well as a full year of production from the Pyrite leach plant. Finally, we're pleased to see that the combined Newmont Goldcorp has identified Penasquito as a core asset in the portfolio of the merged company. Penasquito is a significant asset in our portfolio and it's great to know it will continue to be managed by a strong operator. I'd like to wrap up on Slide number 8 with a few short comments on some of the other key development stories in our portfolio. At Barrick's Cortez mine, production to us was approximately 20% lower in the December quarter compared to the prior year quarter because of lower production subject to our royalty. We expect to see increased production from Crossroads as waste stripping advances through 2019. We expect to receive a Crossroads production profile update during the March quarter and should be in a position to share that with you on the next quarterly conference call. Turning to Barrick's Pueblo Viejo mine, gold production was lower this past quarter compared to a year ago due to lower grade and recovery, in part caused in part by higher organic carbon in the ore. While this lower production was disappointing, the main story at this operation is the growth potential resulting from the pre feasibility study currently underway for the combined expansion project, which includes the pre oxidation heap leach pad, a new mill and flotation concentrator and additional tailings capacity. On a 100% basis, Barrick expects that this project could increase throughput by 50% to 12,000,000 tonnes per year, allowing the mine to maintain an average gold production of approximately 800,000 ounces after 2022. This project has the potential to convert roughly 7,000,000 ounces of measured and indicated resources to proven and probable reserves. We look forward to hearing updates from Barrick on the progress of the pre feasibility study work underway. Finally, at Golden Star's Wassa mine in Ghana, operations continue to perform well. Wassa produced 150,000 ounces of gold in calendar 2018 and Golden Star is expecting calendar 2019 production of 170,000 to 180,000 ounces, which is 13% to 20% higher than the 2018 production level. The milling rate is expected to increase in calendar 2019 from 3,500 tonnes a day to a target of 4,000 tonnes per day in calendar 2020, and capital has been allocated to upgrade infrastructure and complete additional delineation and stope drilling. Deep drilling at Wassa is continuing to show positive results and a PEA on the optimal long term development is expected in the second half of twenty nineteen. Although the bulk of the upside we've seen from our Golden Star investment has been from Wassa, improvements at Prestea in raised development, long hole drilling and blasting productivities are expected to continue, supporting an increased production rate in calendar 2019. During the December quarter, the Planet Prestea was converted to a low tonnage, high grade configuration, allowing efficient processing of this target mining rate. I spent the last week in Ghana with Golden Star and was impressed by the progress being made at Wassa. I was also encouraged by the work being done, being undertaken at Father Brown. As you may remember, this is a high grade surface ore feed from Wassa in the past and Golden Star is evaluating the opportunity to supplement the Wassa Mill with underground feed from Father Brown. The Wassa Mill has an installed capacity of 7,500 tonnes per day compared to the 2019 target feed rate of only 3,500 tonnes per day. I will now turn the call over to Bill to discuss our financial results. Thanks, Mark. I'll turn your attention to Slide 9. As Tony mentioned at the beginning of his remarks, revenue this quarter was 97 point $6,000,000 on volume of 79,600 gold equivalent ounces. This volume was in line with our expectations as we discussed during our fiscal Q1 conference call. Earnings were $23,500,000 down from adjusted earnings of $28,000,000 in the second quarter of the last fiscal year, although there were a number of specific items related to the new tax law that impacted both quarters. With respect to volume, we saw GEOs decline 11% in fiscal Q2 relative to the same period last year. Volumes were impacted by lower gold stream sales from Andacollo and Pueblo Viejo, which were partially offset by higher gold and copper sales from Mount Milligan and improved contribution from Rainy River. We also saw a reduction in royalty revenue due to lower production at Penasquito and Cortez, which was partially offset by $2,500,000 of royalty revenue this quarter from Voisey's Bay. This is the 3rd quarter for which we received a royalty contribution from Voisey's Bay. Metal prices had a negative effect and were down across the board, with gold down 4%, silver down 13% and copper down 9% year on year. With respect to certain items of note, we experienced 2 this quarter. The first is related to tax. In this quarter, we experienced a benefit of approximately $6,000,000 or $0.09 a share due to additional utilizable foreign tax credits resulting from U. S. Tax reform. While we had previously estimated taxes payable under the new tax law, we, like all other U. S. Taxpayers, needed additional regulations from the IRS in order to fully reflect its impact. We were able to recognize that impact with respect to foreign tax credits this past quarter. While we don't expect any further material impacts, many aspects of the law remain unclear, so further guidance received from the authorities could cause some additional adjustments to our tax calculation. We now expect our full year tax rate will be in the range of 18% to 22%, down from the 23% to 27% range we provided last quarter. With respect to the 2nd item of note this quarter, we had a $3,600,000 loss or $0.045 a share net of tax as a result of the mark to market movements in the equity positions we hold. We have previously discussed the new accounting standard for the recognition and measurement of financial instruments we adopted on July 1, 2018 that gives rise to this income statement impact. Continued volatility from this standard can be expected in the future to the extent we continue to hold these positions. We always like to remind you that our low share count makes relatively small earnings changes appear more significant on a per share basis. G and A expense for the quarter was $7,400,000 down from $9,600,000 the prior year quarter and $9,900,000 in the 1st fiscal quarter of 2019. The reduced G and A spend experience this quarter is