Good day, and welcome to the Royal Gold Fiscal 2018 third quarter 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, this event is being recorded. I would now like to turn the conference over to Karli Anderson, Vice President of Investor Relations. Please go ahead.
Thank you, Allison. Good morning, and welcome to our discussion of Royal Gold's third quarter fiscal year 2018 results. This event is being webcast live, and you'll 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, Vice President Corporate Development, Stefan Wenger, CFO and Treasurer, Mark Isto, Vice President Operations, and Bruce Kirchhoff, 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 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.
Tony will give you an overview of the quarter, followed by Stefan with the financial update, and then we'll open the lines for a Q&A session. I'll now turn the call over to Tony.
Thanks, Karli, and good morning, everybody. Thank you for joining the call. I'll begin on slide four. We reported another solid quarter operationally. Higher revenue during the quarter included our full quarter of production from Rainy River, our newest royalty property. We also benefited from a gold price that was up 9% from a year ago. Quarterly operating cash flow topped $100 million for the first time ever, reflecting continued strong performance from the portfolio and a $21 million tax refund collected from Chile. Even without the impact of the tax refund, Q3's cash flow from operations was a record for Royal Gold. Our reported earnings were impacted by an impairment at Pascua Lama, where Royal Gold has a 5.45% gold royalty and a 1% copper royalty on the Chilean deposits.
In coming to this decision, we balanced our view of the long-term potential of an asset with 16.5 million ounces of resource subject to our interest in one of the world's most prolific mining regions, with the recent announcements by Barrick to recategorize reserves to resources and to suspend work on the underground pre-feasibility study. While the impairment is reflective of the project conditions today, we continue to believe that Pascua Lama represents significant option value for our Royal Gold shareholders. Absent non-cash impacts, our adjusted earnings of $0.48 per share continued our trend of consistent and solid performance over the last several quarters. We're allocating our strong cash flow to dividends, debt reduction and new business. We paid out $16 million in dividends during the quarter. We reduced our debt for the fifth straight quarter by paying down another $75 million.
This leaves us the outstanding balance under our revolver of just $75 million, which we expect to pay off completely before the end of the year. We now have over $1 billion of total liquidity for new opportunities. On slide five, we have some updates on some of the properties. At Rainy River, New Gold announced 39,000 ounces of gold production in their second quarter of operations, and the milling rate averaged 17,500 tons per day, lower than the design throughput of 21,000 tons per day due to a combination of relatively minor operational issues. The project is still ramping up, and we are encouraged that the mine has demonstrated ability to improve both throughput and recovery. On specific days, throughput has achieved 22,500 tons per day, and New Gold has commissioned a study to determine if design capacities could be exceeded.
I'll have a bit more about that later. Gold recovery was 81% during the quarter, but recent operational improvements resulted in 87% average gold recovery during the first three weeks of April. New Gold expects Rainy River production to increase throughout this calendar year due to improvements in throughput, grade, and recoveries. At Wassa and Prestea, production of over 57,000 ounces was driven by stronger than expected performance from Wassa Underground, and Golden Star reiterated gold production guidance of 230,000 to 255,000 ounces for the year. Wassa Underground experienced a 13% increase in grade and a 26% increase in the mining rate to 2,400 tons per day. While the mining sequence at Prestea continued to improve, particularly with the second Alimak stope now in production. Golden Star also released some excellent exploration updates, more than doubling the inferred resources at Wassa Underground to 5.2 million ounces.
We have been talking about exploration potential within Golden Star's significant property position in the Ashanti Belt, and we are pleased to see such impressive results less than 36 months after Royal Gold made its initial investment. Finally, per our agreement with Golden Star, our gold stream percentage increased to 10.5% on January 1st. At Mount Milligan, Centerra sequentially restarted milling operations during the quarter following a temporary shutdown at the end of December. They are currently operating at 40,000 tons per day and will increase production once water supplies are adequate. Centerra is guiding to average throughput of 55,000 tons per day in the second half of this calendar year. Lower processing rates during the quarter were somewhat offset by higher gold and copper grades.
Looking forward to the June quarter, we expect sales related to our streaming agreements to be in line with the March quarter, as inventories will be reduced according to our routine sales procedures, offsetting lower expected deliveries from Mount Milligan in that period. We do anticipate lower overall sales in the September quarter, as the final effects of the Mount Milligan temporary suspension are realized. Turning our focus to growth on the next few slides. I will start with the near-term catalysts and then highlight longer-term reserve updates, and then finally talk a bit about our portfolio optionality. We expect that New Gold will continue to make progress ramping up to their design parameters.
