Good day everyone, welcome to the Royal Gold 2018 full year and fourth quarter earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone, to withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Karli Anderson, Vice President of Investor Relations. Please go ahead.
Thanks, William. Good morning and welcome to our discussion of Royal Gold's fourth quarter and fiscal year 2018 results. This event is being webcast live, 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 Heissenbuttel, CFO and Vice President, Strategy, Mark Isto, Vice President, Operations. 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 our safe harbor and cautionary statement in today's press release and slide presentation, is presented in greater detail in our filings with the SEC. Tony will give you an overview of the quarter, followed by Bill with the financial update, then we'll open the lines for a Q&A session. Now I'll turn the call over to Tony.
Good morning, thank you for joining the call. Since this is our fiscal year-end call, some of my comments today will be more global in nature. I'll begin on slide four. Today we're pleased to report another year of record results for Royal Gold. Record revenue of $459 million was 4% higher versus last year, while the gold price was in line with the prior fiscal year. Record operating cash flow was $329 million, up 23% versus last year, reflecting continued strong performance from the portfolio of 40 operating properties. Our GEO volume was 354,000 ounces, which is slightly up from last year. We've been guiding that we are allocating our strong cash flow to dividends, debt reduction, and new business. In fiscal 2018, that emphasis has not wavered. We paid out a record $64.1 million in dividends.
We paid off our revolving credit facility in June, just as we planned. We now have over $1.1 billion of total liquidity for new opportunities. We took advantage of a relatively quiet year for industry growth to enhance our position in the Peak Gold joint venture, through an agreement to acquire 13.2% of the equity of our joint venture partner, Contango Ore. We look forward to sharing the results of our ongoing Peak Gold preliminary economic assessment with you later this fall. We also increased our interest in the Mara Rosa property in Brazil through the acquisition of a 1.75% royalty, which is in addition to our existing 1% royalty interest we hold on the property. Our balance sheet was further improved with the repayment of Golden Star's $20 million loan ahead of schedule.
It's been impressive to watch Golden Star's operational and financial transformation from a high cost open pit miner of complex refractory ores to an underground producer of high quality and cost attractive oxide ores. Royal Gold identified this potential and invested at an inflection point in Golden Star's history. On slide five, we've charted our operating cash flow over the last five years. Despite a flat gold price, Royal Gold delivered a 22% compounded annual growth rate in operating cash flow since 2014. I'd like to highlight that our share count has been essentially flat during this period, making our cash flow numbers highly accretive. This impressive growth is a function of our business development success and organic growth of our portfolio of 40 operating properties. I note that we are not yet hitting on all cylinders at Mount Milligan and Rainy River.
We expect better days for both of those assets ahead. On slide six, turning to recent developments at some of our properties. At Rainy River, New Gold announced 55,000 ounces of gold production in the June quarter, only its third quarter of full operations. As New Gold is resolving some startup operating issues, it has reduced its full year guidance at Rainy River to 210,000-250,000 ounces for calendar 2018. We continue to be encouraged that the mine has demonstrated the ability to improve both throughput, which is expected to increase to 24,000 tons per day by the fourth calendar quarter, and recovery, which increased by six points in the June quarter to 87%. New Gold's current mine plan for Rainy River compares favorably to the 2014 feasibility study, which was a starting point for our investment. Overall contained gold and silver is higher than the feasibility study.
Slightly less gold grade is more than offset by higher reserve tonnage. The new production profile generally results in fewer ounces in the early years, offset by higher production in later years. At Wassa, Golden Star's production of over 61,000 ounces of gold reflected continued strong performance from Wassa Underground, where average grades were approximately 5 grams per ton, which was a 65% increase in grade from the same quarter a year ago, and much of the production was still from the open pit. At Prestea, Golden Star reported that its average grade increased to 13.5 grams per ton from 8.2 grams per ton in the prior quarter, due to improved stope design and execution. Golden Star reiterated gold production guidance of 230,000-255,000 ounces for the year.
