Royal Gold, Inc.
Q2 2021 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good day and welcome to the Royal Gold Fiscal 2021 Second Quarter Conference Call. All participants will be in a 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 Alistair Baker. Please go ahead.

[Alistair Baker:]

[Bill Heissenbuttel:]

Good morning and thank you for joining the call. Before beginning, I would like to remind you that, Royal Gold continues to operate remotely, and we'll do our best to offer a coordinated response to any questions. Also, please bear in mind that this reporting period is quarterly for us, but annual for most of our operators. We may not be in a position to offer in-depth answers to questions on our operating assets to the extent the information for the December quarter has not yet been released. I'll begin on slide 4. We continued our strong start to fiscal 2021 with another quarter of record revenue. Total revenue of $158 million was driven by excellent operating results across the portfolio, particularly from our royalty segment. Relative to the prior year quarter, our Cortez revenue and our Australian royalty portfolio revenue were both up over 100%, while our Peñasquito and Marigold revenue increased over 50%. We had a couple of new contributions this quarter from royalties that while small, demonstrate the optionality embedded in our portfolio.

[Mark Isto:]

Thanks, Bill. I'll start by making a brief comment on the excellent performance across the portfolio. Our royalty segment contributed 32% of revenue, while typical contribution has been in the range of 28%. We saw especially strong contribution from the Peñasquito royalty and many of the smaller royalties also performed well which demonstrates the significant upside and optionality in the smaller and older portfolio assets.

[Paul Libner:]

Thanks, Mark. I will now turn your attention to slide 9, and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the second quarter of fiscal 2021 to the prior year quarter. We experienced another consecutive quarter of record revenue, as we recognized a 28% increase in our revenue to $158 million on volume of 84,500 gold equivalent ounces or GEOs. The increase in our revenue when compared to the prior year quarter was due to higher average metal prices and a strong contribution from our royalty segment, including the two new royalty contributions that Bill mentioned earlier in his remarks. With respect to metal prices, the average price of gold, silver, and copper increased 27%, 41%, and 22%, respectively when compared to the prior year quarter. Contributions from gold continue to be dominant within our portfolio as the revenue mix for the quarter was 76% from gold, 11% from copper, and 10% from silver.

[Bill Heissenbuttel:]

Thanks Paul. Our financial and operating performance in the second fiscal quarter continued our strong start to fiscal 2021. Solid performance from our operating portfolio has allowed us to take full advantage of the robust metal price environment. And over the 12 months ended in December, we have invested $114 million at Khoemacau, moved from a net debt position of $54 million to a net cash position of $182 million, and paid dividends of $73.5 million. We see an active business development market today, but we remain mindful of long-term returns when we bid for opportunities. The financial performance of our portfolio allows us to be patient with new investment opportunities, and we will remain disciplined as we continue to evaluate our new business pipeline. Our strong balance sheet and access to liquidity positions us well to execute on new transactions in a timely manner. Operator, that concludes our prepared remarks. I'll now open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question comes from Cosmos Chiu with CIBC. Please go ahead.

[Cosmos Chiu:]

Thank you. Thanks, Bill, Mark, Paul and Alistair. And great to see that you've increased your dividend once again. I guess, my first question is on Khoemacau here. Just to confirm, I guess, the additional $50 million that's needed to get the mine to commercial production that's -- is that in essence a cost increase due to COVID-19?

[Bill Heissenbuttel:]

Yes. Cosmos, this is Bill. Can you hear me okay?

[Cosmos Chiu:]

Hi, Bill. Yes.

[Bill Heissenbuttel:]

Yes. Okay. Great. Yes. Essentially it is. I mean, the impact of COVID-19 and it's due to a number of things. I mean, you have quarantine costs, you have to have some extra staffing that's necessary just to sort of fill in when you have people in quarantine. So it is all related to the pandemic.

[Cosmos Chiu:]

And Bill, I guess, based on your understanding after the additional funding of $50 million how much cushion do they have? Because as Mark said earlier in the prepared remarks, never say never, there might be potentially more -- could be more COVID-19 impacts to it. Like I'm just trying to get some confidence around that number to try to figure out how much cushion they have built in at the operator level?

[Bill Heissenbuttel:]

Yes. And that number is probably not something we can disclose. I will say that what they've come forward with is that's the maximum they think they'll have to spend to get to commercial production. So Mark is there anything else any other color you might add to that? We just might be limited in what we can say.