As I mentioned earlier, they are also finalizing a study to evaluate the potential to increase Rainy River's throughput by approximately 15% to 24,000 tons per day from the current design of 21,000 tons per day. We expect Rainy River to be a top 10 revenue generator for us, and this study may enhance the stream value further with the potential to pull more ounces forward. At Cortez Crossroads, waste stripping continues. We anticipate that sporadic ore will be encountered in the second half of the calendar year, and we expect meaningful production to build early in 2019. At Peñasquito, Goldcorp reported that construction of its pyrite leach circuit was 86% complete, with wet commissioning of the carbon pre-flotation circuit already underway.
Goldcorp expects commissioning of operations in the fourth quarter of this calendar year and projects that the project will add an incremental 1 million ounces of gold and 44 million ounces of silver over the mine life. Turning to slide seven, I would like to highlight the depth of our portfolio. We have 192 properties in the portfolio, of which 39 are currently producing. Amongst our development stage assets, Sabina has made excellent progress at the Back River project, where Royal Gold has a 1.95% NSR and there are approximately 2.5 million ounces of reserves subject to our interest. Sabina has received most of its key permits, with the last major permit, a Type A water licence, anticipated by the end of this calendar year. In the September quarter, Agnico Eagle plans to begin production at LaRonde Zone 5, where we have a 2% NSR.
2018 guidance calls for gold production of 20,000 ounces, growing to 42,500 ounces in 2020. Within our operating properties, we have been pleased to see double-digit reserve increases within the royalty portfolio at Wharf, South Laverton, Gwalia, Leeville and Twin Creeks. While calendar year production guidance at Dolores is up 35% due to pulp agglomeration and underground mining. While the royalties are generally not as large as our streams, they provide interesting option value, and we expect additional organic growth from our large portfolio in the future. On slide eight, turning to our Peak Gold joint venture in Alaska. Three years ago, when we first told you about this project, we said that we would invest on a success basis.
We committed $5 million to it initially, we said that if we liked what we saw, we'd continue to invest up to $30 million to earn a 40% interest by the end of 2018. Indeed, we've now earned our 40% interest, but earlier than that was scheduled, because we are encouraged by our exploration success. The gold resource consists of 11.3 million tons, creating 3.5 grams per ton, and is located near surface. This equates to approximately 1.3 million ounces of gold, and there is a bit of silver and copper present as well. The Peak Gold joint venture has set a budget of slightly over $9 million this calendar year to continue exploration and to complete an economic evaluation of the property. Royal Gold will be responsible for funding its pro rata share of the budget.
We anticipate the PEA being complete during the September quarter of this year. Tetlin is a Native village in Alaska and owner of approximately 675,000 acres under lease by the Peak Gold joint venture. On the map on slide eight, the darker green is the land associated with the Tetlin lease, and we've also expanded our interest to the west onto approximately 175,000 acres of state land. You can see that the size of our property position is significant compared to our friends at Fort Knox or Pogo or even across the border into the Yukon. Consistent with our success-based investment strategy, we opportunistically agreed to purchase a 13.6% equity position in our joint venture partner, Contango Ore. This purchase increases our overall effective ownership stake in the property.
While we haven't considered exploration an integral part of our growth strategy, we will continue to pursue opportunities where we find them, as long as we can identify a means to exit into our core business. Turning to slide nine, I want to highlight some long-term optionality in the portfolio. For example, Barrick recently announced a scoping study to evaluate pre-oxidation heap leach and flotation concentrate at Pueblo Viejo, which proved successful, paving the way for a pre-feasibility study this year. This plan has the potential to increase the conversion of approximately 7 million ounces of current gold resource into reserves on a 100% basis, which would extend the mine life and enhance the annual production profile. Another pre-feasibility study was recently completed at Nueva Union, which is the joint venture between Teck and Goldcorp.
A few years ago, we purchased a 1.4% NSR on an area covering roughly 30% of the La Fortuna deposit. Our interest is in the heart of the deposit, which is expected to produce gold and copper in years four through 18 of the current mine plan. Finally, I want to remind you of our trial related to Voisey's Bay, which is set to begin in September. We have a 2.7% NSR on all metals produced but are currently receiving no royalty revenue from the mine, according to Vale's calculation of the royalty. Given the significant production profile from Voisey's Bay, we are eager to resolve this matter in court. Now I'll turn the call over to Stefan.
Thanks, Tony. Turning to slide 10, we ended the quarter with over $1 billion in total liquidity, an increase from $975 million last quarter. This includes approximately $100 million of working capital plus $925 million of revolver capacity. For the remainder of fiscal 2018, we continue to expect to pay down debt aggressively. Absent any new transactions, we will fully repay the remaining $75 million outstanding under our revolver by the end of June. On slide 10, there's a snapshot of our debt reduction efforts over the last five quarters. We've paid down $270 million on our revolver over this period, with $75 million of that paid in Q3. At March 31, our net debt to EBITDA was right at one times. Following the repayment of our revolving credit facility, our only remaining indebtedness will be the $370 million of convertible bonds, which mature in June 2019.
