Royal Gold, Inc.
Q4 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good afternoon ladies and gentlemen. My name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold Fiscal 2013 Fourth Quarter and Year End Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn the call over to Karli Anderson. You may begin.

[Karli Anderson:]

Thank you, operator. Good morning and welcome to our discussion of Royal Gold’s fourth quarter and fiscal 2013 year end results. This event is being webcast live and you will 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; Bill Zisch, Vice President Operations; Bruce Kirchhoff, Vice President, General Counsel; and Stanl Dempsey, Chairman. Tony will open with the discussion of the year followed by Stefan with the financial review and then Bill Zisch will discuss the performance of our portfolio. After management completes their openings remarks, we’ll open the line for Q&A. Before we begin, I want to remind everyone that this discussion falls under the Safe Harbor provision of the Private Securities Litigation Reform Act. A discussion of the company’s current risk and uncertainties is included in the Safe Harbor statement in today’s press release and is presented in greater detail in our filings with the SEC. Now I’ll turn the call over to Tony.

[Tony Jensen:]

Good morning and thank you for joining us. We’re using a few slides to frame our discussion and I’ll begin on slide three. Today, we are earning some important accomplishments announcing the new acquisition and shedding some light on our expectations for the future. This is Royal Gold’s 12th consecutive year of record revenue. And as you can see from the chart on slide three, our revenues have grown about 400% since 2008. But it is also important to note that we have grown our EBITDA margin at the same time, which now stands at 90%. We’ve always make cost containment our priority regardless of gold price. As a result, we’ve had the flexibility to invest in gold projects while increasing our dividend for 11 straight years. Our most advantage for years now consumed with slashing expenses in right that we sell. Royal Gold is focused on leveraging our unique scalability that allows us to grow our business off a lower fixed cost base. Turning to slide 4, this morning, we announced a new acquisition. We’ve acquired a 1.4% NSR royalty concessions at the El Morro in Chile that we estimate cover about one-third of the total reserve. Goldcorp hold 70% ownership in El Morro and is the operator with the remaining 30% held by New Gold. At December 31st 2012, proven and probable reserves totaled 9.5 million ounces of gold and 7 billion pounds of copper. Currently the Chilean authorities are working to define and implement a community consultation process with Goldcorp’s support. As a result, the El Morro construction activities have been suspended pending the completion of that effort. Our rationale for this investment is that we believe this is a food project with a good operator in a good jurisdiction. As you can see from the chart on slide 4, El Morro has one of the highest in-situ metal values of undeveloped gold and copper deposits worldwide. It has a mine life that spans nearly two decades and like so many large systems, we would expect reserves to expand overtime. I know the region well having operated a mine not far from El Morro and we have confidence in the operator. While we recognize it will take some time to complete the permitting process. At our price point for the acquisition, we think it is an attractive opportunity to give our shareholders exposure to this property. Turning to slide 5, another accomplishment we’re celebrating today belongs to Thompson Creek. Here you will see a photo of the Mt. Milligan facilities in the foreground and the mine in the background. The primary pressure and conveyor have been commissioned the core resource stockpile has embedded at the minus position to deliver ore to the crusher. The phase start-up of the concentrator is planned to commence in just a few days with the first ore feed expected to occur in mid-August. All of the concentrator grinding and flotation circuits are scheduled to be operational in September. We congratulate the concentrate team for delivering Mt. Milligan on the schedule and substantially within the budget range established 2.5 years ago and we look forward to the beginning of commercial production later this year. On slide 6, we will have a few more pictures that I’ll show over the course of this morning’s call that illustrate the scale of the operation and the status of the build. This is a picture of the primarily crushing facility, the mechanically stabilized earth well and the 60 inch overlaying conveyer that transports material to the core score stockpile. Stefan will discuss how Mount Milligan start-up is expect deposit impact our future financial results in a moment, but before I turn the call over to Stefan and Bill to discuss our financial and operating results and outlook, I’d like to mention what we’re currently seeing in the market for royalty and streaming opportunities. Equity financing is a permanent viable means of raising capital. 2012 was the lowest year providing equity raises in a decade. And 2013 is shaping up to be even linear. The cost of corporate debt and convertibles is increasing. And companies are beginning to look forward with some concerns about working capital if weaker metal prices are sustained. Against this backdrop Royal Gold with over $1 billion in available liquidity is well positioned to provide support to the industry. But as we have demonstrated in the past we will remain disciplined when allocating our capital. With that, I’ll turn the call over for Stefan for financial update.

