Royal Gold, Inc. (RGLD) Earnings Call Transcript & Summary

Our next speaker this morning is Royal Gold. Royal Gold owns a large portfolio of producing, development, evaluation and exploration stage streams and royalties located in some of the world's most prolific gold regions. Here today to provide an update is Bill Heissenbuttel, President and Chief Executive Officer of Royal Gold. Thanks, Bill.

Jackie and I were just commenting that between us, we have quite a few syllables up here on the stage. So good morning, everyone. Jackie, thanks very much for the opportunity to speak this morning. I will be making forward-looking statements. So I ask you to be familiar with our cautionary statement. So we're about halfway through our fiscal 2020. It'll end on June 30 of this year, and we've had a really good start to the year. Our gold equivalent ounce, what we call GEO, volumes were up for the 3- and 6-month period ending December 31, and we experienced strong quarterly revenue for both periods due in large part to higher metal prices. Average realized gold prices alone were up 20% for both periods compared to our fiscal 2019. Our cash from operations for the first part of this fiscal year were sufficient to make our initial investment in the Khoemacau project, pay our quarterly dividend and still enhance our overall liquidity. The reduction in debt is a focus for us. And at the end of December, we had $135 million outstanding under our revolving credit, having paid down $35 million in the December quarter and $85 million in the first half of this fiscal year. And we've also spent the last 60 days transitioning to a new management team. The transition has really been a seamless one due to the years of experience these individuals have had with Royal Gold. I inherited a very strong team with lots of depth and has really made it easier for me to focus on new opportunities and strategic direction. It is not just the management team as I also benefit from one of the strongest Boards in this industry, a group with diverse background and skills and a willingness to provide guidance when asked. So people often ask me how the strategy might change under this new group, and I typically respond by saying the Board's decision to retain me or hire me as the CEO is a vote for consistency of strategy and direction. We will remain dedicated to the business model and the focus on precious metals, gold in particular. Now of the individuals up here, Mark and Paul are here with me at the conference, and I invite you to get to know them if you have a moment. So I want to outline for you a high-level view of the company, our strategy and the business model. There are really several key attributes. So when we first speak of optionality, we're talking about gold price optionality, given the leverage we can get from our streaming structures and our sliding-scale royalties. But really, more importantly, we're talking about the cost-free upside inherent in our portfolio. You can buy the GLD, but that ounce will always be an ounce. What we seek to invest in ounce is in mines where 1 ounce could become 2 ounces or 3 ounces or 4 ounces over the mine life, and I think you've seen many examples of that in our portfolio. So for a generalist, in particular, this sector is a natural for you when you're ready for a bit more risk than the GLD but you don't want to take on full operating company risk. We're highly efficient. With our 24 employees, we've got a market capitalization per employee of about $300 million, and our cash G&A expenses of $25 million represents 0.35% of our total market cap. We provide a diverse set of 43 producing properties, and I'll spend a bit more time on those properties a bit later. In terms of capital deployment, we continue to be very selective when it comes to new transactions. The new investment opportunities then will fit into quarterly conference call schedules in terms of timing. There may be starts and stops for a variety of reasons, so patience and discipline are key. Now when we do invest, our financing strategy is tilt to cash and our bank facility first for capital, so the growth is accretive to our shareholders. We have not done an equity issue since 2012, and we got our position in the GDX as having the fewest shares outstanding very closely. Our financial position is strong. As I mentioned in the previous slide, our debt outstanding $135 million, and our total liquidity, which is cash plus revolving credit availability, was almost $1 billion. And we generated almost $150 million in operating cash flow in the first half of this current fiscal year. Finally, we have a long history of paying increasing dividends. We've paid a dividend since 2000. We've increased it every year since 2001, including last November when we raised our calendar year 2020 dividend to $1.12 per share. We remain focused on increasing the dividend rate and ensuring that rate is sustainable over the long term. So what I want you to take away from this slide: cost-free upside, high margins and good liquidity. Capital allocation is focused on new investments, debt reduction and dividends, and we're focused on total shareholder return and per share measurements through those dividend payments and a reluctance to issue additional equity. So the first thing I want to say about this slide is there's absolutely no mathematical formula behind it. Don't look for means or standard deviations. This is an illustration to make a point about our business model. So to the left side of the graph, you have many of the aspects of developing and operating mines that we're not directly exposed to. Our first investment is our last investment unless we agree to something new. Now look, that's not to say we don't have exposure to these issues. Higher costs that lead to a mine closure affect us. Higher capital that delays a project start-up can affect us. But higher costs, whether they're capital or operating that impact an operator's return, do not flow through to our return on investment. In addition, we don't have to staff up to address the problem nor do we have to allocate capital to fix it. So our asset-related costs are defined by contract, not the vagaries of mine ownership. Now on the upside, we do benefit from metal price -- higher metal prices, but more importantly, production expansions and resource conversion. So one has the element of accelerating ounces and the other involves the expansion of ounces. We benefit from the exploration work of our operators, and we also see benefits from their optimization work. So I talked about our market cap per employee. Here's a slightly different take, and that's revenue per employee compared to the S&P 500. And I think there's only a REIT that ranks ahead of us in terms of headcount efficiency. And what that efficiency translates into is higher EBITDA -- higher margins. If you were to divide our 6-month EBITDA by our gross revenue less the cost of stream sales, you discover a margin of about 90%. So that actually means that our business is scalable. And by that, I mean, we can add new revenue sources without the need to create a new staff dedicated to that project. The revenue will fall