Good day. Welcome to Royal Gold's fiscal 2018 first 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Alistair Baker, Vice President, Investor Relations. Please go ahead.
Thanks, operator. Good morning. Welcome to our discussion of Royal Gold's first quarter of fiscal year 2018 results. This event is being webcast live. 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; Stefan Wenger, CFO and Treasurer; Bill Heissenbuttel, Vice President, Corporate Development; Mark Isto, Vice President, Operations; and Bruce Kirchhoff, Vice President, General Counsel, and Secretary. Tony will open with a brief overview of the quarter, followed by Stefan with a financial update. After management completes their opening remarks, we'll open the line for a Q&A session. 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. Now I will turn the call over to Tony.
Thanks, Alistair. Good morning. Thank you for joining the call. I'll begin on slide four with a summary of the quarter. We began fiscal 2018 with strong, steady performance. Royal Gold delivered solid cash flow generation, debt reduction, and growth at Rainy River. Volume of 88,000 gold equivalent ounces was consistent with the year-ago quarter. Our reported revenue of $112 million reflected a gold price that was down about 4% from a year ago. We generated $72 million in cash from operations, which was our second highest quarterly cash flow in company history. Earnings of $0.44 per share topped most analysts' estimates, principally due to lower expenses during the quarter. Our growing and sustainable dividend continues to be a priority for our board and management team. We paid out $16 million during the quarter, equivalent to a 22% cash flow yield.
We continue to strengthen the balance sheet. Over the last three quarters, we paid down $145 million of debt. Currently, all of our cash flow is dedicated to dividends and debt reduction. We already have a strong balance sheet, but it's getting even stronger to prepare for future acquisition opportunities. Today, we have about $900 million of liquidity to pursue new deals, and we have no capital commitments. In my final summary remark, we congratulate New Gold, which declared commercial production at Rainy River on October 19th. Our management team and board traveled to the site in August. We had a chance to meet with the construction and operations team and tour the property just as they were finalizing all things to start operations. We are pleased with their progress and their pre-commissioning efforts, which certainly aided in a successful startup to date.
We want to make Royal Gold an investment for all classes, not just the precious metal class. We benchmark ourselves well beyond just the precious metal industry. One of the elements that is important in all companies is diversification. Rainy River is our 40th producing property. Few investment opportunities offer such rich diversification with 40 unique sources of revenue. All of our producing properties are in minerals. On to slide five. As we near the end of calendar 2017, operators of our principal properties have updated their full-year guidance projections. At Mount Milligan, Centerra experienced some unplanned downtime in the pebble crusher and SAG mill during the quarter. That throughput will be difficult to make up. They have reduced their midpoint of their full-year gold guidance by 11%. The calendar year copper guidance is unchanged.
Centerra continues to expect a strong December quarter for both copper and gold as compared to prior quarters of the calendar year. I'd like to remind you that Mount Milligan remains firmly in the lowest quartile of worldwide production costs and is a strong cash flow generator for both Centerra and Royal Gold. At Pueblo Viejo, low end of its expected gold production range from 625,000 to 635,000 ounces. Finally, at Wassa at Prestea , Golden Star has reiterated their full-year guidance of 255,000 to 280,000 ounces. I'd remind you that our current stream of 9.25% of gold produced will increase to 10.5% on January 1st, 2018. Turning to our other sources of growth and diversification on slide six, our sequential additions of new volume remain intact.
On the heels of the Rainy River ramp-up, we expect Cortez Crossroads ore production and the startup of the Pyrite Leach circuit at Peñasquito next year. These three volume additions do not require any further front-end capital investment on our part. We're very pleased to see the progress that was made at Rainy River during the quarter. We invested $175 million in 2015 in return for 6.5% of the gold and 60% of the silver at a purchase price of 25% of spot for each metal. We expect our first contributions from Rainy River in the current December quarter. The mine has nearly four million ounces of gold and 10 million ounces of silver in reserves, which equates to a 14-year mine life.
