Once again, for those who don't know the drill, I will ask Bill some questions, but please feel free to shoot some through on the app as well, and we'll get to as many of those as we can. Thanks, Bill. We'll start off on Mount Milligan, maybe, as a starting point. You announced just earlier this month a transaction with Centerra where Centerra effectively paid upfront to offset a portion of the existing Mount Milligan stream. So how does that transaction provide relief for maybe an increasingly mature Mount Milligan mine, and how does that benefit both yourselves and the operator?
Yeah, well, I think the immediate benefit that you saw was an extension of the reserve life out to 2035, and that, in fact, is limited really by tailings storage facility space. So what we were trying to work with Centerra on is how do you provide an avenue for a BC copper-gold porphyry? And we all know these things go on forever and ever and ever. So how do we create a path to doing that? For a long time, we've admitted that the stream is a large stream. But we were the ones, when there were cost overruns, that stepped up and helped finish the mine. So I don't apologize for having a stream of that size. We only got our money back 18 months ago. So it's not as though we've made a horrendous return on this thing.
What I hope people will focus on going forward is Centerra is working on a PEA. It's not just about 2035. It could be about 2042, and it could be even longer. I think if there's been one criticism of our portfolio, it's shorter mine life. If we can take our bigger asset and say we might have 20 years out in front of us, I think that answers a big question that people have. I thought it was great because the analyst reports came out, and it was positive, positive. When you can do a win-win transaction like that, I think that's great.
When you look at that structure, are there other opportunities in your portfolio for something similar or other sort of win-win transactions? I mean, you're right. It's always amazing when every side gets a bit of a benefit.
Yeah. The interesting thing about Milligan is it was the only stream that did not have a stream rate step down or a cash price increase. It was our first stream. We were trying to figure things out. I think streams at the time didn't have those things. Over time, what we realized is we got to flip the economics back to the operator to incentivize them to continue to extend the mine life. I would say I would take a different look at it. I worry about other stream counterparties coming to us and saying, "We want that." I can say that Milligan is unique, and it didn't have those step downs. It made sense for us to do that.
It's an interesting business model because when we think about transactions or negotiations, we often think about trying to get as much of the value for yourselves as possible. But you're right. And in a stream or another negotiation similarly, you want to make sure the mine stays in business. You want to make sure your commodity that you're streaming stays in production. So I mean, more broadly, when you're thinking of transactions, what do you do to sort of ensure that happens besides a step down?
Well, it really is a step down in the cash price. And if you look, we probably have more precious metal streams on precious metal mines. And if you look at the long-term interest we have in those mines, it's usually sub 5%. So you may look at Pueblo Viejo and say, "Oh, you're taking 7.5% of the gold, Rainy River's, what is it, 6.5% of the gold." But then when you get to the step downs or you get to the cash price increases, over 95% of the value of the metal is going to the operator. I think that's important. That keeps them interested in continuing to extend the mine life.
I want to dig into something that you said a minute ago, just on, sorry. I lost my train of thought there.
No problem.
OK, I'm going to get back to that. My brain will work eventually. OK, in the February 2024 transaction, does that increase your exposure to gold, sort of decrease your exposure to copper in your broader portfolio long term? And is that by design, or is that just a consequence of the restructuring?
I think it's a consequence of the restructuring. I understand why you say that because the ultimate cash price we would pay on copper is higher than the implied gold cash price. That wasn't intentional. And in fact, Centerra being a gold company, I think they probably would have had an incentive to push us towards more copper. There's no brilliance behind the restructuring.
I remembered the other question I was going to ask you. It does work eventually up there. On the issue of long mine life, and you said that something that you've been criticized for in the past is having shorter mine life than some of your peers on the streams. How are you addressing that? So what do you do when you're looking at new transactions, or what lens are you looking through to address that?
Yeah, look, it's important. It's a strategic goal. We would very much like to have as many opportunities with mine lives that go on 20 or 30 years. We're not in an industry where you can really pick and choose and say, "Well, I don't want to do that particular investment because it's only a mine life.
Can you just lower your mic?