more in line with typical levels as it does not include the high levels of spending associated with the Vale litigation, the most significant contributor to the higher G and A in the previous quarters. Our DD and A expense for the quarter was $38,800,000 or $4.88 per gold equivalent ounce, which was a $3,200,000 decrease over the prior year quarter, reflecting our lower GEO volumes. Our cash from operations was approximately $59,000,000 down from $76,000,000 from the prior year quarter, directly related to the lower volumes and prices and higher cash taxes paid during the period. At the end of December, we held approximately 25,000 gold equivalent ounces in inventory. We expect sales for the current quarter to be on the order of 5% higher with a modest pull on our metal inventory levels. I'll now turn to Slide 10 and finish my comments with a summary of our financial position. Our liquidity position continued to strengthen over the quarter. We ended December with cash of $157,000,000 approximately $40,000,000 higher than the end of the September quarter, and we had working capital of $167,000,000 These figures, coupled with our undrawn $1,000,000,000 revolving credit facility, provide us with total liquidity of almost $1,200,000,000 Our only indebtedness is the $370,000,000 of convertible bonds, which mature on June 15, 2019. We have available and still plan to use cash on hand and our revolving credit facility to repay the notes at maturity. I'll now turn the call back over to Tony. Thanks, Bill and Mark, both of whom are fighting some pretty serious colds. So thanks for fighting through that. I'll conclude on Slide 11 following on Bill's last comment about our liquidity and strong financial position and what that means to us in today's market. We often say that there are 3 ways that new business opportunities come to us. The first is through balance sheet restructuring, the second is through financing of development projects and the third is through financing M and Real Gold has been active in all of these areas at different times in our history, and opportunities will present themselves from each of these sources at different times and frequencies depending on the market environment. We were extremely busy in the 2014 period, helping to refinance balance sheets, but the industry is now much better capitalized and balance sheet restructuring is not a major source of new business today. More recently, many of the opportunities we've been working on have been financing development projects, which is the second source of new business opportunities. With the continued growth in the trend of passive investing and generally negative investor sentiment towards the mining industry, there has been a lack of new equity in the sector, which has typically been a major source of financing for new projects. The cost of debt has also been rising, and many companies are hesitant to use debt financing given recent history. As a result, we have been very busy working to try to fill the gap by providing capital to project development opportunities, which are typically smaller transactions than what we saw in the 2014 to 2016 period. With respect to the 3rd source of new business, M and A, we're seeing some very interesting business opportunities given the state of play of the mining market. Firstly, the consolidation we've seen among the largest companies in the gold sector will present opportunities for us to provide cash financing to bidders who are interested in acquiring non core assets spun out from the larger merged entities. I see some very interesting parallels to what we saw happen a few years ago in Australia, where the gold industry was reborn by buyers of noncore assets, who are able to see the potential to reinvest in those assets. Examples would be Northern Star and Evolution, who grew into multibillion dollar market cap companies by acquiring, recapitalizing and rejuvenating assets that major gold companies had defined as being too small and mature to maintain in their portfolios. The second interesting thing about today's environment is that market valuations have reached levels we've never seen before. And we are busy working on ways to take advantage of what we think is a disconnect of fundamental asset values in a world where precious metal assets are in short supply. Regardless of where the opportunities come from, we have been patiently building our financial capacity and are well positioned to take a leading role in any opportunities when we see the potential to add high quality investments to our portfolio. Our cash and access to capital are valuable differentiators for us as we consider new opportunities. Operator, that concludes our prepared remarks, and we'd be grateful for some opportunities to answer questions. The first question is from Josh Wolfson of Desjardins. Please go ahead. Thanks. First quick question on Voisey's Bay. The revenue that we saw in the Q4, is that something we should expect roughly going forward with the new agreements? Josh, I think that's a pretty good run rate. That's a very stable operation. We don't expect major variances from the production itself. The only variance that, of course, we're not in control of would be the nickel price. Right. I won't hold you accountable for those changes. And I guess bigger question on the Peak Gold JV. I understand there's obviously a lot of conversations that are happening that are confidential. But maybe just bigger picture, our understanding is that Royal Gold is interested in streams, but given its stake in the asset level, its interest in contango as well as having royalties, it would seem to be the interest that would be too large to convert to just a stream. So in the conversations that are happening, are there any sort of disclosures or information you can provide on how the company would resolve that or what its best sort of outlook would be there? Thanks for the question, Josh. And we are, at this point, coming to the market with contango as well. So they also are part of our market test. And we'll see whether this is the right time to monetize our asset or not. Only the market will tell us that. But we think that it should be quite valuable. And certainly, the consideration that Contango might want and what we might want are different things. But let me just speak to the Royal Gold side of that discussion. And let's not limit ourselves to potential compensation to just Peak Gold. Perhaps there's another asset in the portfolio of an acquiring company