Gold Royalty Corp. (GROY) Earnings Call Transcript & Summary

Good morning. I'm your vid host, Joanne Jobin, and I'd like to welcome you to the Gold Royalty Informational Townhall Forum. Today, we will focus on this morning's announcement by Gold Royalty regarding royalty and gold-linked loan to finance Aura's Borborema project in Brazil. [Operator Instructions]. With us this morning is Gold Royalty team led by CEO, David Garofalo, who will make the intros to the team and take you through this milestone for the company. David, the stage is yours.

Well, good morning or good afternoon, as the case may be. I'm delighted to be joined by my partners, John Griffith, our Chief Development Officer; Andrew Gubbels, our Chief Financial Officer; and Alastair Still, our Director of Technical Services. As we announced in our press release yesterday evening, Gold Royalty is pleased to announce the acquisition of a 2% net smelter return royalty in Aura's Borborema gold project in Brazil, and a gold-linked loan Aura convertible into a further Royalty in Borborema for a combined USD 31 million cash investment in the project. At the same time, we're pleased to announce that Queen's Road Capital and the Taurus Mining Royalty Fund have agreed to make a combined USD 40 million strategic investment into Gold Royalty Corp. through an unsecured 5-year convertible debenture. These transactions provide immediate cash flow per share growth, accelerating our transition to positive free cash flow less than 3 years after our IPO. It demonstrates our ability to make meaningful value accretive acquisitions even in an environment of scarce capital for the gold sector, leveraging our deep network of a Board and management, and that has delivered 3 meaningful acquisitions in 2023, including this Borborema, the Cozamin Royalty acquisition a little earlier this year and the acquisition of a Royalty portfolio from SOQUEM, another strategic investor in the company. Our strategy is to link growth and is strongly validated by 2 large experienced mining institutional investors in Queen's Road and Taurus. With Queen's Road and Taurus, we add to an impressive roster of strategic shareholders, including Barrick and Newmont, who became our second biggest shareholder as a result of the acquisition of a Royalty on i-80's Granite Creek mine in Nevada last year; SOQUEM, an arm of the Quebec government who sold us their portfolio of precious metal royalties early this year; and of course, Goldmining our founding shareholder has not only retained their original shareholding, but have been opportunistically adding to their investment in Gold Royalty in the market since our IPO. This transaction is truly transformational for Gold Royalty. In Borborema, we have a royalty on a new long-life gold mine with an experienced and successful operator at Aura in a jurisdiction we are very familiar with, and an asset that we think has significant upside potential both geologically and operationally. We invite in 2 new strategic investors in Queen's Road and Taurus. It opens up new opportunities for us for continued accretive growth. So with that, I'd like to pass it on to John Griffith to talk about the acquisition and the rest of the team to walk through the particulars of the asset and the financing related to it. Thank you.