[Mark Isto:]

Of course. Right. I mean, I think the only thing I would add Bill is that we make our -- it's advanced funding and we're only a portion of the funding that comes in. So they started the year with pretty substantial funding available to them. So they're well funded certainly for the construction they have left to complete given the fact that we're only a portion of it.

[Cosmos Chiu:]

And then in terms of the actual construction itself to the extent that you can, what's the critical path item here for them to get to sort of ramp up by Q2 -- calendar Q2 commissioning by Q2, and then sort of getting the concentrate shipment by Q3? Is there one or two critical path items that they're looking at, at this point in time and concentrating on?

[Bill Heissenbuttel:]

Mark, I'll leave that to you, maybe you can.

[Mark Isto:]

Yes. Sure. Yes the critical path certainly for the last several quarters it has been running through the mill refurbishment work. And this has really been an area where they have seen some COVID-19 impacts due to just contractor productivity. So just the -- I would say, it runs to -- run out the mechanical and electrical work getting that completed would be the critical path, which wouldn't be atypical for a project at this point in time. The mining and development is not a critical path. It's been going quite well.

[Cosmos Chiu:]

Okay. Great. And then maybe switching gears a little bit. Bill, as you mentioned, this is your fiscal Q2, but a lot of the operators full year 2020. And looking at your operator performances, I see that for example, Cortez actually did very well in terms of what they have projected for 2020 versus actual. One of them, I think, the SS -- or the first revenue was 101 to 700 ounces versus 67,000 ounces. So that's GSR1, for example. I guess what I'm trying to ask here is that could you maybe recap what happened in 2020? And then what should we expect, to the extent possible that I can share with us what we should be expecting for 2021? And maybe putting crossroads as well, I think, two quarters ago Mark or Bill you talked about crossroads and that's going to have a positive impact on 2021. I'm just trying to figure out if the outperformance in 2020 is sustainable looking ahead.

[Bill Heissenbuttel:]

Yes. Cosmos, I'll actually start with the latter part of the question. And then maybe I'll ask Mark if he has anything to say about looking back to just 2020. It's usually sort of in the first three or four months of the calendar year where we get a new forecast from Cortez. So we will be in a much better position on the next quarterly call, we think to be able to give you a better look in terms of what this year looks like. I know last year we also went out a couple of years. I can't promise you we'll be able to do that. That's up to discussions between us and Barrick. But we just -- we have to defer what does 2021 look until the next quarter. Mark, anything you want to add on last year's production?

[Mark Isto:]

Well, just you're right that calendar 2020 actually they did exceed their plan by a small margin. So we're very happy. It tended to be weighted more in calendar Q1 and Q2 than back-end weighted. But overall they did do a good job at providing an estimate.

[Cosmos Chiu:]

And then maybe my last question, again, switching gears a little bit here. On taxes, with the new administration in the US Biden and Harris hearing some chatter about potential changes to corporate taxes, corporate tax rates and whatnot. Should we be aware of any potential impacts to Royal Gold in terms of when it might happen? Or if it happens is it going to impact Royal Gold at all? Could you give us a bit more color on that?

[Bill Heissenbuttel:]

Sure. Like it's early days. And I think the soft answer if you will is it's too early to tell. The – Biden does have a tax plan that would show increased corporate tax rates. I am personally skeptical that he's ever going to get to it only because he's got a pandemic. He's got a vaccination program. He's got an economy that he's got to deal with first. And then he's also turning his attention to immigration and health care. And a 50-50 senate split does not give the democrats cart launch to pass whatever they want and there are some vulnerable senators that are going to be up for reelection in 2022. So if Biden's going to get anything done, it's going to be really in the next 12 months. I just – again this is my personal view I don't spend time awake at night worrying about the tax rates going up.

[Cosmos Chiu:]

Thank you. Great. Those all the questions I have. Thanks a lot.

[Bill Heissenbuttel:]

Thanks, Cosmos.

[Operator:]

Our next question comes from Josh Wolfson with RBC Capital Markets. Please go ahead.

[Josh Wolfson:]

Thanks. I just had a quick question for the Khoemacau funding outlook. As it stands for that $50 million or up to $50 million number, are the three different financing options the team has outlined the only available options? Is there some sort of restriction in place that would require Cupric to utilize strictly those options? Or could they go elsewhere for capital?

