Earnings Call: Q1 2018

Nov 2, 2017

Good day, and welcome to Royal Gold's Fiscal 2018 First 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. I would now like to turn the conference over to Carly Anderson, Vice President and Investor Relations. Please go ahead. Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's Q1 fiscal year 2018 results. This event is being webcast live, and you'll be able to access the replay of this call on our website. Participating on the call today are Tony Jensen, President and CEO Stefan Wenger, CFO and Treasurer Bill Heisenbuttel, Vice President, Corporate Development Mark Istow, 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 and 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, Carly. Good morning and thank you for joining the call. I'll begin on Slide 4 with a summary of the quarter. We began fiscal 2018 with strong, steady performance. Rail 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 $112,000,000 reflected a gold price that was down about 4% from a year ago. We generated $72,000,000 in cash from operations, which was our 2nd highest quarterly cash flow in company history, and earnings of $0.44 per share top most analyst 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 $16,000,000 during the quarter, equivalent to a 22% cash flow yield. And we continue to strengthen the balance sheet. Over the last three quarters, we paid down $145,000,000 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 $900,000,000 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 19. Our management team and Board traveled to this site in August. And 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 the successful start up 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. And 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 and all of our producing properties are in minerals. On to Slide 5. 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 with the pebble crusher in Saginaw during the quarter. That throughput will be difficult to make up. So 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. And I'd like to remind you that Mont 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, the oil ended its expected gold production range from 625,000 to 635,000 ounces. And finally, at Wassa Prestea, Golden Star has reiterated their full year guidance of 255,000 to 280,000 ounces. And I'd remind you that our current stream of 9.25 percent of gold produced will increase to 10.5% on January 1, 2018. Turning to our other sources of growth and diversification on Slide 6. Our sequential additions of new volume remain intact. On the heels of the Ringing River ramp up, we expect Cortez Crossroads ore production and the start up of the Pyrite Leach circuit at Penangcillo next year. These three volume additions do not require any further funding capital investment on our part. We're very pleased to see the progress that was made at Rainy River during the quarter. We invested $175,000,000 in 20.15 and returned for 6.5 percent of the gold and 60% of the silver at a purchase price of 25% of spot for each metal. We will be delivered gold and silver monthly, so we expect our first contributions from Rainy River in the current December quarter. The mine has nearly 4,000,000 ounces of gold and 10,000,000 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 twenty eighteen. Gold production will be lumpy, but in total, 3,200,000 ounces of reserves will be mined over a 9 year period. And finally, Goldcorp has accelerated its Pyrites leach project. It was originally scheduled to begin production in 2019, but the startup has now been moved forward into the Q4 of 2018. Once the Pyrite Leach project is in operation, 40% of the gold and 48% of the silver now reporting details are expected to be recovered in the new circuit. According to Goldcorp, this equates to 1,000,000 ounces of gold and 44,000,000 ounces of silver over the current life of mine. Turning to Slide 7, we have some additional details about Ringing River's progress. New Gold started processing ore on September 15 and declared commercial production on October 19. To date, this has been a very successful startup. From October 1 to 24, 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 II amendment, which was obtained a few months earlier than expected. This further de risks the start up and clears the way to finalize the construction of the main tailing storage facility. Once startup is complete, we expect that Newbold would turn to evaluating Rainy River's longer term potential beyond its first 14 years of mine life. New Gold has 200 square kilometer land package in one of the world's most favorable jurisdictions for mining activity. And on Slide 8, I'd like to just talk about our portfolio for a moment. One of our corporate objectives is to further our portfolio diversification. And 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 3 largest royalty and streaming companies, in terms of market and that's in terms of market capitalization, Our diversity in terms of number of projects is as good or better than our 2 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. And I'll turn the call over to Stefan for the financial details. Thanks, Tony. On Slide 9, there is a snapshot of our debt reduction efforts over the last three quarters. At September 30, our net debt to EBITDA was just above 1.5x. 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 1.5x net debt to EBITDA, we will have a decrease in our drawn interest margin to LIBOR plus 1.5 percent and lower undrawn fees of 30 basis points compared to the 1.75% 35 basis points that we are currently paying. Moving to Slide 10, I've summarized our tax DD and 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% to 25%, in line with our actual fiscal year 2017 rate. DD and A was about $4.50 per GEO at the low end of our original guidance. We continue to expect DD and A to be between $4.50 $500 per GEO for fiscal 2018. We paid $16,000,000 in dividends during Q1, resulting in a 22% cash flow payout ratio. We have paid down $145,000,000 on our revolver over the last 9 months with $50,000,000 of that during the Q1. At September 30, we had $916,000,000 in total liquidity, an increase from $860,000,000 last quarter. This includes $116,000,000 of working capital plus $800,000,000 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. And 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. 