Sorry. There we go. So if you go back, though, and you look at what we've done lately, we've done Great Bear. We did a couple of transactions on Cortez. We did the Milligan restructuring. And I think all of those are kind of setting up for decades ahead of us. And that's really when we came out with the transactions, that is what we were focusing on, trying to address the criticism that we've gotten from analysts and investors at times.
Moving on to sort of commodity focus in general, Royal Gold's revenues are largely gold-focused, but you do have some copper in your portfolio. And that was ahead of the trend. I mean, over the last couple of years in the mining industry, in the gold mining industry in general, we've seen more interest in copper as companies are kind of looking to get exposure to future metals or ESG metals. Can you talk about how you might think about adding additional either copper or other non-gold, non-precious elements to your portfolio? Is that something that you are looking at?
I think you're giving us way too much credit because our copper exposure came out of the restructuring of Milligan. It was not intentional that we would do that. And one of the things I say to our shareholders, "Why do you own our shares? What are you interested in?" And they come back and they say, "It's the gold exposure." And sometimes they actually try to set you up. They go, "Yeah, what do you think of lithium? Isn't that really exciting? Are you going to do battery metals?" And I said, "No. I mean, we're not trying to create the Glencore of the streaming industry, right? We're a gold company. We focus on precious metals. But we're a gold company. That's what we do. If you want diversification, you can find it somewhere else.
I don't think you want us to do it." That being said, if we have a good opportunity come into us, it's a good copper, nickel, zinc, a market that we can understand and have worked in, sure, we'll look at it. If we've got a good operator, a good project, a good country, and a good return, we can tuck those in. But the business development team, when we actually go out and start marketing for new opportunities, they're focused on precious metals. The other stuff will come to us, and we'll just look at it. So it's not really a focus for us.
What do you think of lithium?
I don't understand this yet.
I'm kidding. I do have a question from the app, and I'm going to ask it before I forget. How has Wassa performed since I don't even know how to say this, Chifeng?
Chifeng.
Chifeng took over.
Yep. They've done very well. They did have a water event last year that affected operations. We did have a team there a number of months ago. And I think you've got a better capitalized company there that is talking about longer-term projects. I'd say the hard part is the disclosure between having a Chinese-owned company and having a North American company is a little bit harder to manage. But we haven't seen anything fundamentally different about the way they've approached the operation.
OK. Just on your broader portfolio, you've said that you're going to issue your 2024 guidance in April, and that will be just for the year. You've done that for the last couple of years. You've put out one-year guidance. Do you continue to think—I know you get this question all the time, but do you continue to think about issuing longer-term guidance? Would it be sort of helpful, as Randy Smallwood just said, to sort of give an indication of where that trajectory is going?
You know, actually, we've heard from a number of shareholders very recently, and they said, "We put no credence in long-term guidance." And I think we're kind of going to, at this point, sort of take the cue from our shareholders in sticking with the one-year guidance that we've done. As you know, we just came off a year where we had given annual guidance in April. And we finished just under that guidance for things we all know about. Peñasquito goes on strike. Pueblo Viejo has an issue with the expansion. But we weren't within the range that we gave. And I can tell you that back in mid-2022, we were doing our strategic planning, and our forecast for 2023 had Peñasquito and Pueblo Viejo producing 90,000-100,000 GEOs. And combined, they were less than 50. And I've said for a long time, we don't control these operations.
In a lot of cases, we don't have good information. I mean, Randy is somewhat lucky in that he writes all of the contracts. We inherit contracts. On the royalty side, we don't have a lot of visibility. We don't have mine plans. I learned about Peñasquito when you learned about Peñasquito. I just think that makes it really, really hard for us to predict what the portfolio is going to do. The other thing I would say is folks who have been committed to medium-term guidance, you can go back to 2018 and go back to 2019 and see how they've done. Because sometimes you kind of find out that there's guidance, and then there's what actually happens. For me, forecasting something that I'm not really confident in, it just becomes harder and harder.
I'm going to ask you to forecast something you're not really confident in. Where do you see the best opportunities for growth in your portfolio? Can you maybe talk about a couple of the assets that you're the most excited about?