[Stefan L. Wenger:]

Thank you Tony and good morning everyone. Let’s turn to slide seven. In fiscal 2013, we reported a 10% increase in revenue driven by volume increases of 15%, somewhat offset by a gold price reduction of 4%. We had net income of 69.2 million or $1.09 per share down 25% from fiscal 2012. The reduction was mainly due to a non-cash impairment loss of 12.1 million related to our investment in Seabridge that was previously recorded in our third quarter. We also had an increase in interest expense associated with our 2019 notes and earnings per share reflected the issuance of 5.25 million shares of common stock in October 2012. These impacts were partially offset by higher royalty revenue. Also in the fiscal year, we paid cash dividends totaling $43.9 million which represents a payout ratio of 25% of our operating cash flow of 172.6 million. Income tax expense for the year was 63.8 million, for an effective tax rate of 46% compared with 54.7 million or 36% in the prior year. The increase in tax expense was associated with third quarter events of the write-down of the Seabridge investment and the filing of our June 30, 2012 U.S. income tax return. For the year, we pay cash taxes of $48 million, representing a cash tax rate of approximately 35%. For the fourth fiscal quarter, our net income was 10.7 million or $0.16 per share, compared with net income of 20.6 million or 35% per share a year ago. Results for the fourth quarter were impacted by lower average gold price of $1,414 per ounce which was a 12% decrease over the prior year quarter, lower revenue at Penasquito and lower contribution from Cortez. Results were also impacted by higher interest expense, higher DD&A and additional shares outstanding than the prior year quarter. Now I would like to discuss our outlook for fiscal 2014 and the impact of expected revenue growth from Mount Milligan. Royal Gold will take physical delivery of metal from Mt. Milligan and handle the marketing and sale of the metal through our Swiss subsidiary. As Mt. Milligan transitions into production the deliveries that Royal Gold will receive will be based on not just the contained gold and the concentrates but also the delivery terms agreed upon with Thompson Creek. We expect deliberate ounces to initially lag Thompson Creek’s reported production by two to four months with the time period transitioning to approximately four months after the first year production. Unlike our royalty revenue for which revenue accruals are made as and when our operators receive smelter payments revenue for the Mount Milligan stream will only be recognized upon the sale of the delivered metal into the market. On slide eight you will see a picture of the Mt. Milligan concentrator pebble crusher and admin facilities. Based on Thompson Creek expected timing for start-up at Mt. Milligan we are forecasting an effective tax rate of between 30% and 34% for fiscal 2014. Reflecting the contribution of Mt. Milligan revenue at a lower tax rate than our U.S. tax rate. Adjusted EBITDA as a percentage of revenue is expected to move downward as Mt. Milligan shipments commence 80% to 85% of revenue. As our payments of $435 per ounce will be reflected on the income statement as a cash cost. DD&A is expected to be in the range of $425 to $500 per gold equivalent ounce for fiscal ‘14. With the rate moving from the high-end in the first half to the lower end of that range in the second half of the year. And now I’ll turn call over to Bill Zisch.