We continue to look forward to production at Cortez Crossroads next year, where we have a 4.5% net value royalty in addition to a 5% gross smelter return royalty. It's a straightforward deposit with most of the ore volume dedicated to heap leaching. Barrick has been stripping the Crossroads deposit for about the last 20 months, and they have several more months to go before encountering ore. We anticipate more stable ore production from Crossroads in the second half of calendar 2018. Gold production will be lumpy, but in total, 3.2 million ounces of reserves will be mined over a nine-year period. Finally, Goldcorp has accelerated its Pyrite Leach project. It was originally scheduled to begin production in 2019, but the startup has now been moved forward into the fourth quarter of 2018.
Once the Pyrite Leach project is in operation, 40% of the gold and 48% of the silver now reporting to tails are expected to be recovered in the new circuit. According to Goldcorp, this equates to 1 million ounces of gold and 44 million ounces of silver over the current life of mine. Turning to slide seven, we have some additional details about Rainy River's progress. New Gold started processing ore on September 15th and declared commercial production on October 19th. To date, this has been a very successful startup. From October 1st to the 24th, New Gold achieved a processing rate averaging 18,500 tons per day or 88% of nameplate capacity. Another milestone for the project was the completion of the Schedule 2 amendment, which was obtained a few months earlier than expected.
This further derisks the startup and clears the way to finalize the construction of the main tailings storage facility. Once the startup is complete, we expect that New Gold will turn to evaluating Rainy River's longer-term potential beyond its first 14 years of mine life. New Gold has a 200 square kilometer land package in one of the world's most favorable jurisdictions for mining activity. On slide eight, I'd like to just talk about our portfolio for a moment. One of our corporate objectives is to further our portfolio diversification. As I mentioned, Rainy River is Royal Gold's 40th operating property, so it's a good time to take a step back and look at the whole portfolio.
While we are the smallest of the three largest royalty and streaming companies, and that's in terms of market capitalization, our diversity in terms of number of projects is as good or better than our two larger competitors. We appreciate a large portfolio because you never know when a new discovery can transform a mine, just as was the case for Cortez and Goldstrike. Our portfolio is 100% minerals and principally gold. Even with the effect of the new copper stream at Mount Milligan, 87% of our Q1 revenue was precious metals. Specifically, our revenue during the quarter was made up of 77% gold, 10% silver, 10% copper, and 3% other metals and minerals. Our revenue comes from traditionally favorable jurisdictions. 89% of our Q1 revenue was derived from properties in Canada, Chile, the United States, Mexico, and the Dominican Republic.
The balance came from Australia and Ghana, also countries with strong mining traditions. Now I'll turn the call over to Stefan for the financial details.
Thanks, Tony. On slide nine, there is a snapshot of our debt reduction efforts over the last three quarters. At September 30th, our net debt to EBITDA was just above one and a half times. As Tony mentioned at the outset of the call, we are focusing on dividends, debt reduction, and strengthening the balance sheet for future business opportunities. When we are at or below one and a half times net debt to EBITDA, we will have a decrease in our drawn interest margin to LIBOR +1.5% and lower undrawn fees of 30 basis points compared to the 1.75% and 35 basis points that we are currently paying. Moving to slide 10, I've summarized our tax, DD&A, and liquidity. Our effective tax rate was 22% in Q1.
For fiscal 2018, we continue to expect an effective tax rate in the range of 20%-25%, in line with our actual fiscal year 2017 rate. DD&A was about $450 per GEO at the low end of our original guidance. We continue to expect DD&A to be between $450-$500 per GEO for fiscal 2018. We paid $16 million in dividends during Q1, resulting in a 22% cash flow payout ratio. We have paid down $145 million on our revolver over the last nine months, with $50 million of that during the first quarter. At September 30th, we had $916 million in total liquidity, an increase from $860 million last quarter. This includes $116 million of working capital plus $800 million available under our expanded revolver. In fiscal 2018, we continue to expect to pay down debt aggressively while maintaining the increased credit facility to fund acquisition opportunities.