[Bill Heissenbuttel:]

There are other sources that would probably require our approval. So I wouldn't want to say just because something may not be permitted under the agreement, it doesn't mean they can't come to us with other options and we'll consider it. I think within the agreement they have – the options that we have laid out and relative to the size of the funding gap right now, those amounts would be sufficient. But look we're open to other sources. And I think it's a great project. So I'm not too worried about them finding sources of capital they need it.

[Josh Wolfson:]

Got it. Yes. I guess the question is more so, do you expect to contribute more towards the project which would – the two options at least that were available for Royal Gold would seem to be accretive options as opposed to just accumulating cash at the current time?

[Bill Heissenbuttel:]

Yes. I mean, I guess, I look at it and say, if you've got a $50 million whole we've got $78 million committed to you and there's yet another basket again, it's more than sufficient. But if they were to come back to us and say notwithstanding, what's available we want to go in this direction, we would certainly look at it.

[Josh Wolfson:]

Great. That’s – those were all my questions. Thank you.

[Bill Heissenbuttel:]

Thank you.

[Operator:]

Our next question comes from Jackie Przybylowski with BMO Capital. Please go ahead.

[Jackie Przybylowski:]

Thanks very much. I think I just wanted to follow up on one of Cos' questions about the guidance for 2021 or I guess sorry for the next quarter Q3 2021. It looks like the guidance the 48,000 to 53,000 ounces is sort of below where you came at for the current quarter. And I was just wondering, if you could give us a little more color on that. Or if you can give us some color as to how that gold equivalent ounces breaks down between gold, silver and copper if that's possible?

[Bill Heissenbuttel:]

Yes. So what I'll say, the one thing that's important to recognize about our revenue is that two of the assets in Milligan and Andacollo can be really lumpy. And when we just sort of say timing of shipments, it's sort of a general comment. But we have heard this question and I wanted to turn this over to Mark to try to give you a little more flavor.

[Mark Isto:]

Yes. Thanks, Bill. Yes. I think the simplest way to think about it is, when you look at Mount Milligan, every shipment of concentrate that they make, we think about it as containing 4,000 to 5,000 GEOs combined Gold Equivalent Ounces. So with the shipment coming early or later than we expect that will shift 4000, 5000 GEOs. So that's -- and the same thing happens with Andacollo, although the amount of gold in a concentrate shipment ranges from 2,000 to 2,500 ounces that are GEOs to us. So what you'll find is between those two and being able to take any friction during six months ago when they produced the concentrate goes into an inventory -- concentrate inventory depending on how they want to be -- the owner wants that. It's returned and shipped and then eventually makes it to its -- the smelter. That has a window. And so simplistically thinking, 4000 to 5000 GEOs on Milligan and 2000 to 2500 GEOs on Andacollo swing. And you can -- you look in table two in our press release, which I think gives you a very good view on variability and how the numbers swing around. So I don't know if I can provide any more color to that, but I'm happy to try.

[Jackie Przybylowski:]

Okay. That's helpful. Thanks, Mark. I guess, yes, that's a helpful answer. If I can just ask a second question. Your total available liquidity keeps going up it's at $1.2 billion at the moment. Can you give us a little bit of an update into your thoughts on opportunities? And that do you see growth investment opportunities on the horizon for yourselves? And if maybe you could talk about that $1.2 billion and how much would you be comfortable putting out in a single transaction sort of at the maximum level would be helpful color as well? Thanks.

[Bill Heissenbuttel:]

Sure. And maybe I'll just address the liquidity. I think, we have Dan Breeze, I might turn over -- turn this over to him on the business development side of things. I think we've always consistently said, we'd be comfortable putting $1 billion into a transaction and I think that still stands. It wouldn't be a preference. We don't want to create a concentration issue. And I think anything of that size would probably -- we would probably want to be in production. So that $1 billion doesn't apply to every single type of transaction that we see. Dan, are you on? Do you want to walk through the environment?

[Dan Breeze:]

Yeah. Thanks. Hi, Jackie. Hope you're well. Can you hear me okay?

[Jackie Przybylowski:]

I can. Thanks. Hope you're well too.

[Dan Breeze:]

Good. Yes. Thanks. And so I think the first thing to say is that we're not under pressure to complete transactions. As you know, we've got a strong portfolio and of course, Khoemacau is going to be coming online here over the next number of quarters. So we're excited about that. But I think it's very similar to what we've talked about in the last few calls. We're seeing a pretty healthy market. I think in the $100 million to $500 million range is how I would describe it. And we've adopted to the realities of not being able to travel very easily. So we're getting a lot of our work done remotely and processes are continuing. We've seen as you -- like we see in the market some transactions happen as well. So we feel pretty good about deploying that capital at some point. And as Bill has pointed out, we've got ample liquidity to do so.