Yeah. So this year, we're sort of looking at Côté. We're looking at Manh Choh and Mara Rosa. These are all relatively smaller assets. But when you aggregate them, I don't know. That's probably 4%-5% of our historical revenue. We got Back River the year after that. And then you got out a couple of years, and hopefully, the Great Bear development is sort of coming over the horizon. And I'm really interested to see what Newmont does with Red Chris because I think there's a great future there.
When I was preparing these questions, I was looking through your corporate presentation. One of the slides that I thought was really interesting was you talked a bit about how you're large enough to sort of compete, and you've got a good capital balance sheet liquidity behind you. You're small enough that some of the smaller transactions really still move the needle for you. How do you take advantage of that? I mean, do you see sort of what's your sweet spot in terms of maybe deal size in the future?
Yeah. I mean, the interesting thing is the way I view this industry, this is a $100 million-$300 million industry. The number of $500 million+ transactions that you see over the history of streaming is relatively small. And I think the point that we're trying to make is I think Paul and Randy have two of the toughest jobs in the industry because they are so big in an industry that just doesn't have large transactions. So I think for them to show growth, they got to string together a lot of these $300 million deals or $150 million transactions. Whereas we use Khoemacau as an example. I haven't done the GEOs lately, but say it's 25-30 for a company that just did 312,000 GEOs. That's one transaction, and you've got sort of 10% gross GEO growth. You're going to see it in our numbers.
That's where I think the advantage comes from is we're not so growth challenged. We're not so big that we have to look at doing a number of transactions to get it. We can still be very selective with what we invest in.
I believe we're still restricted on MMG because of the Khoemacau transaction. So I'm going to ask very vaguely if you can maybe talk through how the transition on ownership is affecting the mine and maybe affecting you guys.
Well, I don't think we know yet. I haven't seen a press release, but I think it's supposed to close this quarter. We have had a conversation with MMG. We are getting to know them. I think the interesting thing is, given the price that they paid, they may be relatively focused on an expansion, which I think hopefully will first take advantage of the infrastructure in Zone five. But I think that will be good for us in the long term. But it's going to play out over the rest of the year as we get to know them a little bit better.
And that asset, if you could just remind everybody, there's certain areas of the property where you have stream, and then there's others that you don't. So can you talk a little bit about how I mean, like you said, you don't know yet. But I mean, where would be the opportunities for Royal Gold versus maybe ones that you wouldn't be included from off the bat?
Yeah. So they're building another mill to take advantage of some of the other deposits. So we have Zone five, and I think we have Mango. But we don't have the other areas. And that's just a function of the negotiation. Khoemacau had an enormous land package. They just weren't going to give us. But I come back to I think if you're going to undertake an expansion, the place you probably want to start is where you have the infrastructure. And so if we can get higher throughput from that part of the expansion, that's a net benefit to us. And we don't see being displaced with the other mill going in there. We don't see material being brought in. And we actually have certain protections in the event they bring other material in.
Makes sense. Yeah. You wouldn't close one mill if you built the other one.
Right.
Yeah. One question I get quite a bit on royalty streamers in general is about return on investment. So obviously, when you make a transaction, when you make a deal, we have the initial either your assessment or our assessment of what that return might look like. But how do you assess the ultimate return on investment? I guess the first question would be, what is your hurdle rate when you're making a decision in the first place, initially? And how do you think about how much to price a deal at? And then if you're looking backward at a deal of a mine that has had some mine life extension or exploration success, how do you kind of compare? How does it stack up? So what you initially assess that versus the ultimate sort of on average, if you could maybe talk about that?
Yeah. All I would say, the ultimate IRR better than the initial IRR because our job is about finding upside, geologic upside. I struggle with the idea of a hurdle rate because every mine is different. So if we make an investment in a 30-year mine, you're not going to get 10% or 12% in our business on something like that. So you take a 30-year mine with a mid-single digit discount rate, and they add 15 years of reserve. You've got a world-class asset. That extra 15 years, what does it add to the IRR? 0.5? I mean, that's the hard part. At the same time, we may see an underground mine that has 5 or 7 years of reserves. And this thing's going for 15 or 20 years.