As always, we continually evaluate our capital structure to determine the most advantageous cost of capital for future opportunities. Tony, I'll turn it back to you.
Thanks, Stefan. Well, let me conclude on slide 11. Over the last 20 years, Royal Gold has delivered value for shareholders through significant share price appreciation and 16 years of a growing and sustainable dividend, outpacing the price of gold in the S&P 500. We've gotten there by staying true to our lower risk royalty and streaming model, focusing on expanding our portfolio during opportunistic times, and stewarding our shares by growing the company out of cash flow generation as much as possible. Today, we have a diverse portfolio of 40 producing properties and decades of experience developing royalty and stream transactions. In the future, Royal Gold will continue to pursue this strategy. Excuse me. We will continue to focus on per share returns, to diligently return capital to shareholders, and to be prepared for future opportunities.
If you get an opportunity to read our recent proxy filing, you'll know that our director, Craig Ashman, has decided not to stand for re-election at our upcoming annual meeting. Craig joined our board back in 2007, and he ushered in a new era of governance for the company as our market capitalization grew from $720 million when he joined to the $5.5 billion we are today. He ensured that our governance programs align with that maturity. Craig has a deep expertise in mining law and is truly an expert in the mining and royalty business. Craig's guidance, attention to detail, his always independent thinking, as well as his unwavering support and passion for the company will be dearly missed. We are grateful for his decade of dedicated service to our company.
Phil, I'll turn the call back over to you, and perhaps we can open up the lines for questions if there are some.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Cosmos Chiu with CIBC. Please go ahead.
Hi, Tony. Hi, Stefan and team. Congrats on a very good quarter. You certainly beat my estimates, and it's being reflected in the share price today.
Thank you, Cosmos.
A few questions from me here. Tony, as you've talked about, you have a very strong balance sheet. You have untapped room on your line of credit. Could you maybe quickly comment on, I know you touched on it, but again, quickly comment on opportunities out there. What's a better opportunity at this point in time? Would it be in precious metals, base metals, and other stuff? Just maybe a general comment.
Thanks, Cosmos. Happy to do so. We continue to see activity. It's certainly quieter than it was 24 months ago, but that was a very, very unique time in our company history, and I think we're back to business as normal. We're seeing things across the board, both in precious metal and base metal. When I say base metal, please understand that I'm talking about streaming opportunities on principally base metal assets. We're still seeing some opportunities in both of those areas. When I get asked that question, I kind of guide that the business size is probably somewhere around the $100 million-$500 million range, not the $500 million-$1 billion range it was 18 months ago.
We're still active. We still like some things. We covered some things, and we'll just have to see whether we'll be successful at the right price point for our shareholders.
Sounds good. Moving back to your current portfolio here. You touched on a few, I would say, production guidance updates, such as Mount Milligan and whatnot. Looking at table three, I would say, the other ones that are sort of behind at this point in time with nine months completed now in calendar 2017 will be your Cortez GSR 1, 2, and 3, and Cortez NVR. Could you maybe comment on that in terms of, are you going to be looking for a much better Q4 calendar 2017, or is that sort of, you're not sure at this point in time?
Let me just put some opening remarks there, and then I'll pass it to Mark Isto, our Vice President of Operations, to see if he has anything further to add. As you know, we're a bit of a swing producer there at Cortez, if you allow me to use that term, and they're focused principally in other areas at the Cortez Hills property, where we don't have a royalty interest. We see the tonnage come in bits and spurts, if you will. I don't know that we have a tremendous amount of confidence that they'll meet the annual guidance there. I wouldn't suggest that you put in your model a large quarter.
We're going to see much more sustained production, as I mentioned, in the second half of next year when all of the major open pit equipment will be back over on the pipeline side, where we have most of our royalty interests. Those would be my general remarks there. Mark Isto, do you have any more comments to add there?
No, I think you described it correctly. We've seen a lot of variability in the forecast that they give us for our production for exactly the same reasons Tony mentioned, and that variability's occurred over the last several years. I would not expect to have an overly different couple of quarters coming up.