We're also pleased to learn of the La Mancha Holdings $125 million financing, which in our opinion, will further solidify Golden Star's balance sheet and position the company for the future if approved by shareholders. We believe Golden Star is rich with efficient opportunities, such as the potential to expand the Wassa Underground Mine to meet the Wassa Mill capacity, to identify further surface resources to supplement the Prestea Underground feed, and to explore throughout their land position, which is one of the largest holdings within the Ashanti Belt in Ghana. At Mount Milligan, Centerra reported strong throughput, topping 60,000 tons per day over a consecutive 30-day period. However, water supply remains the key focus for Mount Milligan in light of the temporary shutdown it experienced in early 2018, resulting from lower than normal water availability.
Centerra is in the permitting process to ensure future water supplies are adequate but caution that fourth calendar quarter production could be impacted if they experience delays in receiving permits that will allow them to continue to draw water from nearby sources. Turning our focus to some exciting catalysts for near-term growth in slide seven. I should mention that these are all examples of organic growth at no additional cost to Royal Gold. I will start with Cortez Crossroads. We understand that initial ore has been placed on the leach pad. This represents the top of the ore deposit, and we continue to expect more steady state heap leach production building in calendar 2019. At Peñasquito, Goldcorp reported that construction of its pyrite leach circuit was completed with commissioning accelerated to the current quarter.
Goldcorp expects first gold from this circuit later this year and anticipates that the project will add an incremental 100,000-140,000 ounces of gold and four to six million ounces of silver annually over the mine life. Finally, at Pueblo Viejo, Barrick continues to advance the pre-feasibility study on the plant expansion to increase production substantially. This strategy includes a pre-oxidation heap leach pad and flotation concentrate. On a consolidated basis, Barrick states that the project has the potential to convert roughly seven million ounces from resources to reserves, which would allow the mine to maintain an annual gold production of 800,000 ounces well into the next decade. Barrick reports that construction has been complete on the pilot leach pad, and that civil works have begun on the pilot flotation concentrator. I will now turn the call over to Bill for our financial results.
Thanks, Tony. Turning to our fourth quarter results on slide eight, as compared to the prior year quarter, revenue of $116.2 million was up 7%, while the gold price was up 4%. Volume increases at Andacollo and Pueblo Viejo during the quarter were sufficient to offset lower contributions from Mount Milligan and Golden Star. Our GEO volume was up 3% for the quarter. Reported earnings of $0.41 per share included impacts of the U.S. tax reform legislation and some other small non-cash items. Absent these items, adjusted net income was $27.6 million, or $0.43 per share, up 39% from the prior year's quarter of $0.31 per share, which was impacted by higher non-cash employee stock compensation expense and a higher effective tax rate. Our cash from operations was up 17% due to volume price and positive working capital and other balance sheet changes.
Our dividends paid increased 5% as a result of the increase in our common dividend to $1 per share in November 2017. For the full year, dividends paid represented 19% of operating cash flow. At the bottom of slide eight, I would like to draw your attention to our liquidity. In the June quarter, we paid the final $75 million outstanding on our revolver, and together with working capital, we now have $1.1 billion in total liquidity. Not only is our liquidity strong, our leverage, as expressed by net debt to EBITDA, is a conservative 0.8 times. Turning to slide nine, fourth quarter ending inventory was comprised of 22,000 gold ounces and 573,000 silver ounces, which was a decrease from the prior quarter. We have started to see the effects of the Mount Milligan suspension of operations earlier this year in the number of ounces delivered.
As such, we expect our first fiscal quarter 2019 sales related to our streaming agreements to be in the range of 10% lower than the fourth quarter on a gold equivalent basis, without having any notable impact on inventory levels. Although this will depend on the ultimate timing of the deliveries from all sources we see in the quarter. Our only remaining indebtedness is the $370 million of convertible bonds, which mature in June 2019. As we have the ability to repay the outstanding principal balance of the bonds with proceeds from our long-term revolving credit, we did not reclassify the 2019 bonds as current on our balance sheet at June 30, 2018. We expect to provide some guidance on depreciation and tax rates for fiscal 2019 after the first quarter.
This will allow us to properly consider some key elements of U.S. tax reform that took effect for us at the beginning of this new fiscal year. I'll now turn the call back over to Tony.