[Jackie Przybylowski:]

That’s really helpful. Thanks, Dan. That’s it for me. Thanks.

[Bill Heissenbuttel:]

Thanks, Jackie.

[Dan Breeze:]

Thank you.

[Operator:]

Our next question comes from Mike Jalonen with Bank of America. Please go ahead.

[Mike Jalonen:]

Hi, Bill. Hopefully, you're doing well. Just calling you from my basement. I might be here a lot longer. But just a question on strong performance on the royalty side, I would like your thoughts. But I assume the whole royalty wasn't part of that since the market was shutdown. I just wondering, if there's been any discussions with Kirkland Lake with your royalty to maybe reopen -- get that mine reopened? Or is that even what Kirkland Lake is thinking? It is a very lucrative royalty at these prices. So just wondering where it stands?

[Bill Heissenbuttel:]

Yes. And I'm going to answer you from my basement. So the -- look we spent months talking to both Kirkland Lake and Newmont trying to solve something that wasn't really our issue. As you know, our royalty does not burden the property and it's paid by Newmont. We were surprised by the statement or the option agreement if you will that was announced in August. And all I can really say to you is that we are in contact with counsel. We are reviewing our options with respect to that agreement. And that's Mike that's all I can really offer you.

[Mike Jalonen:]

Okay. Thanks and good luck.

[Bill Heissenbuttel:]

Thanks.

[Operator:]

Our next question comes from Tanya Jakusconek with Scotiabank. Please go ahead.

[Tanya Jakusconek:]

Hi. Good morning, everyone. Can you hear me?

[Bill Heissenbuttel:]

Yes. We can hear, Tanya.

[Tanya Jakusconek:]

Okay. Great. Thank you. I have got three questions. I just wanted to circle back on your fiscal Q2. Other revenue, which we don't have the details on. We have Peñasquito and Cortez. But just on the other royalties, can you give us a breakdown of what are the bigger ones in there? Because that was a lot better than we were anticipating, and we'd just like to have a bit of clarity on the bigger items in that other revenue.

[Bill Heissenbuttel:]

Paul, can I ask you to maybe…

[Paul Libner:]

Yeah.

[Bill Heissenbuttel:]

…give a few names there. I mean, I think we say in the quote that none of them represent 5% but maybe we could just take off some of the bigger ones.

[Paul Libner:]

Yeah. Hi, Tanya. How are you?

[Tanya Jakusconek:]

Good. Thank you.

[Paul Libner:]

Kind of a couple of items that I'll just point out, and two that Bill mentioned in his remarks as well. But probably the bigger one was the 4% NPI that we have on Kurnalpi. It's the Kurnalpi NPI, which is -- it covers certain tenements on South -- Saracen South Laverton property in Western Australia. That royalty generated $3.7 million to us this quarter or approximately 2000 GEOs. So that was really the big item for the quarter. But I'll also say too is the rest of our Australian royalties, we had a nice contribution from a lot of our Australian royalty portfolio. Just to let you know I mean including that Kurnalpi of $3.7 million, we had total contributions in Australia, $40 million for the quarter and that compares to $34 million in our Q1. So those are probably the two big -- or the bigger ones that I would probably point out to you if that helps.

[Tanya Jakusconek:]

Okay. What -- are you thinking of providing us a bit more information on that other category going forward?

[Bill Heissenbuttel:]

Yeah. I think, we've always tried to keep the disclosure to what we phrase as our principal properties, but I'm happy to take that request on and talk to the team about it and see if it makes sense to give you a bit more detail in the future.

[Tanya Jakusconek:]

Yeah that would be helpful. Thank you. And maybe just moving on to the Q3 stream outlook. And I know Jackie asked this and just for us to understand, the outlook suggests again that the -- what you will receive is going to be similar to the level of stream deliveries as Q2. But given the production outlook for both Mount Milligan and Andacollo as we're ramping up through the second half of this year appears better, is it just the timing of these deliveries that are causing this swing because we would have expected the second half to be stronger?