Yeah. I guess it's hard to say at this point in time, in the past, have you seen any kind of, not underperformance, but if it was slower than what you had expected in a particular year, would it be followed by a year that was better than expected? It's too hard to pinpoint at this point in time?
Yeah. Let me answer your specific question with more of a generic answer. All good miners are going to mine the highest grade available to them.
That's what I mean by a swing producer. To fill the mill off and the additional tons will come from the lower grade areas where that's particularly on the South pipeline, in Gap area today.
I got you
The only thing I can say there is the reserves are in the ground, and they'll come out eventually. As the higher grade diminishes in the open pit, then, the priorities swing to the pipeline complex.
Mm-hmm. Yeah. Okay. Tony, we had talked about base metals earlier, and you talked about base metal mines as well. One base metal asset within your portfolio that I guess we didn't talk about today is Voisey's Bay. Any kind of update on what's happening there in terms of the legal issues or legal dispute? Clearly it's a nickel and cobalt asset, and I would imagine right now is a pretty good time to have a cobalt royalty.
Yeah, we're very active in the litigation at present. We have guided that we have a court hearing, a court trial date that's set for the second half of next calendar year, I'll be a little more specific about that today. It's set for September. We are doing all things to be absolutely prepared for that at the present time. There's a lot of activity that's going on there. The attorneys will call it the discovery phase, but very much advanced in our thinking and preparation at this point.
Great. Thank you. That's all I have. Congrats again.
Thanks, Cosmos.
The next question comes from Steven Butler with RBC Capital Markets. Please go ahead.
Thank you, operator. Tony, two questions. The first one, broadly speaking, given your technical background and experience with large scale plants, when you read through the lines at Mount Milligan, you've got a 62,000 tons a day plant that's struggling to get up to the rated capacity. You've got issues with the SAG mill and the pebble crusher, not just this quarter, but previously. Does this put up any red flags for you when you look at it? As I say, when you put your mine manager's cap on, your engineering background, can you talk a little bit about what you see happening there and how you see it being resolved, bearing in mind, obviously, you're not the operator, but from a very high level, what are your thoughts?
Steven, thanks for the question. Any chance I get to put my mine manager's hat back on, that's a good day. We are not the operator, so please take my comments appropriately. I wanted to say in my prepared remarks how good the project was doing. It's in the lowest quartile of worldwide cash production. I think they actually, all-in sustaining costs were $437 an ounce this quarter. It's just a fabulous asset, and yet it kind of has a bit of the stigma that it's not performing well. It's not performing necessarily up to the 62,000 tons per day nameplate capacity, but it's a very successful mine. I just want to lay that groundwork first before entering into any other part of the conversation.
The things that we can't control in a deposit or in a mine site are the things that nature has put there, the grade and the volume and all of those things. There's not an issue there. We don't understand that it's an issue with the particular hardness of the material. The plant is a well-built plant, but there is truly a problem that Centerra's highlighting regarding maintenance. If we look at the availability of the plant during the quarter, we would agree that it's not a number that we'd expect to see out of a typically run plant. That one, we know it can do better. These are the man-made issues that we can work on.
I don't really focus very much on the throughput as much as I do on maximizing the recovery and on an NPV basis, I think there's not going to be a lot of difference at a reasonable throughput rate. Will it get all the way up to 62,500? I don't know, but I know it can do a whole lot better than where it's at today. If you can get another five points on availability, that's a lot of tonnage throughput on a tonnage per day basis. Those things will come along. Centerra highlighted to us and to you on their call yesterday that they have made some management changes there. They made some system changes, and if we really look for some of the optimistic things that have happened on the project since Centerra has come in.
They've only had a bit of time in the operator seat before they had to put out their guidance for the entire calendar year. They have matured their geometallurgical model significantly now, which I'm sure they'll continue to calibrate that, but it's going to be a better estimating tool for them, both on production and budgeting purposes going forward. I think setting proper expectations is going to be huge for all of us on Mount Milligan. Finally, I'd say one of the things that hasn't been really discussed very much is some improvements in recovery since they've taken over. We've seen some nice tick ups in the copper recovery, and the gold recovery has ticked up, not as much, but certainly in the right direction.