that we might be able to obtain a stream upon as well. And I kind of like that strategy, obviously self serving because it puts us over the core part of our business. But it also allows the acquiring company to pay for the acquisition over time out of the production of another asset and not simply transfer a whole bunch of cash to us on day 1. So we don't know if we're going to be successful in that strategy. We think it makes sense, and we're hopeful that it will make sense to some of the parties that are looking at the The next question is from Alex Hunchak of CIBC. Please go ahead. Hi, guys. I was wondering if you could just remind me the timeline on those permits that Centerra is waiting for right now. And I'm assuming that they don't apply to the sort of April of this year ramp up, but that they are kind of needed for next year to avoid having to ramp back down again. Is that right? Thanks, Alex. So we understand that Centerra is expecting the ability to increase the flow rate at the sources they already have, Philip Light, Rainbow Creek and Meadows Creek. And we expect that, we understand that they expect the permits to come before the spring melt, which is absolutely crucial and allow them to capture more of that spring melt to retain it into the tailings facility. So that's what I can tell you on the permit side. On the I think your question on Part 2 was a bit around production. But let me just say that in the guidance that Mark gave you, the lower first quarter production, I believe, at 30,000 tonnes per calendar day, it was incorporated into that production schedule. So if they're able to do better than that, obviously, that would be a benefit to the guidance they put out already. Alex, is that responsive to both parts of your question? I think that covers that. I'll take that. That's great. Thanks a lot. Thank you. The next question is from Tanya Jakusconek of Scotiabank. Please go ahead. Good morning, gentlemen. Great. Good morning, gentlemen. I have two questions and one of them is just a clarification just so that I understand. Just on the guidance that was provided for fiscal Q3, I just want to make sure that I understood it. It's going to be about 5% higher than fiscal Q2 on your stream sales. Was that what you said? That's correct. And modest pull on the inventory levels, is that on all three inventories? We think of the inventories in gold equivalent ounces. We don't separate it by metal. Okay. Okay. That takes care of that one. And then just maybe coming back to the M and A environment, and this one's for you, Tony, or whoever wants to take this question. I mean, there's a lot of assets out there now for sale. And obviously, lots can happen there. But just from yourself, when you look at your 3rd option of financing M and A transactions, perhaps just a little bit about is there a certain level of geopolitical risk that you are looking at? So for example, perhaps you don't want more exposure to Africa or are you looking at streams over royalties? Some of these assets may not be able to take on the streams or maybe there are some. So maybe a little bit more on your strategy there. Yes, Tanya, thanks for the question. So we very much will not compromise our three pillars of due diligence where we look at the project itself and the quality and can it sustain a stream. We often look at that project from the operator's perspective, and we don't want our stream to push the project up into the 4th quartile. And so that's just a very basic guidance that we do in any acquisition. The second pillar would be the people and making sure that we have a very comfortable operating team and capable operating team to manage the asset. And then finally would be the place. And always going to be guided by our geopolitical risk appetite and being able to get comfortable wherever the asset's at. And those may be any one of those may be a showstopper for us in investing in a project. And when they all 3 come together, then that's a recipe for investment for us. So we won't cross any I think you've been with us long enough to know the areas that we're comfortable in. There are certain countries in Africa that we're comfortable operating in. We're very much comfortable up and down the Americas, with the exceptions the obvious exceptions. And certainly in Asia Pacific, there's many places there, particularly in Australia, that we would be quite comfortable doing business in. So those are a bit of bread and butter, but that's our strategy won't change as we think about this new environment. And in the new environment, Tony, are you focused mainly on gold and silver because there are some non gold assets that may be coming up for sale? Are you looking at any of those or streams on those? Yes. We very much are quite pleased to be probably the highest percentage of gold, highest percentage of precious metals on a small investment basis, could get an interest in something that is non precious metal but would very much be a decent rate of return on a long term asset, we might take a look at it. But we're not out there focusing on it. We're very much focused on the precious metals. Okay. And then I guess my last one just on the M and A. I know I ask you this almost every quarter, Tony, but sort of the size range for us, now that we have a new financing M and A sort of environment. Sort of the the last time I think we talked about most of the deals you were looking at were somewhere I think in the $200,000,000 to $300,000,000 range. What sort of range are we looking at now in this new environment? Right. I would say $200,000,000 dollars plus or minus would be probably the best guidance that I could give there. I think $300,000,000 might be a quite sizable deal in market environment. This concludes our question and answer session. I would like to turn the conference back over to Tony Jensen for closing remarks. Well, thank you for taking the time to join us. And on the call, we also have Dan Breeze, who is in our Zug office. Dan manages our international business development activities, and we're absolutely just pleased and tickled to have Dan join our team starting on the start of this year, and he's already off to an impactful start. So I look forward to Dan taking an active role on these calls in future sessions, but a big shout out and welcome to Dan to our Rogold team. With that, we thank you for your interest and we look forward to speaking again in the very near future. Bye for now. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.