[William M. Zisch:]

Thank you, Stefan. Good morning, everyone. Continuing with the focus on Mt. Milligan I’d like to show a series of slides that will walk you through the concentrator. The next slide number nine is the SAG mill. That’s a 40 by 20 foot SAG mill with 122 megawatt gearless wrap-around drive. Moving to slide 10, you will see there are two ball mills; they are 24 by 41 feet, driven by two variable speed synchronous motors. As Thompson Creek has announced commissioning is underway. The next picture on slide 11 is of the floatation cells. There are five cells per train two refers and three scavengers and each tank has a capacity of 200 cubic meters. And on slide 12, there is another view of floatation cells in the regrind area. As you can see Thompson Creek is set for commissioning. Turning to slide 13. Our remarks on the broader portfolio will compare the June 2013 quarterly results with the March 2013 quarterly results rather than the prior year comparables to give you a better sense of near-term performance. Revenue in the June quarter was about 17 million below the March quarter. Metal price differences account for most about 10 million of that difference. The balance was a result of lower grades that Andacollo as expected, normal seasonality of Voisey’s Bay, the impact of Wolverine coming off a record quarter in March and a completion of our royalty at El Chanate. These impacts were partially offset by production increases at Cortez, Gwalia Deeps, Peñasquito and Robinson. At Andacollo, gold sales during the quarter were in line with expectations mentioned during the March quarter as mining transition to lower grade material. Teck has maintained their guidance of 63,000 ounces of gold for calendar 2013. Planned production during the next few quarters is likely to remain at level similar to this quarter’s 16,000 ounces. At Voisey’s Bay, it is normal to see seasonal adjustments of copper production during the June quarter as shipping schedules are restricted. At Yukon Zinc’s Wolverine mine, production this quarter relative to the preceding quarter is down because of the March quarter was a record for the mine. Additionally, in late June, Yukon Zinc announced that eyeing to lower metal prices; they will reduce production rates by about 40% with plans to reevaluate that production schedule in the fall. Our First Quantum’s, Robinson mine favorable gold production for the year as a result of the mining sequence that has operating in gold rich areas during the first half of the year. Copper production was also up during the quarter exceeding the preceding quarter by 75%. Sustaining productive mining and plant throughput have allowed Robinson to report consistently strong quarters during this year. Production from Barrick’s Cortez mine attributable to our account increased in the fourth quarter as the mine sequence call for a resumption of mining at the pipeline and gap pits where we hold royalty interest. As surface mining equipment is being returned from Cortez Hills project. At Gwalia Deeps St. Barbara reported strong production during the month of June contributing to the quarter’s production that was more than twice the level realized in the March quarter. At Goldcorp’s Penasquito mine production was about 5% above the March quarter. Their reported production aligns with back end weighted guidance provided by Goldcorp. Sulphide plant achieved throughput of 105,000 tons per day during the quarter following the completion of crusher maintenance, blasting and the addition of new fresh water wells. Significant improvement was realized in the month of June with the sulphide plant achievement average throughput of over 120,000 tonnes per day during the month. Goldcorp also announced that they recently completed water study, has defined an additional water source, referred to as the Northern well field that is within the permitted basin. Goldcorp plans on beginning construction to develop this water source during the fourth quarter of calendar year 2013 with the completion of the project expected during the second half of calendar year 2014. In mid-July, Barrick announced that they must complete Pascua-Lama water management system to the satisfaction of Chile’s environmental superintendent before resuming construction activities in Chile. Barrick has also stated that they intend to resequence construction of the process plan and other facilities in Argentina in order to target first production by mid 2016. I’ll conclude by saying that our portfolio generally performed well and we forward to the addition of not Milligan mine a producing property in the coming month. With that I will turn the call back over to Tony.

[Tony Jensen:]