Thanks, Bill. I'll conclude on slide 10. Looking back over fiscal 2018, Royal Gold navigated its business with a steady hand. We delivered solid, steady performance with total shareholder return during the fiscal year that beat the S&P 500, the price of gold, and the gold equity indices. We stayed true to our core objectives to provide optionality and leverage to the gold price. Our fiscal 2018 revenue was 77% from gold, or 86% stayed in precious metal terms. Our cash flow will grow quickly now that our revolver is repaid, positioning us well for new opportunities. We are patient and disciplined regarding capital allocation, investing at the troughs when opportunities are often abundant, and being patient during quiet times while rebuilding the balance sheet.
This organic growth strategy, utilizing our own cash flow, has been effective for Royal Gold over the last deployment and recapitalization cycle, in that we have not issued a share for equity finance since 2012. This is a very interesting market in which we can be relevant. Operators have limited access to equity markets, and few wish to issue equity today because of large market value discounts. We would not be surprised to see precious metal miners going private in this market, something I certainly haven't seen before in this sector. At the same time, the cost of debt is climbing. As we have said many times, debt and equity are our main competitors. When miners intensify their efforts to develop and purchase additional properties or recapitalize their companies, we'll be there and ready. We're still paying a growing sustainable dividend.
Royal Gold paid over $400 million in dividends since 2001, when the gold price traded at $263 per ounce. Our commitment to a growing return of capital has been unwavering in nearly two decades. We strive to be the most valuable company in our business. A purchase of a share of Royal Gold at the beginning of fiscal 2001 would have yielded over a 30-fold increase in share price through the end of fiscal 2018, not including the benefit of 17 years of dividends. Looking forward, we will continue managing our company to pursue best-in-class total shareholder return. Operator, that concludes our prepared remarks, and we'd be happy to open the lines for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first questioner today will be Cosmos Chiu with CIBC. Please go ahead.
Hi. Thanks, Tony and Bill, and thanks for the call. Maybe a few questions from me here. First off, last week, Centerra's update on Mount Milligan and New Gold's update on Rainy River caused a bit of investor concern. Maybe we can tackle each of them separately first. At Rainy River, I know you've talked about, Tony, potentially for the production to improve on a go-forward basis, but are you at all concerned about the liquidity position of New Gold?
Well, look, we obviously are managing and monitoring that actively, but the issue is, I think their first bonds don't come due, Bill, correct me if I'm wrong, until 2022?
Yes.
We think there's plenty of time to get this operation up and running. I think it's a little early to be too concerned. Our focus is on the asset, and we see no reason why the asset can't perform at very successful levels.
Yeah. Tony, on that front, could you remind us what kind of security you have on that stream?
Bill's our expert on that. Bill, could you speak to that?
Hi, Bill.
Sure. Yeah, Cosmos Chiu. The stream is unsecured relative to the assets of New Gold. The stream is an obligation of New Gold, the parent company, so we have all of the assets underlying it. We do have a collection account into which our share of proceeds is paid, and that's used to make deliveries. It is one of the stream agreements where we actually put a leverage test into the document. We have a leverage test that's very similar to the banks, but it's independent of the bank agreement.
That's some background on where we stand.
Bill, not saying it's going to happen, but in the case where something does happen to New Gold, what kind of protection do you have? Where would you rank?
We rank with the bond. The bond and the bank facility are both unsecured.
We're pari passu at the top of the food chain right now.
Got you. Okay. Then maybe again, on Rainy River here, could you remind us in terms of how much you paid for that stream and how much cash flow has been returned so far?
Well, we're very early days in the cash flow return. I might stall a little bit and see if Carly can come up with that figure, either now or a little later in the call.
Okay.
We purchased that for $175, Cosmos.
Okay. The book value today is still pretty close to $175?
Yeah. I believe at the end of June, we'd gotten about 4% of the advanced payment back.
Okay. The last question on Rainy River here is Given the news item that happened last week, given the update coming from New Gold, again, maybe still early days, but is there any potential that you need to test it for impairment, much like what you did with Pascua last year?