I think there's a lot of good positive news around this deposit, and as a mine manager, I'd be tickled to be the operator of this. There's still a lot of low-hanging fruit that can be harvested.
Great. Thank you. Just if I may, the second question, you talked about Crossroads. You mentioned several more months of waste stripping and then beginning to put ore in the pads here at early 2018 from the sounds of it, with a larger contribution in the back half of the year. As I understand it, and as I would model it for yourselves, look to be building up pregnant solution through the first half of the year, and so production to your credit really doesn't kick in until the third quarter, or do you expect to see a smooth ramp-up from day one early, call it Q1 2018 calendar, and then production from that point on increasing through to the back half of the year? Can you give us a sense on how you think that leach contribution from Crossroads will flow through to your revenue line?
You have a very good understanding of it. It will be back-end weighted, for sure. They're going to encounter bits of ore in the top part of the deposit that'll go to the leach pad early in the year, but in my understanding, it won't be material. The bigger volumes start coming in in the second half of the year. Of course, you have all of your leach residency time and everything else to be concerned with. I would very much guide you later in the back half of 2018. Let me just touch base with Mark. I apologize, Mark is not in the same office as us today, but I just want to make sure that if he has anything to add to that.
No, your explanation is correct. It's definitely back half weighted.
Okay. Does that give you enough, Steven, to go on?
That's very helpful. Mark and Tony, just from your recollection, do you know if there's higher grade, either patch zones within that that could go to the plant or your understanding is it's fairly homogeneous, and everything goes to the leach pads?
No, there'll be some tonnage that goes to the pad. If you look on the split between metal volume, what's produced in the mill and what's produced in the heap leach pad, it would be a stronger percentage than it is on the ore volume if you understand what I'm trying to say. I don't know exactly what the breakdown is, but you should expect some of that volume of the 3.2 million ounces to be going into the mill.
Into the plant.
Yeah, correct.
Okay. Thank you. That's perfect. That's very helpful. Thank you.
Thanks, Steven.
The next question comes from Andrew Kaip with BMO. Please go ahead.
Hi, gentlemen.
Hey, Andrew.
Hi. Hey, look, just to follow up on Steven's question, that 3.2 million ounces, how long is that mine plan? How long should we expect production from Crossroads?
It's a nine-year mine plan, but I think that takes in some leach down time as well. The heavy ore will be two years prior to the end of the mine plan, so you have some ramp up and ramp down. Again, since the mine is not restricted principally by the volume going through a confined mill, they can put as much volume as they need to and they encounter on the heap leach pad. I really want to stress the lumpy word that I used, that 3.2 million ounces could swing quite a bit. As we get into it, Andrew, and the rest of the folks on the call will try to give a little better guidance than what we're giving now, because I truly believe it could be a significant variance from year to year.
Okay, thanks. Just another operational question. Wassa and Prestea. Prestea had a very strong quarter. It somewhat offset weaker than expected production out of Wassa due to dilution. I'm just wondering, you've probably reviewed the project recently. What are your views on Wassa, and certainly in particular, Wassa being able to get to above 2,700 tons per day with the new outlook that they have?
Yeah. Mark has been watching this project very closely. He's had boots on the ground himself, probably every nine months or certainly not more than a year. He's as close as possible to this one. Let me pass that question to you, Mark.
Yeah. Well, I think they reported that they're at 2,400 tons a day for this last quarter. We think that achieving the 3,000 tons a day that they're talking about is very achievable. The infrastructure that they put in, their twin declines, if you will, are good for 4,000 tons a day. They've had very steady progress on their stope production. A positive trend. I think it all bodes well for them to achieve their forecasts of getting to 3,000, for sure, and possibly beyond. I think it's very good.
Just the dilution issues that they were running into. Have you had a conversation with them about what exactly was taking place?