Thanks for the update Bill. I’ll conclude on slide 14, I like to take this opportunity to welcome Karli Anderson and Jason Hines to Hynes to our to our Royal Gold team currently is our new VP and Investor Relations as you heard in the just front end of this call, and during the retirement of Karen Gross. And Jason will be looking after our subsidiary that owns the Mount Milligan interest and working closely with Bill Heissenbuttel on Corporate Development opportunities. Both of these individuals have already begun to contribute meaningfully to the company and we look forward to even greater things in the future. In closing, fiscal 2013 was a solid year for Royal Gold. On an aggregate basis, the production volume increased to 15% was partially offset by a 4% reduction in average gold price resulting in 10% higher revenue. We maintained our cost and capital allocation discipline; we strengthened our balance sheet -- dollars in available liquidity. We are well-positioned for this period of unique opportunities. We added to our interest at Mt. Milligan early in the year. We now control 52.25% of the gold from that project. Just today, we announced the acquisition of the El Morro royalty. While we experienced some headwinds related to Pascua-Lama construction did advance, notably during the year, with Barrick investing an additional $1 billion, bringing the total spent-to-date to $5.4 billion. We remain confident in the long-term value of this deposit. Most importantly on Mt. Milligan, construction, advanced on schedule and on budget with mill commissioning now underway. Operator, that concludes our prepared remarks and we’d be happy to answer any questions if there were some on the line.

[Operator:]

Certainly. (Operator Instructions) Your first question comes from the line of Patrick Chidley from HSBC. Your line is open.

[Patrick Chidley:]

Good morning, good afternoon Tony and everybody.

[Tony Jensen:]

Good morning Patrick.

[Patrick Chidley:]

Hi! Just wanted to ask sort of a question that is really aimed at some of the downside that people may be concerned about with Thompson Creek, Mt. Milligan and I’m wondering if you could just maybe flush out what happens if Thompson Creek does get into financial difficulties? What are your rights there, if they go into, for example, into administration at any stage?

[Tony Jensen:]

Well, let me start out on the positive side of that topic. Thompson Creek, announced today that they anticipate having about $100 million of free board over the next coming months as they work towards commissioning the property. So, they don’t have any expectations of having problems, and certainly we have to build to this date, and we don’t expect any start-up site problems, but answering specifically to your point. If in the event that it did go into administration, we do have a limitation on how much debt, obviously, that can stand in front of us and that limitation is $350 million. So, we would be second in any kind of liquidation event behind that, but really what we want to do, Patrick, is maintain our business interest. We think this is a quality property that’s going to attract another buyer, if that were to happen. We are fully supportive of Thompson Creek. We want to see them be successful here. I think we’re quite comprehensive when we put the deal together originally, now, three years ago to plan for a situation like you outlined.

[Patrick Chidley:]

Yeah, thanks. I understand that and that’s good to know, but if – I’d imagine, for example, if the company did go under, but the mine was still going, it wouldn’t be such a great idea to close the mine, so I would presume that Mt. Milligan would just continue producing and it’s the source of cash flow. I’m wondering if that the – going into administration changes your rights on the metal stream or not?

[Tony Jensen:]

Well, in other words, those are events that we can’t really comment or predict on. We just don’t know that what eventuality might happen there. I would expect if the mine produces we have the right to receive a percentage of the gold and that would be honored through that administrator process until something else is decided by a court of competent jurisdiction.

[Patrick Chidley:]

Right, okay. Good. Thanks and then just a follow-up question, if I may. This is with respect to El Morro. That transaction is, obviously, kind of long-term looking forward. Can you comment on the situation there in terms of where you perceive Goldcorp to be on their ability to move forward on the project, and sort of what timing, you’d expect, getting into cash flows?

[Tony Jensen:]

Let me, Patrick, introduce you to Bill Heissenbuttel, our business development, vice president and he’ll comment on that.

[William Heissenbuttel:]

Yeah. Patrick, I mean, Goldcorp has not identified a firm timeline with respect to the build of El Morro. They clearly have some work to do on the indigenous issues there. I think one of the good things about this acquisition is we were able to see the delay in front of us and, as Tony said in his prepared comments we were able to reflect the delay in the valuation methodology we used with respect to the acquisition.

[Patrick Chidley:]

Right. Good, okay. All right, thanks very much.

[Tony Jensen:]

Thank you, Patrick.

[Operator:]

(Operator Instructions) Your next question comes from Kevin Chiu, your line is open.