We currently plan to repay the principal amount of the bonds in cash, using cash flow and availability under our $1 billion revolving credit facility. As we have the ability to repay the outstanding principal balance of the bonds with proceeds from our revolver, we do not anticipate reclassifying the bonds as current on our balance sheet at June 30, 2018. On slide 11, I've summarized our tax stream sales and DD&A outlook for the remainder of fiscal 2018. For the last quarter of 2018, we expect that our effective tax rate will be between 17% and 23%, subject to any revisions to our preliminary accounting for the U.S. tax reform. Third quarter ending inventory was comprised of 26,000 gold ounces and 659,000 silver ounces, which was an increase over the prior quarter due to deliveries received late in March.
We expect our fourth fiscal quarter 2018 sales related to our streaming agreements to be in line with the third quarter, as inventory is expected to be reduced according to our routine sales procedures, offsetting lower expected deliveries from Mount Milligan. DD&A for the third quarter was $455 per GEO, and it was about $460 per GEO for the nine months ended March 31. We now expect DD&A to be between $450 and $470 per GEO for our full fiscal year. We have paid more than $47 million in dividends during the first three quarters of fiscal 2018, reflecting our commitment to paying a consistent and sustainable return to our shareholders. For the nine months ended March 31, we've paid out nearly 20% of our operating cash flow in dividends.
Thanks, Stefan. Looking back over the third quarter, we can reflect on several accomplishments. We reported record operating cash flow even net of the Chilean tax refund. Mount Milligan rebounded from an abnormal water shortage and returned to milling operations ahead of schedule. Peñasquito began wet commissioning of the carbon pre-flotation circuit and continues to post updates that are ahead of schedule for the pyrite leach circuit. We had our first full quarter of sales at Rainy River, and the production ramp-up schedule is trending favorably. Golden Star reported a significant increase in reserves as well as positive underground advancements. Six of our royalty properties reported double-digit reserve increases. Looking forward to fiscal 2019, which is just around the corner for us, we expect to see initial production from the Peñasquito pyrite leach and LaRonde Zone 5 later this calendar year, quickly followed by Cortez Crossroads production.
We will release the preliminary economic assessment at Peak Gold. We will continue to seek opportunities to deploy our strong liquidity. Allison, with that concludes our prepared remarks. We'll turn the lines open 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 touchtone phone. If you are 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 for a moment to assemble our roster. Our first question will come from Kerry McCrary of Canaccord. Please go ahead.
Hi, good morning. Just a couple of questions on Voisey's. Do you have a potential timeline on how long the trial would take? Also, would you have a sense of what the cumulative payment could be retroactively to when they stopped paying the royalty?
Thanks, Kerry. Look, we're going to start just probably in mid-September. We think that's going to be a couple of months for sure. It may actually drift into December. Time will tell. Of course, the decision that's rendered from the court will be up to the court at that point in time. We can't give very much guidance as to when that likely will come out. We wouldn't expect any kind of decision before the end of this calendar year. With regard to what is at stake here, there's some historical claims that we have filed that relate to the very first pound of nickel that was produced there. We think of those historical claims in the $tens of millions. What's significantly at stake is the forward-looking royalty after Long Harbour was built.
That's, as I mentioned in my prepared remarks, we're not getting any revenue at all at this point because of the way they calculate it. When you look at the volume, I think we put the volume up on one of the slides. When you look at that volume and do your own math, you can see that going forward over the rest of the mine life, that could be well over $100 million in value going on a forward-looking basis. Certainly something that we're taking very seriously, Kerry.
Great. Thank you.
Our next question will come from Josh Wolfson from Desjardins Capital Markets. Please go ahead.
Thank you. For the Peak Gold project, I'm operating under the assumption that it's not your main interest to be an operator of this asset. Would you be able to talk a bit more, I guess, on what the potential options there are available to, I guess, convert that equity interest into something else? Also, I guess in the context of there being an existing royalty on the order of 4%-7% on the property?
Yeah. Thanks, Josh. Thanks for the question. There are several different things that we can do with Peak Gold, and when the timing's right. We don't think the timing's right to monetize it at this particular point. We very much think that there's additional exploration potential on the project that we'd like to spend some time with first. The second point I'd like to make is that we're long on this project. We're long on the project right from day one. We like the asset, and that's why we picked up the two different royalties. I guess it's essentially one royalty, but it's applicable on two different parcels between 2% and 3%. We already have an ongoing interest. With regard to the core of your question, let me just say that we're not particularly interested in gold, sorry, in $. We're more interested in gold.