Cosmos, we have taken a look at that new technical report that came out, and we actually look at the contained gold being about 10% higher throughout the entire life of mine plan than what we actually did our work on back a few years ago. You do see a little bit less production in the first few years, and then the higher production later on in the portfolio.
We're not at all concerned on our carrying cost on the asset at this point.
Okay. Under accounting rules, what's a potential trigger for needing or leading to an impairment test? Is it if reserve resources come down or is there some other trigger points as well?
Well, there are a number of tests for impairment. I think one of the key drivers is you look at the undiscounted revenue or cash flow that you expect to get from the asset. If that is below your carrying value, you then have to do a discounted analysis, and that's really what we did with Pascua just a couple of quarters ago.
Okay.
It's different than IFRS. We're able to take a look at the cumulative cash flow versus our carrying cost, and then if that's below the carrying cost, then we look at the discounted rate.
Okay. I guess from that perspective, you've looked at the Rainy River technical report that came out two days ago. You've looked at projections in terms of cash flow at this point in time. You're very comfortable with your book value that you have in place.
We are.
Okay. Maybe switching gears a little bit here on Mount Milligan, the water issue here. I was there myself five, six years ago. Never could have thought that was gonna happen. Tony or Bill, how close are you to the situation here? Have you been to site recently and what's your perspective on this?
Well, Mark Isto is our VP of Ops, he is very close to this. I think I'll just turn that question over to him because he knows what's going on there.
Thanks. Hi, Mark.
Yeah. Hi. It's probably been about a year since we've been to site, but we get a regular update as far as what's happening with the operation in general, and specifically about the water situation. I would say that we've got enough details to feel comfortable we understand the situation, and also feel comfortable that the message track that Centerra's put out, we fully understand it, and the permitting in the near term is the key issue on water sources that they, in fact, are using or have used last winter. We think it's a very straightforward plan that they have in the near term to continue with steady state operation.
Again, on the question of security, could you remind us what kind of security you have on the Mount Milligan stream?
We are secured, we are subordinated, and I just can't remember the basket that sits in front of us.
I think it's like $230 million or something that sits in front of us. We can sure get that for you, Cosmos.
Okay. Tony, on Mount Milligan, you're secured on the asset.
We are.
Okay. It's not a similar situation to Rainy River.
No.
Okay. I got it.
That's correct.
In terms of book value here, for Mount Milligan, could you remind us how much you paid for it and how much you've received so far?
Well, the total investment was $781.5 million.
Yeah.
I'm just trying to think on the return of the asset. I think it's over.
200?
I want to confirm.
40. Yeah.
Yeah, 40%.
Yeah.
I want to confirm that number for you.
You'll be able to see that in our financials, right?
You'd see the net book value.
The net book value in the financials.
You wouldn't necessarily see the return on investment.
Yeah.
Okay. Again, no concerns about impairment at Mount Milligan?
No.
Okay. Maybe on a happier note, on Golden Star, it sounds like they've received a large injection of cash from La Mancha. Certainly, Tony, you were fairly close to Golden Star previously on the board of directors, not so much anymore. Would you say that's a positive? How does that, if they do look at expansion potential for Wassa, what they call Wassa Deeps, is that gonna benefit Royal Gold?
Absolutely. Let me speak specifically on Royal Gold's behalf here, and I encourage you to talk directly to Golden Star for their comments. We just view this as a very good suite of assets. We're very pleased to be associated with it, and it's just amazing the endowment of this area in the Ashanti Belt. You know that the B-Shoot continues to plunge, and they continue to intersect some pretty exciting grades there. It's probably plunged deep enough to think about some other access other than a ramp, and perhaps a shaft would be in place. What I get excited about is, Mark, you'll have to help me out with the throughput, but what is their underground ramp throughput or mining right now?
They're doing 2,500 tons a day.
2,500. The mill has capacity for 7,500.
Is there another way that you could either increase the ramp production or supplement that with shaft production? It could be very exciting for that asset. It's already a large producer, but it could even be larger. As I said in my prepared remarks, Prestea is still ramping up, and they're still learning how to do things with the Alimak raises, but we don't see any reason why that isn't going to be a very successful operation. To the extent that they could find some additional surface ores to supplement the high-grade underground, there's plenty of mill capacity there at Bogoso available. That's just speaking about the two assets. Beyond that, there has been, and there continues to be all kinds of other targets and resources throughout their property package.