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 and 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. We will continue to focus on per share returns to diligently return capital to shareholders and to be prepared for future opportunities. Finally, if you get an opportunity to read our recent proxy filing, you know that our Director, Craig Hass, has decided not to stand for reelection 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 $720,000,000 when he joined to the $5,500,000,000 we are today. He ensured that our governance programs aligned 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 and 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. And Phil, I'll turn the call back over to you and perhaps we can open up the lines for questions if there are some. Okay. Thank you. We will now begin the question and answer Our first question comes from Cosmos Chiu with CIBC. Please go ahead. Hi, Tony. Hi, Stefan and team and congrats on a very good quarter. You will certainly beat my estimates, and it's being reflected in the share price today. Thank you, Cosmos. 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. So 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 base principally base metal assets. So we're still seeing some opportunities in both of those areas. But when I get asked that question, I kind of guide that the business size is probably somewhere around the $100,000,000 to $500,000,000 range, not the $500,000,000 to the $1,000,000,000 range it was 18 months ago. So we're still active. We still like things. We covered some things and we'll just have to see whether we can we'll be successful at the right price point for our shareholders. Sounds good. Maybe moving back to your current portfolio here. You touched on a few, I would say, production guidance updates such as Mount Milligan and whatnot. But looking at Table 3, I would say, the other ones that are sort of behind at this point in time with 9 months completed now and calendar 2017 will be your Cortez GSR 1, 23 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 Istu, our Vice President of Operations to see if he has anything further to add. But 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. So we see the tonnage come in bits and spurts, if you will. And I don't know that we have a tremendous amount of confidence that they'll meet the annual guidance there. So 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 major open pit equipment will be back over on the pipeline side where we have most of our royalty interests. So 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. I mean, 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 has occurred over the last several years. So I would not expect to have an overly different couple of quarters coming up. Yes. I guess it's hard to say at this point in time, but in the past, have you seen any kind of sort of not underperformance, but if it was lower than what you had expected in a particular year, would it be followed by a year that was better than expected? Or it's too hard to kind of pinpoint at this point in time? Yes. Let me answer your specific question with more of a generic answer and all good miners are going to mine the highest grade available to them. And so that's kind of what I mean by a swing producer to fill the mill often the additional tons will come from the lower grade areas where that's particularly in the South Pipeline and Gap area today at the pipeline side. So it's not a it's the only thing I can say there is the reserves are in the ground and they'll come out eventually. And as the higher grade diminishes in the open pit, then the priorities swing to the pipeline complex. Yes. Okay. And 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. Yes. We're very, very active in the litigation at present. We have guided that we're going to be we have a court hearing, a court trial date that's set for the second half of next calendar year. And I'll be a little more specific about that today. It's set for September. And we are doing all things to be absolutely prepared for that at the present time. So 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 Stephen Walker 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 tonne 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 managers cap on your engineering background, Can you talk a little bit about kind of 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? Yes, Stephen, thanks for the question. Any chance I get to put my manager's hat back on, I feel it's a good day. But we are not the operators, so please take my comments appropriately. Look, I wanted to see 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 $4.37 an ounce this quarter. I mean, it's just a fabulous asset. And yet it kind of has a bit of the stigma that it's not performing well. Well, it's not performing necessarily up to the 62,000 tons per day nameplate capacity, but it's a very, very successful mine. I just want to lay that groundwork first before entering into any other part of the conversation. Now we don't have 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. And 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 is highlighting regarding maintenance. And 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. And that one, we know it can do better. And so these are the manmade issues that we can work on. And 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 62.5? 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 5 points on availability, that's a lot, a lot of tonnage throughput on a tonnage per day basis. So those things will come along. Centerra highlighted to us and to you on the call 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. And they have matured their geometallurgical models 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. So I think setting proper expectations is going to be huge for all of us on Mount Milligan. And finally, I'd say one of the things that hasn't been really discussed very much is some improvements in recovery since we'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. So 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. Right. Thank you. And just if I may, the second question, you talked about Crossroads, mentioned several more months of waste stripping and then beginning to put ore on 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 solutions through the first half of the year. And so production to your credit really doesn't kick in until the Q3 or you expect to see a smooth ramp up from day 1 early, call it Q1 2018 calendar and then 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 