Thanks, Dave. I'd first like to draw all the audience's attention to our cautionary statement, which can also be found on our website. Turning to Slide 3. We're thrilled to be speaking to you today about a transaction that is strategic, innovative and collaborative, demonstrating the efficacy of the combined experience of the Board and management team. It is strategic, given the immediate impact on Gold Royalty's revenue, which we will discuss in greater detail. It is innovative, given the transaction structure affords low-risk, near-term cash flows via preproduction and gold-linked coupon payments, while simultaneously providing long-term exposure to Borborema's robust expected production profile and also significant exploration upside. It is collaborative. Given our partnership with a proven operator and miner in Brazil, with a high-quality management team and also given our participation in a fully funded high-quality project, which is permitted and under construction with initial production expected in early 2025. The financing that Gold Royalty has secured echoes these strategic, innovative and collaborative sentiments. The $40 million unsecured convertible debenture financing adds long-term strategic partners in Queen's Road Capital, a leading source of capital to the global resource sector, and Taurus also a leading global resource sector financier. We'll talk more about these strategic partnerships in due course. But I would highlight that this financing and the stated partnerships will support the continued accretive growth of the company. Proceeds will be used to partially fund the transaction and to partially reduce drawn borrowings under our credit facility, providing enhanced liquidity. And finally, with regards to the timing of the transactions, they are subject to customary closing conditions and expected to close in December 2023. Turning to the next slide. Taking a closer look at the transaction structure, the first component is a $21 million royalty financing which provides a 2% net smelter return or NSR royalty over the Borborema project. As mentioned, the risk to Gold Royalty associated with the timing and successful ramp-up of the Borborema project is mitigated by Aura's commitment to make preproduction payments of 1,000 ounces per year which will continue until the earlier of commercial production or 10 years. The royalty steps down to 0.5% NSR after 725,000 ounces of production, which is marginally below the anticipated production of 748,000 ounces of gold over an approximate 11-year mine life as outlined in the Borborema feasibility study announced in August this year. Furthermore, Aura will retain the rights to buy back the remaining royalty for USD 2.5 million after the earlier of 2.25 million ounces of production or the year 2050. And then finally, I'd highlight that the Royalty is secured by a pledge of mineral rights. Turning to the $10 million gold-linked convertible loan. Upon maturity or early redemption, Gold Royalty has the option to be repaid fully in cash, i.e., $10 million, or to be repaid $5 million in cash and retain an incremental 0.5% NSR over Borborema. This feature allowed Gold Royalty to extend additional capital to Borborema, while Aura works to unlock access to additional resources currently constrained under an existing paved road. If Aura is successful in relocating the road, the additional resources will enhance the mine life and Gold Royalty will have the option to gain additional exposure to the project through this conversion feature. The coupon offers Gold Royalty exposure to gold as it is determined based upon a quarterly 110 ounces of gold or equivalent to 440 ounces per year. The loan matures on 6 years, and does, as I mentioned, have an early prepayment mechanism exercisable after 2 years. If Aura elects the early repayment option, there is an incremental payment to be made to Gold Royalty. And Gold Royalty retains the conversion rights potentially providing an increased royalty on the project at that time. If Gold Royalty exercises its conversion rights, the incremental royalty will be subject to the same buyback terms as already noted. An important added feature to the transaction structure is the ESG co-investment contribution. The idea is to facilitate investment in an ESG initiative that is incremental to any existing or regulatory initiatives and is intended to promote enhanced social or environmental programs. The way it will work is that Gold Royalty will, upon completion of the project, provide Aura a rebate of $30 per gold equivalent ounce payable from the NSR royalty, up to a maximum of USD 300,000. At Gold Royalty, we believe that Aura as owner and operator of Borborema is best positioned to determine the most suitable program for the community and the environment. We will then work with Aura to agree that the program meets the intended requirements and the rebate will become effective. We believe this is the most effective way to ensure that ESG funding is productive and efficiently implemented. Turning to Slide 5. There are a number of moving pieces in the transaction structure, and so this slide seeks to graphically pull together the key elements in an illustrative manner. I should highlight that the information on this page is based on Borborema's feasibility study published in August this year and information contained in our press release dated December 5, 2023. From Aura's perspective, in simplistic terms, the company will receive $23 million -- sorry, I beg your pardon, $31 million in financing for Borborema. Gold Royalty will initially receive the coupon on the loan payable in gold ounces, highlighted in the light gold brown color on this chart. We will also receive preproduction payments highlighted in black, until the earlier of project completion, which in this case is assumed to be partway through 2025 in this illustration. And I do highlight that these payments would continue for 10 years if completion isn't met. Once the preproduction payments fall away, the 2% NSR kicks in, represented by the blue bars. Finally, if Gold Royalty elects its conversion option under the loan, we will receive an incremental 0.5% NSR illustrated by the dotted box. In this instance, we have assumed that Aura does not exercise the early repayment option for illustrative purposes only. I'd now like to hand over to Alastair Still to talk more specifically about the Borborema project. Alastair?

Thanks, John. It's certainly important now to talk about the project after we've heard about the transaction structure. And the deposit and the company are both very solid, very good, robust asset, which we've done significant due diligence on. What I would draw people's attention to is the resource statement for the company, which has over 2 million ounces in indicated category and resources and a further almost 400,000 ounces inferred. Within that resource, there's a subset that's been converted to a reserve. The reserve is what was reported by Aura in their feasibility study in August. And that feasibility study only captures 812,000 ounces of the indicated resource, which was upgraded to a probable reserve. What that necessarily implies is that there is another 1.265 million ounces in indicated category that will be converted to a reserve should Aura be successful in completing a relocation of a road around the margin of the pit. This provides tremendous upside from an exploration perspective, yet really no additional drilling is needed. It's really an engineering task and engagement with the community to move that road, which we have already begun the process on. Furthermore, I would point out that when resources are converted to reserves, the inferred are not considered. So all 393,000 ounces that are inferred resources, those are not captured by the feasibility study, yet they're contained within the pit shell and there's a very good opportunity for those to be mined during production. The deposit itself is very well defined, very well understood. There's over 100,000 meters of drilling on it, so there's good confidence in the resource. It's a well-suited deposit or body for this type of open pit mining. It's a modest strip ratio. The average thickness is 30 to 35 meters, so there's good continuity and it does go up to 50 meters thick in places. The deposit is open in all directions, and there is a potential for future underground, which Aura will look at in the future as well as expansion along strike and further down dip as well. You can also see on this table here that the capital to construct the project is quite a modest number and Aura is now fully funded with the financing they have secured and cash on hand to build this, and they are experienced operators building and operating mines. And if we move forward to the next slide, we can talk about Aura as an operator. Aura actually are well suited in Central and South America. They have a strong pipeline of producing and development assets. They currently have 4 mines in operation, including the recently announced commercial production at the Almas deposit in Brazil. And I would point out that when Aura built this mine, it was built on budget and a total construction time of 16 months. That's very important for us because Aura have established themselves as strong operators, and presence in Brazil is very important for building Borborema. The Almas mine has come online just in the last couple of months, September 15, it declared commercial production. And they're already looking at ways to optimize that and increase and expand production. So it's good that the team is innovative and looking to grow their resources. They are a well-established producer with a target of reaching 450,000 ounces per year by the end of 2025. So that illustrates how they're well suited to not only construct Borborema, but also operate it very efficiently as well. And on that, I will pass over to Andrew, please.