To the extent that any party that ultimately came in as a partner on the project or somebody that might take operating control, we'd be much more interested in very strategic and creative options where we can exit into our core business rather than just simply taking $ in our position.
Understood. I guess maybe more broadly, when you look at this type of asset, which has very high grades and likely attractive margins for the operator, is there sort of a rough number in mind that you have that would represent the potential streaming percentage of production, or is it too early to sort of evaluate that?
Josh, I think we're quite a bit too early to really put pencil to paper on that. I think just now, if you were to look at it from a valuation perspective of what resources are in the ground, that's probably one of the better metrics at this particular point. We're going to give you a whole lot more guidance about what we think about the quality of the asset when our PEA comes out in September.
Understood. Maybe just one last question on the asset. Any sort of perspective on timelines when you think it could be in production or sort of a range of dates that would be reasonable?
Yeah, I think it would be too early for us to speculate on that at this time. Let me just turn the question to Mark Isto, who happens to be sitting remotely in Toronto today. Mark, will there be any permitting timelines associated with the PEA, or will it just simply be production estimates from pre-construction on forward?
Yeah, we'll have a preliminary schedule for sure. It's obviously hard to get precise, but we know what type of studies need to be done for the permitting, and we'll be able to have a general project schedule for sure.
Josh, that should give you some strong help. We're completing this preliminary economic study on what's there today. By no means do we expect that to be the end of the exploration potential on the project. It could be an interim look at the project at that point.
Got it. All right. That answers most of my questions. Thank you very much.
Thank you.
Again, if you would like to ask a question, please press star then one. Our next question is from Lucas Pipes with B. Riley FBR. Please go ahead.
Hey, good day, everybody.
Hi, Lucas.
I noticed the filing of an automatic mixed shelf. I wondered if there's a particular motivation to file it at this time. It may be looking for some things on the M&A side, for example. I would appreciate your perspective on the mixed secured shelf. Thank you.
Thanks, Lucas, for our question. It's just a matter of our previous shelf expiring, and so we want to be completely ready and available to do any kind of business and be prepared for any kind of opportunity that might come our way. It should be just replacing the old shelf. Very consistent with the prior shelf that was filed.
Got it. Since we are on the topic of M&A and it's been a while since you've been more active on that front, what's the appetite at this point in time, and what sort of opportunities are you seeing in the market at this point in the cycle? Thank you.
You want to take that question, Bill?
Sure. Yeah, we're still seeing a number of opportunities. It's very reminiscent of the pre-2015 time period. I think what we're seeing is really more in the development space than sort of balance sheet restructurings, and those just take more time to mature. Oftentimes you need other sources of capital to come along. We just have to be patient there. I think previously we've talked about transactions in the $100 million-$500 million range. I'll just give you a sense, we're probably seeing more towards the lower end of that range. With the growth pipeline that Tony talked about, I just think we can remain patient and just let these opportunities mature.
Got it. That's very helpful. I'll leave it here. Thank you very much.
Thank you, Lucas.
Our next question will come from Michael Jalonen of Bank of America. Please go ahead.
Oh. Hi, Tony and everyone.
Hi, Mike.
I just had a question on Pascua Lama. What's the book value of Pascua Lama now post the write-down? I have a second question.
Stefan, please.
Sure, Michael. The book value post the write-down is $178 million.
Okay, thanks, Stefan. Part two, Tony, to come up with the option value for that 170, was it $172 million, Stefan?
178.
$178. What type of mining plan did Royal Gold model for Pascua Lama to arrive at the optionality?
A very interesting question. We took a look at as much data as we could get our hands on, both publicly and through Barrick, who were quite helpful. We took our own view on whether an open pit plan might look more promising versus an underground plan. We had to ultimately use our experience and determine what probability we felt was applicable to both plans. Of course, we used quite a significant discount rate. We used a 9% discount rate once we determined an impairment was applicable, which is quite a bit higher than what we normally do. We did that because we think it's reflective of the project conditions today.
You're assuming that one day there might be a mine here still?
Yes, we are. Otherwise, we'd have wrote the whole thing off. We're still believers. At some point, there's going to be a production here.
I want to also be an analyst. Okay, thank you.
That's where you're going.
Once again, if you'd like to ask a question, please press star, then one. Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Mr. Tony Jensen, President and CEO, for any closing remarks.
Well, look, thank you very much for joining us today. We very much appreciate your interest and continued support of Royal Gold, and we look forward to updating you on the future progress on quarterly calls to come in the future. Mike, I particularly look forward to updating you on Pascua Lama at some point. All the best, and thank you for joining us.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.