You may look at the transaction and say, "That's really aggressive based on what we see." And I say, "Yeah, but that's why I've got the geologists on staff who tell me we think it's going to do this." And even in that case, I would expect the IRR to be even higher than that 45-year mine life because there is more risk associated with it. So unfortunately, it's a little more art than science. We had a case study of Mulatos. We bought a royalty at Molotov in the early 2000s, and it had a cap. And I think the initial mine life was seven or eight years, and the cap was well beyond that. We eventually got to the cap. So the mine life was supposed to be out like 2010, 2011. The mine's still going.
We hit the cap. Our pre-tax return was 35% or 36%, a third of which was resource reserve upside, two-thirds of which was price upside. And that, to me, is a great that's what we're trying to do, not have the cap. But those kind of returns is what we're targeting.
When you're looking to do due diligence on a transaction, can you talk a little bit about how your team might operate? You would send people to site. You would do your own geological models. You would make your own net asset value or free cash flow models.
Absolutely. So we do have a technical team on staff. It's relatively small for a phase two-type analysis. We have consultants that we bring in. We've worked with them for years. We don't go out and hire a firm. We've got a geologist we like. We've got a metallurgist, a mining engineer, a person who does capital costs, operating costs, and so environmental, social, bring all that to we can have 10 or 11 people on a due diligence team and probably send five or six of those to site. And I can tell you that the adjustments that we make to their model, if we turn the model back to them, they'd say, "What mine is this?" Because we do take things downward, and then we do our own cash flow evaluation on our adjusted numbers.
When you compare sort of your forecast versus the company's forecast, would you say yours end up stacking up pretty well in hindsight?
Unfortunately. Sometimes.
It should be good. It should be a good thing, no?
Well, sometimes I would say more often than not, our team ends up being closer to what we actually see. But that's fine. That's what we expected.
Oh, that's actually, I mean, congratulations. That's good. So again, digging into your slide deck, you talk about your strategic objective for recent transactions and hopefully future transactions as well to strengthen and diversify the portfolio. So you mentioned already duration. But how important is it to add mine life or potential life of mine extension? I know you said the investors have been or analysts have been sort of critical. Do you pay for that future upside today with just that objective of getting duration? Or how important really is it?
Well, it may look like that. It may look like we're paying for the upside. What I will say is if we're paying for some of the upside, it's because our team has looked at it and thinks there is a lot beyond that and that there is an acceptable return that we're going to receive on that investment. So what we did here is you paid a lot Cortez, you paid a lot for what we see. It was like, well, it's what we don't see in the market right now that our team firmly believes in.
Another objective would be counterparty and improving, I guess, the stability of counterparties you work with. So how valuable is it to have strong partners for Royal Gold? And does the importance of that strength of the counterparty differ for royalties versus streams? Do you care more about who the counterparty is for one or the other?
Yeah. I mean, obviously, it's extremely important. And the larger companies, they have a broader set of skills. They have experience. They have capital to fix the problems when they ultimately come up. That being said, we all acknowledge that streaming is used by midsize companies for the most part. And so if you want to have a relationship with one of the majors, you're probably going to buy third-party royalties. That's where you're going to get that relationship. It's not going to be direct. The other thing about the strength of the counterparty is royalties and streams are very different. In many jurisdictions, a royalty will essentially run with the land.
In that case, I don't really care so much about the balance sheet because if a company gets into trouble, maybe it goes bankrupt, we can expect that the royalty will survive, and the next owner will have that obligation. Absolutely not true for streams. And so when we write a stream contract, we do get into things like financial covenants, defaults, security, where do we rank? And we do care about if there's debt ahead of us, how much is there? And a lot of times, we say, if it goes wrong, how much of that debt could we take out to preserve our interests? So streaming investment is much more sort of my background of banking and what's the credit analysis. Whereas royalties, we don't worry as much about it.