[Bill Heissenbuttel:]

Yeah. I mean, don't forget that the one thing about Milligan and Andacollo there is this six-month delay. So when we look at our December quarter, and I'll just sort of focus on Milligan a little bit, you'll remember that in the second calendar quarter they cut back production due to COVID-19. Well, that starts showing up well after -- people tend to forget about it and then it can show up in our results. I think the thing -- when Mark pointed to table two in the press release, and you look at the variability of each of the individual assets if any of those two bigger assets suddenly match up where you might have lower numbers, you can see these swings but I don't see the range that we've given being completely outside of what we've done before. It is very much timing driven. But if you see production increases of the mine hopefully you'll see that in our results but you won't see that in our results for six months.

[Tanya Jakusconek:]

Okay. So it's the timing of it. And then maybe my last question, just on the M&A and you mentioned your $1 billion transaction. Those would be something that you would do, obviously, asset being in production and a $100 million to $500 million range that you're seeing now. Are those more in the development stage type of acquisitions, or are they producing? And are you still focused on gold? Or have you shipped it to silver? Maybe just a bit more on that. Thank you.

[Bill Heissenbuttel:]

Yeah. And Dan I may turn this back over to you. The one thing I will say is that we're always going to be gold focused. And you've probably heard me say it before. If you give me five transactions to look at and three of them are gold and two of them are silver, I'm going to look at the gold ones first. So silver is in the box, but we're very much focused on gold. We don't take strategic shifts and say, okay, now we're going to do some silver. We tend not to be able to pick the market that way. You take the deals as they come in. Dan is there anything you want to add?

[Dan Breeze:]

Sure. Yeah, hi, Tanya. Hope you're well. Thanks for the question. I would just add that when you think about the buckets of where the use of proceeds are generally directed towards, project development, M&A and strengthening the balance sheets. And I think right now what we're seeing mostly is on the project development side and some of the equity raises that are happening in the market they're small and they're moving forward the projects, which is good for us as well. We're seeing more of those kinds of projects move forward where we can be part of the capital structure on the development side. So it's probably skewed more towards project developments I would say.

[Tanya Jakusconek:]

Okay. That makes sense. Okay. Thank you so much for that.

[Paul Libner:]

Thank you.

[Bill Heissenbuttel:]

You're welcome.

[Operator:]

Our next question comes from Greg Barnes with TD Securities. Please go ahead.

[Greg Barnes:]

Yes. Thank you. Bill, I just want to double-check if the $50 million funding gap at KCM is the entirety of the funding gap. It's not just what you could -- they could cover via your funding options?

[Bill Heissenbuttel:]

That is the funding gap.

[Greg Barnes:]

Okay. And secondarily, your comments at the end of your prepared statements about being disciplined and focusing on returns and being patient. If I'm reading between the lines, obviously the loyalty space has got a lot more competitive. Are you not seeing the returns on the latest deals that have been done, particularly attractive for you?

[Bill Heissenbuttel:]

I think the industry as a whole I think you've seen a compression in returns. But I think when I look at it it's -- you've got the initial return based on a reserve that you see at the time and I've said many time and again that's not the return we're ultimately looking for. We're looking for the assets that have upside, where I can say to you a number of years later see you might calculate a really low return at the beginning, but this is what we saw coming in the future. It is more competitive. And I would say it's more -- it's not just the fact that the space has more people in it it's that the equity markets are open a little bit more. Interest rates are low so the debt markets -- and we haven't seen sort of all of that come together in a long time. So the point really is we can be patient. We're not going to chase deals because we have to fill something -- some pipeline in the future. We're going to find the transactions that we want to do. But to your point, I would say that the competition in the sector is greater because these other sources of capital are now more available.

[Greg Barnes:]

And when you review some recent deals, are you -- do you think the other participants are pricing in too much for the upside beyond the basic reserve? Or is that not the case yet?

[Bill Heissenbuttel:]

I'll be honest with you when one of our competitors announces a transaction we dissect it. But everybody has a different technical team. Everybody has a different view of upside. They may have some familiarity with the asset. So it would be -- it would be really hard for me to start saying okay Company X thinks that this mine is going to instead of having a 5-year life is going to 20-year life. I can't really do that.

[Greg Barnes:]

Okay. Fair enough. Thank you.

[Bill Heissenbuttel:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Heissenbuttel for any closing remarks.

[Bill Heissenbuttel:]

Well thank you very much for taking the time to join us today. I very much enjoyed the questions. We appreciate your interest in Royal Gold and we look forward to updating you on our progress during our next quarterly call. Take care.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.