[Unidentified Analyst:]

I have got a few questions maybe first of again on Mt. Milligan, Tony judging from your answer to Patrick's questions you have full confidence in Thompson Creek, reading over I guess Thompson Creek’s financial reporting last night, they have talked about a small increase, only a small increase in terms of I think about $40 million to about $50 million in the CapEx remaining CapEx for Mt. Milligan, are you comfortable with that? Are you okay with it, what's your perspective on it?

[Tony Jensen:]

Well you know, let me go back to essentially the range they establish in February of 2011 both on schedule and timing, sorry scheduling and on budget and they are surely up in the higher end of the budget range that they established and having heard from Thompson Creek I understand these lead us to cost increases are somewhat related to how the start up expenses, whether the capitalized or expenses and I guess some had been moved into the capitalization rather than expense. So, I don't know that there is any cost that has been unexpected on their part just what bucket it's been put into. And again, we understand they have about 100 million of projected surplus on their cash basis as they go through start up. So you know I am not able to really comment on anything further than that but that's the situation as we understand it.

[Unidentified Analyst:]

Okay great. And Tony or Bill, in terms of El Morro, would you be able to give us, I guess your royalty at this point in time is only on one-third of the reserve base, would you be able to give us a bit more description in terms of like which part of the deposit would that be on and you know in terms of current mine plan or the current plan at this point in time, would it be at the front or at the end of the life and mine production?

[Tony Jensen:]

We would expect that certainly the production on our royalty ground there would be heavier at times than others. But if you were to think of El Morro as a circle and if you are drive diagonal from the upper left to the lower right on that circle there is a swat of claims that run through just a little bit below the center point that would not be subject to our royalty interest. So, we would have all the in the interest outside of that. So at times, I am sure the mining plan would be certain phase, at certain years later on the ground that we have our interest on but I think perhaps we can give you some visual guidance on what we think the pit and the property position look like as we present future. PowerPoint type presentation in the future.

[Unidentified Analyst:]

Great. That will be great. Thank you. That's all I have.

[Operator:]

Your next question comes from the line of Shane Nagle from National Bank. Your line is open.

[Shane Nagle:]

Thanks operator.

[Tony Jensen:]

Good morning, Shane.

[Shane Nagle:]

Good morning, guys. Just a couple of quick questions around Wolverine obviously touching on them being down 40% in terms of production, is this kind of run rate we expect to see. This is one of the assets you guys have that we just don't have really good access to the information on?

[Tony Jensen:]

Yeah Bill Zisch, do you want to take that comment.

[William M. Zisch:]

Yeah Shane, the run rate that you referenced, if you take their current run rate which is about what they saw last month, and then reduce that by 40% that they are suggesting that's about what we would expect to see until they re-evaluate that.

[Shane Nagle:]

Okay. And then you mentioned they are going to re-evaluate sometime in the fall or early next year.

[William M. Zisch:]

Right. That's what they have stated correct.

[Shane Nagle:]

Okay. And then with Mt. Milligan you mentioned the delay of two to four months in terms of the payment. So, if they are in commissioning now obviously the answer is produced by the commissioning phase you are entitle too as well, so you are thinking maybe early next year you start to seeing some cash flow from this operation?

[William M. Zisch:]

We probably would expect to see some cash from the operation in our second fiscal quarter. So in the December quarter probably not substantial and we would expect the first concentrate lots to be our shipments to be of lower quality as they continue to work through the system. So we do expect some revenue just over probably 12 month build coming into full production power for our interest.

[Shane Nagle:]

Okay. That's great. Thank you very much guys.

[Tony Jensen:]

Thanks Shane.

[Operator:]

We have no further questions on the line. I will turn the call back over to the presenters.

[Tony Jensen:]

Thank you, operator. And thank you for your questions and taking time to join us today. As always we appreciate your interest and continued support to Royal Gold and we look forward to updating you along the progress during our next quarterly call particularly in regard to the status in Mt. Milligan commission efforts. Thank you everybody.

[Operator:]

That concludes this conference call. You may now disconnect.