Thank you, Alastair. Okay. Let me start off with our commitment to sustainability here. So our investment at Borborema marks the first opportunity for Gold Royalty to implement its ESG co-investment strategy. Now this is something that we have had as part of our mandates on potential investments for new royalties, and this was the perfect opportunity to include our ESG co-investment strategy with Aura Minerals. So here, we will collaborate with Aura to provide ESG funding that will supplement or further enhance its existing sustainability programs. We're not funding what their existing commitments are for ESG, we're providing additional funding for Aura Minerals. And to facilitate this, Gold Royalty will take a small rebate of $30 per ounce payable from the NSR royalty upon commercial production at the Borborema mine, not right at the outset with the preproduction payments, but once the mine has reached commercial production. And these funds will be allocated towards mutually agreed ESG programs. So through this innovative ESG co-investment strategy, Gold Royalty will not only help Aura Minerals build its Borborema project with its financing, it will also contribute to communities surrounding the mine. Now let me give you a snapshot of [indiscernible] going forward. The investment in [indiscernible] Gold Royalty has continued to execute on its strategy of adding cash flow, quality cash flow generating assets to its world-class growth portfolio. With the Cozamin project also coming online in Q1 2024 and Canadian Malartic royalty expected to grow next year, the addition of Borborema with its preproduction in gold-linked loan coupon payments and Cozamin, which was acquired earlier in 2023, it will contribute to a step change in [ geos ] and cash flows in the coming years. I really emphasize the free cash flow, operating free cash flow positivity of the company in 2024. Gold Royalty, as everyone knows, has had a world-class growth portfolio. It now has an established solid foundation of cash flow generating assets and near cash flow assets to smooth its path towards becoming a leading diversified precious metals royalty company. Now as mentioned previously, to finance the Borborema investment, Gold Royalty will issue $40 million of convertible debentures in a private placement to strategic investors. With additional net proceeds used to reduce credit drawn on the company's secured revolving credit facility, thereby for the company going forward, this funding provides Gold Royalty with long-term unsecured capital [indiscernible] cash coupon and gives us the support and flexibility to continue to grow the company. Importantly, Gold Royalty has aligned itself with strategic investors that are supportive of the company's long-stated growth strategy. Queen's Road Capital will provide $30 million of funding to Gold Royalty. QRC has been an active finance partner for growth-oriented mining companies such as NexGen Energy, Los Andes Copper and Adriatic Metals. It's investment in Gold Royalty is its first in the streaming and royalty sector. Taurus Funds Management via its Taurus Mining Royalty Fund will provide $10 million of capital to Gold Royalty. Taurus is an established private financier in the mining sector, having successfully funded companies such as [ Trendin ] Gold and West African Resources and recently acquired a royalty over Taseko's Florence Copper Project for $50 million. Together, these investors are not only providing acquisition financing, they're also pledging their support for Gold Royalty management and validate the company's strategy and vision. Now I'll pass it back to David for concluding remarks.

Well, thanks very much, Andrew. We're delighted, as I said, to complete this transformative transaction with strategic investors adding an asset that delivers double-digit rates of return with expansion potential both geologically and also from an operational standpoint that could further enhance the rate of return, providing full upside to the gold price in an environment where the gold price is accelerating, catching a bit, if you will. And we think that will start to get reflected in the gold equities over the coming months and years, and we're well positioned to enjoy the upside in the gold price given the royalty model. With that, I'd be delighted to open it up for Q&A and all of our management team that presented today is open to answer any questions that you might have.