Yeah, I think they've talked about Father Brown and some of the other satellite deposits as well.
Right. Father Brown was a very successful operation for them a few years back in an open pit scenario. They're just looking at the underground now. Combined those assets with liquidity to be able to do things, that's really good for Royal Gold. By the way, to answer your other question, we have our interest on all of their entire property position.
Got you. Great. Thanks, Tony, team, Bill and Carly. Thanks for answering my questions.
Thanks, Cosmos. Appreciate the questions.
As a reminder to everyone, it is star then one if you would like to ask a question today. Our next questioner today will be Lucas Pipes with B. Riley FBR. Please go ahead.
Good afternoon, morning, everybody.
Lucas.
Tony and team, I was intrigued by some of your comments in your prepared remarks about how the market fundamentals have impacted the way some miners are looking at financing. I think you even mentioned some companies are looking to go private. Can you elaborate on that, and would Royal Gold play a role in that? Could Royal Gold play a role in that?
Yeah, I don't want to speak for companies and say that some companies are looking at that. What I said is I would not be surprised if, when there's very high-quality companies, you can look through your own portfolio there and see which ones might be in this basket. When you're trading at 0.5 times NAV, it's awful tempting to capture that value internally. There are some good assets that are trading at that kind of level. I wouldn't be surprised if that were to happen. To the extent those kinds of companies want to continue to grow, their access to other capital is limited. What I really want to kind of emphasize here is that this financing product that we have is very malleable. We can fit into a lot of different market scenarios.
We've moved out of the scenario where we're restructuring balance sheets, now we're moved into kind of another very potentially unique period of time where I think we can be relevant. Those are the nature of my prepared remarks.
Got it. Are you seeing increased inbounds given the change in the market over the past couple of months?
Well, look, we think about things very creatively here. We don't really wait for inbounds to happen. We actually would consider strategies and then execute on the strategies. Yeah, we've seen a reasonable amount of traditional inbounds, but some of the more creative things, we're acting more like an investment banker.
Interesting. Okay. There were a number of questions on impairments from the prior participant. Maybe you can just kind of remind us how you're reporting under U.S. GAAP and how that would be different from companies reporting under IFRS. Maybe that's part of why we got so many questions on that.
You want me to take that, Bill, or you want to take it? Okay. IFRS, I think you have to look at the discounted cash flow of those assets and compare them to your carrying cost. Under GAAP, we look at the cumulative cash flow and compare it to the carrying cost. If the cumulative cash flow is less than the carrying cost, then we have to use discounted cash flow theory to determine what the impairment might be. That's the nature of the difference. I guess going down the road just a bit further with that, the other difference would be under IFRS, I understand you can write down an asset and then later write it back up.
Yeah.
We don't have that ability to write up later on under GAAP.
If we apply this to Rainy River, for example, given that the cumulative amount of gold, I think you mentioned even increased 10%, and since you're not discounting that stream by any rate, just the cumulative amount of cash flow coming from this asset is unchanged or even higher than before, hence no impairment, even if the timing of those cash flows have changed.
I'm looking to Carly for this collaboration, New Gold marks to market their liability to us on a quarterly basis, I believe, is how they treat their accounting. We paid $175 million for that asset, as I mentioned, and I think they marked to market our interest at about $280 million. As I said earlier, at this time, we have no concerns about our carrying cost on Rainy River.
Got it. Okay. That's very helpful. I appreciate that, and best of luck.
Thank you, Lucas.
This will conclude our question and answer session. I would like to turn the conference back over to Tony Jensen, President and CEO, for any closing remarks.
Well, thank you, operator. We really appreciate all of you taking the time to join us today and appreciate your interest and continued support of Royal Gold. We look forward to a very exciting first fiscal quarter for Royal Gold, and we'll hopefully have some very interesting things to talk about at Peak Gold and others, and we look forward to updating you as those news events come available. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line.