They're still mining longitudinal stopes, which I think is part of the issue. They haven't got into the transverse stoping, which implies the bigger, more expansive ore zones. The longitudinal stopes, in my opinion, are going to have more dilution. They've talked about not having the amount of definition drilling in front of them that they like to have, and I know they're pushing to make that happen, and that will certainly improve their dilution management. I think as they switch to getting some transverse stopes, which I think are coming in the first quarter of the year, I might be mistaken on that, but I think that will be a potential significant improvement in the issue as well. I hope that helps.
Yeah, it does. Thanks very much.
Thanks, Andrew.
If you have a question, please press star then one. The next question comes from Lucas Pipes with B. Riley FBR. Please go ahead.
Hey, good morning, everybody.
Morning, Lucas.
I wanted to follow up a little bit on the Wassa open pit. Obviously, saw the announcement yesterday that they will cease operations there in January 2018. I wondered if you could give us a little bit more color as to what led to that decision and at what point they may return to that part of the project. Thank you.
Lucas, let me make some general comments there, because obviously we're not the operator, and we guide most of those specific comments back to Golden Star. I can tell you, as I said earlier, a good miner is going to be focused on margins, and the highest and best margins they have is through the underground. They've been able to increase that underground throughput. They've had a very successful start up. You heard Mark talk about the current underground tonnage per day, and I think the plan was somewhere around 14,000. They're well above that, and they even cease to go higher. The high margin ounces are underground rather than open pit.
I'm sure the management team and board just took a look at what the most best margin ounces that were available and weighted them against the capital required to deliver those ounces and came up with this decision. It's something that we have been very close to ever since we looked at the project. This move to the lower volume, but higher grade, higher margin, is very much what we were anticipating.
Got it. As I think about the progression of volumes for you, that should have an impact, correct?
Well, there may not be as many ounces that are produced because the mill is, I think, at Wassa is going to be really cut in half, and they're only going to be utilizing one ball mill at a time, but the grade's going to be higher over time as well. Let us just see what their budgeted projections are for next year. We don't have those yet. Again, in our acquisition philosophy and our thoughts about how we've been thinking about the project, this doesn't come as a surprise to us.
That's helpful. Maybe a question to try to put it all together. Obviously, there's been a little bit of the delays, issues at Mount Milligan, and the ceasing of open pit operations at Wassa. On the other side of that, of course, we still have some growth coming forward from Rainy River, Cortez, et cetera. If you try to put it all together, when I think about kind of 2018 volumes, gold equivalent ounces, what is that going to be up year-over-year versus 2017? I would appreciate a little bit more guidance given all those moving pieces.
Lucas, we don't come out with specific guidance in any particular forward-looking period of time. What we have said in the marketplace is that we expect continued growth in our company even would offset the declines that we've had. With regard to specific guidance on calendar 2018, we'll get that probably in the June, well, probably in the May or so timeframe, we'll collect all those end of March quarter, and we'll be able to show you what those numbers look like for the calendar year. We've got a lot of new good pieces of business. We really haven't spoken on the Q&A about Rainy River at all, but that's starting up faster. If that proves to be the case, would certainly be a big benefit to us. The effect that we see the Pyrite Leach being accelerated into the end of 2018.
That's going to be a lot of 2019 tonnage. That's also a big positive. The fact that we got a little bit of an uptick in our streaming rate at Wassa, Prestea starting in January 1st is another good piece of little incremental bits that all make a difference to us. We don't have any specifics to guide for you at this time, but just generalities.
In terms of maybe a range in terms of growth, would you be able to provide that?
We've not done that. We've been very conservative in how we think about that. Sorry, we're not going to be able to speculate at this time.
Okay. Well, I appreciate all the color. Thank you very much, and good luck.
This concludes our question and answer session. I would like to turn the conference back over to Tony Jensen for any closing remarks.
Well, thank you for your interest and all the great questions on the Q&A session. I will look forward to continuing a steady and solid performance in the months and quarters ahead and look forward to speaking with you in the very near future. Thanks for joining us.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.