Thank you, David. That was a great update, and thank you for your time today. We'll now moderate some Q&A that has been added. First question is how should we treat the accounting of the preproduction payments? I assume this will not be treated as royalty revenue on the income statement, but will hit the cash flow statement.

I can take that. Yes, the preproduction revenue and the loan, the revenue from the gold-linked loan will be included in our adjusted revenue. It will hit the cash flow statement, that is correct. It will be considered revenue in terms of our accounting. So it will be cash coming to the company. But again, based on some of the accounting rules, you may not see it on the revenue line. But rest assured, it is cash flow, and you will see it in our adjusted total revenue, non-IFRS figures.

Excellent. Next question regards NAV, what price relative to NAV did Gold Royalty pay for this?

Yes. We're expecting, at current gold prices a very strong double-digit rate of return, well in excess of the cost of capital of the financing, the strategic financing we did with Queen's Road Capital and with Taurus.

Excellent. Next question. What does the balance sheet look like post this deal?

The acquisition of the royalty and the extension of the gold-linked loan to Aura is $31 million. We're raising $40 million in total. At the moment, we do have circa $17.5 million or so of debt outstanding. We will use excess proceeds above the purchase price to repay the certain amounts outstanding on the credit facility, net of certain transaction-related expenses. Pro forma for the transaction, we should expect to see total debt outstanding on the credit facility somewhere around the $10 million mark pro forma for the transaction. And then, of course, we'll have the $40 million in convertible debentures. We will have additional credit available under that facility given that we pay down -- we'll pay down a certain amount of the debt outstanding.

Excellent. Obviously, rates have gone up. But what would you say is the IRR of this royalty deal relative to the cost of financing and shares? What's discount rate did you use on this?

Yes. I'll just highlight earlier, we're expecting comfortably in the double-digit rates of return on this opportunity. It really depends on your gold price assumption because this is very much gold oriented. It's geared to the gold price. But at current gold prices, we're comfortably in the double-digit territory well in excess of the cost of capital from the debenture.

All right. Next question. Was this a competitive transaction? What has been the deal environment like outside of this? Would these 2 new partners be willing to fund additional deals if they come up and are they -- and attractive?

I'll start, and I know John will have some things to interject. But this was a bilateral process as virtually all the deals that we've done since our IPO have been, is leveraging relationships. We have a very strong relationship with Dundee Corp., who are formally joint venture partners on the Borborema project, which they convert into an NSR since then. And they were responsible for raising the capital from Santander on the project financing and from us on the royalty. And so we've had a strong relationship. I've had a strong relationship with the principles of Dundee for decades, and that relationship led to this opportunity. So John, you can answer the rest of the question. .

Yes. No, thanks, Dave. It's a very active market. I think in what I would describe as the sub-$100 million environment for those seeking to raise capital, there is no shortage of opportunities. And I think we've used this phrase before, but we're in a perpetual state of due diligence, so not just on this transaction, but on other opportunities. So certainly, no peace for the wicked, so to speak, in terms of the corporate development team. But I also think that having the strategic alignment with Queen's Road Capital and Taurus will certainly enhance our ability to remain very competitive in this marketplace.

Thank you, John. Next question. This is impressive. Were you able to get this done in this sort of environment? And is your small size helping, I would think this is too small for the large guys to bother with.

Yes. I mean, I think the interesting thing is we've seen the large companies do transactions of this size and in fact, in some instances, even smaller. So I think it's about being nimble. As we've always articulated the benefit of having the experience of the Board and management team and advisory board is really what helps us punch above our weight and be able to come up with a competitive solution -- creative solution to a very exciting project development opportunity. So I think it's a great example of keeping the team small and lean, but being able to continue to grow. As Dave has mentioned, we have 240 million -- I beg your pardon, 240 royalties, and we could manage a portfolio significantly larger without having to increase the size of our team. And I think the transaction itself was really a collaborative effort across Board talent and management talent to get this done.

I can imagine it was no easy feat and quite a nice Christmas present. Congratulations team, this is a real milestone for you. It doesn't look like we have any other questions. So we will end the townhall at this time. Thank you, gentlemen, for, again, a great update. David, do you have any closing words before we sign off?

All I would say is, please, if you have any other detail question, we remain at your disposal. You know how to reach us. Many of us just have our first initial, last name, @goldroyalty.com, you want to reach out by e-mail or info e-mail or 1-800 number. We're always delighted to hear from you and answer any questions you might have on this or our business in general. With that, I hope everybody has a lovely holiday.

Thank you, David. And before we sign off, please ensure that you fill in the short questionnaire at the end of the presentation. This helps us and the company to communicate more effectively with you in the future. Thanks for joining us, and we'll see you on the next townhall forum. Goodbye, everyone.

Thank you.