the 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 will go to the leach pad early in the year, but it won't be in my understanding, it won't be material. And then the bigger volumes start coming in, in the second half of the year. And then of course, you have all of your leach residency time and everything else to be concerned with. So I would very much guide you later in the back half of twenty eighteen. And 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 he has if he has anything to add to that. No, no, your explanation is correct. That's it's definitely back half weighted. Does that give you enough, Stephen, to go on? That's very helpful. And Mark and Tony, just from your recollection, do you know if there's higher grade either perch 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, 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. So I don't know exactly what the breakdown is, but you should expect some of that volume of the 3,200,000 ounces to be going into the mill. Into the plant. Okay. Thank you. And that's perfect. That's very helpful. Thank you. Thanks, Stephen. Okay. The next question comes from Andrew Kaip with BMO. Please go ahead. Hi, gentlemen. Hey, Andrew. Hi. Hey, look, just to follow-up on Stephen's question. That 3,200,000 ounces, how long is that mine plan? How long should we expect production from Crossroads? It's a 9 year mine plan, but I think that takes in some leach down time as well. So the heavy ore will be 2 years prior to the end of the mine plan. So you have some ramp up and ramp down. And again, since the mine is not restricted by principally by the volume going through confined mill, they can put as much volume as they need to and they encounter on the heap leach pad. So I really want to stress the lumpy word that I use that that 3,200,000 ounces could be could swing quite a bit. And as we get into it, Andrew and the rest of the folks on the call, we'll 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. And then just another operational question. Wassa and Prestea. Prestea had a very strong quarter, and it somewhat offset weaker than expected production out of Wassa due to dilution. And 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? Yes. Mark has been watching this project very, very closely. He's had boots on the ground himself probably every 9 months or certainly not more than a year. And so he's as close as possible to this one. Let me pass that question to you, Mark. Yes. Well, I think they reported that they're at 2,400 tonnes a day for this last quarter. And we think that achieving the 3,000 tonnes 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 tonnes a day. They've had very steady progress on their stope production, positive trends. So I think it's 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. And then just the dilution issues that they were running into, have you had a conversation with them about what exactly was taking place? Well, 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. So the longitudinal stopes in my opinion are going to have more dilution. I mean, 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. But I think as they switch to getting some transfer stopes, which I think are coming in the Q1 of the year. I might be mistaken on that, but I think that will be a significant potential significant improvement in the issue as well. I hope that helps. Yes, it does. Thanks very much. Thanks, Andrew. The next question comes from Lucas Pipes with B. Riley FBR. Please go ahead. Hey, good morning, everybody. Good morning, Lucas. So 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. And 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 just let me make some general comments there because we're obviously we're not the operator and we guide most of those specific comments back to Golden Star. But 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. And they've been able to increase that underground throughput. They've had a very successful startup. You heard Mark talk about the current underground tonnage per day, and I think the plan was somewhere around 14,000. So they're well, well above that and they even see Sculp to go higher. So the high margin ounces are underground rather than open pit. And so I'm sure the management team and the 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. And so this move to the lower volume but higher grade, higher margin is very much what we were anticipating. Got it. And so as I kind of 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 1 ball mill at a time, but the grade is going to be higher over time as well. So let us just see what their budgeted projections are for next year. We don't have those yet. But 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. And then 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 seizing of open pit operations at Wassa? And then on the other side of that, of course, we still have some growth coming forward from Rainy River, Cortez, etcetera. So if you try to put it all together, when I think about kind of 20 18 volumes, gold equivalent ounces, what is that going to be up year over year versus 'seventeen? I would appreciate a little bit more guidance given all those moving pieces. Yes. Lucas, we don't come out with specific guidance in any particular forward looking period of time. But 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. And 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 dollars end of March quarter and we'll be able to show you what those numbers look like for the calendar year. But we still we've got a lot of new good pieces of business. We really haven't spoken on the Q and A about Ringing 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, now that's going to be a lot of 2019 tonnage, but that's also a big positive. The fact that we got a little bit of an uptick in our streaming rate at Huaca Prestea starting in January 1 is another good piece of little incremental bits that all make a difference to us. So no, we don't have any specifics to guide for you at this time, but just generalities. And in terms of maybe a range in terms of growth? Would that be would you be able to provide that? No, we've not done that. We've been very conservative in how we think about that. So 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 in all the great questions on the Q and A session. I will look forward to continuing a steady and solid performance in the months 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.