We've talked earlier today about diversification. It's obviously been increasingly important for royalties and streams after we've seen what happened with Cobre Panama. I asked Randy the question. Royal Gold is a little bit different. I mean, you don't have the same sort of asset concentration risk that we've seen with maybe Franco and Wheaton. Can you talk about how you see diversification is important to sort of preserve that level of diversification that you've got already? And if that's the case, does that sort of cap you at a certain transaction size just so that you don't get too diversified or too concentrated?
Yeah. It's actually a strategic goal for us. I mean, I would love to have our top revenue producer sort of sub-20 and our top five maybe sub-50. Mount Milligan has been a big part of our revenue for a long time. And we've been through the good parts. We've been through the hiccups. That being said, you don't want to force yourself into a diversification. We got to do a transaction just to diversify because then you end up having to work out the investments you just made, and you've sort of lost focus on other opportunities. So I love having Milligan as one. I love having PV as two. But I would really like to have even more diversification within the portfolio.
We had that question, I guess it was to Paul earlier on consolidation of the royalty streaming space. Would acquiring a smaller royalty streaming company sort of jump-start or continue your diversification in a sort of step-change way?
Yeah. It would. And there are some of the smaller companies, there are assets in the portfolio that we quite like. There's no doubt about it. I think the struggle right now is that I think the larger companies trade at a premium, and the other companies trade at a lower premium. And even if you can do an accretive transaction for both, you need two willing parties to engage in that discussion. And there are points in time where if those valuations get closer and closer, paying a premium to acquire those companies? No, it doesn't make sense. We don't need a bigger, we don't necessarily need a bigger portfolio. We can still grow asset by asset. So it's more of an option than we've got models on all the competitors. But it's something that we found very difficult to pull together.
As a U.S.-listed company, you're a little unique in the mining space. There's very few U.S. companies, and there's even fewer U.S.-listed royalty streaming companies. How do you sort of see the market today in terms of the investment landscape? Are you getting more interest from U.S. retail, U.S. generalist investors right now? Or is everything on the quieter side? Maybe it would be interesting to hear you talk about your experience.
I'd say right now, it's on the quieter side. We've really had a really strong focus on marketing to the generalists in the U.S. because we really do see because we're a U.S. company, we're in U.S. equity indices. And we can say to them, "Look, really, do you want operating and exploration risk?" And most of them say, "No. I don't know the industry that well." So it's between Bullion and us. OK? So if you buy an ounce, it's still going to be an ounce five years from now. You're not going to earn any interest on it. Or you can take that what I call the baby step into the mining industry, which is us, where an ounce, hopefully, if we're doing our job correctly, the geologic upside becomes two or three or four ounces, and we pay a dividend. We've had pretty good success.
We've actually had people with one or two meetings actually buy into our shares, which is great. My sense of the market is no one's quite comfortable with 2,000+ yet. Not quite sure if they believe in it. I think there was this sort of end of 2023 euphoria the rates are going to go down. There are going to be 6 rate cuts. You're going to have 2 this year? I don't know. So I think there's a bit of caution, to be honest, amongst the generalists.
I agree. I think there is as well. But I mean, just given your U.S. listing, I think that just positions you very uniquely in that you've got the index inclusion to the Dividend Aristocrats index and things like that, which, I mean, differentiates you a little bit from your peers, I guess, as well.
There is no other precious metal company in that index. So I know you were asking some of the folks up here before about dividends. I mean, paying an increasing annual dividend for 23 straight years is something we're extremely proud of and quite frankly protective of.
How do you protect it?
Don't do anything dumb.
We've got 45 seconds left, Bill. How do you protect your dividend? What do you?
Don't make any mistakes. You have to be cautious. You can't look at next year and say, "I can afford to increase the dividend by 20%," and then five years later, you can't.
You have to cut it.
Then you have to cut it. You may look at it and say, "Well, you don't pay much out in terms of cash flow payout ratio." Yeah, that's because we're thinking 5 and 10 years ahead. We want to continue this record.
Yeah. No, that makes sense. And obviously, your shareholders value that predictability.
They understand. They understand.
Yeah. I think we're, I mean, we don't have enough time probably for me to even ask another question. So I will say thank you very much. I appreciate your time. And thanks for inviting.
Thanks for inviting.
Thank you.