through to cash flow. Those employees we do have look after our portfolio of about 180 properties, over 40 of which are in production. Now most of the major mining companies on this list have something less than half that figure, and they're some of the biggest in the mining industry as a whole. Now while we do have some large revenue contributors, you could look at our general and administrative expenses for the first 6 months of this fiscal year, you'd be able to cover them from royalty revenue from just whole Dolores and Canadian Malartic. Again, it's a high margin, scalable and efficient business. So our portfolio generates a very gold-focused revenue stream, about 76% gold in the first half of this fiscal year. And our sources by country include well-known mining jurisdictions such as Canada, Chile and the U.S., Nevada in particular. And we've had a number of positive developments in our portfolio recently, including the stabilization of water supply for Mount Milligan's mill, the end of the blockade at Peñasquito, the end of a labor strike at Andacollo, the ramping up of production at Crossroads and Barrick's continued work on a potential expansion at Pueblo Viejo and also note this morning's new gold release regarding Ontario Teachers' investment in New Afton, which will also improve New Gold's liquidity. At the same time, we recently saw the release of the new Rainy River mine plan. We expect the plan will actually improve the economics to New Gold and will also enhance their financial condition, the financial condition of our operator. Now the plans led to a reduction in gold and silver production under our stream. But our initial impairment calculations indicate that while depletion rates may rise, there is no expected impairment of our carrying value under U.S. GAAP rules. So while the report showed a smaller operation, the fact the results are public and no longer the subject of rumor, I think, puts the asset on a stronger footing for us in one sense. So people ask me about growth in this portfolio. And I firstly look to the expansion at Pueblo Viejo, which -- where we could see a sort of a stronger-for-longer metal production profile beyond 2022 than we envisioned when we made the original investment. Now remember that chart when I was talking about the inherent upside through production expansion, this is a great example. So current estimates are 800,000 ounces of gold on 100% basis of production beyond 2022 and with an expansion in tailings capacity, the potential to bring 11 million ounces of gold from resources into reserves. I think the other growth story that we focus on is Khoemacau. This is the silver stream investment we made in the copper-silver project in Botswana. It's owned by Cupric Canyon Capital. We've invested $88 million of our $212 million commitment, although Cupric has the option to increase our investment to $265 million if needed and that would increase our stream percentage from 80% to 100%. Now the project is expected to produce 1.5 million ounces of silver to us annually at the lower stream percentage, which at today's prices would kind of translate into about 17,000 net gold equivalent ounces for us. And the project is supposed to be in production in mid-calendar 2021. But it's not just the operating successes of our partners that we recognize but also the social and environmental work of these firms, whether it's Pueblo Viejo's conversion of its fuel source at its power plant to natural gas, Newmont's work with the Cedros community at Peñasquito in terms of sustainable water availability or Golden Star's recognized oil palm plantation, which is in its 15th year or so of attempting to reduce poverty through employment generation. We recognize these efforts as keys to the success of their operations and, therefore, our investment. So when we take new investments, we always look to see where they rank on the industry cost curve. In the case of a stream investment, we look at it with and without the stream. We tend to stay away from assets where we believe the stream will push the asset into the fourth quartile of the relevant cost curve. So as you can see, most of our assets and all of our key assets lie within the top 3 quartiles. And the assets that do reside in the last quartile are more than likely either assets acquired in a portfolio and/or are a bit more mature, and none are critical to our overall revenue. Now since revenue is provided along the access, one thing that appears absolutely obvious is the revenue concentration. Milligan is consistently over 20% of our revenue. Our top 3 produce about 60%. And if you were to ask me what is a strategic goal that I'm focused on, that is to continue to diversify the revenue base. So of all the attributes I spoke of earlier, it is optionality or, said another way, organic growth that I think is most important. When we announce new transactions, investors and analysts will provide a return on investment, including an IRR. And I'll tell you that the initial estimate of IRR is not what we're focused on. We're looking to make acquisitions and improve IRR over time. We're playing a long game, as I call it, when we look at the success of transactions. This chart is intended to give you a feel for a couple of things: number one, the mine lives that make up our portfolio and show you what percentage of our original investment has been returned to us. So the portfolio has a revenue-weighted average life of 14 years, which means we're under no particular pressure to rush in a new transaction. And as you can see, many of our assets have returned a multiple of the original investment, and we hope to repeat that performance with our newer assets, the larger green circles, as they continue to mature. Now because we don't develop or operate mines, our investment and growth opportunities require a need for capital, a flow of precious metals and a willingness to enter into a life of mine contract. So the good news is, this industry always needs capital, whether it's for development, mergers and acquisitions or balance sheet restructurings. I believe the stream market has been the most consistent source of capital for this industry for years. Project finance market is a shadow of what it was pre-2008, and the equity market access has been pretty spotty for all but the most highly liquid and largest names. So although the current limitations on capital is just one side of the story, there is another. And that is the fact that the stream market has become much more mainstream with the likes of Barrick, Glencore and Teck entering into these contracts. And I think any CFO would have a duty to know what a streaming company is willing to do when discussing financing options with his or her Board. And what we've also proven is that you can do a stream on a mine's primary metal, like we have at Pueblo Viejo, Wassa and Rainy River. This is no longer just a by-product financing tool. Generally, I'm encouraged by the deal flow we see in the market recently. Yes, the bidding on transactions is competitive, but it's always been competitive. Today's Osisko, Sandstorm and Triple Flag can be equated to yesterday's International Royalty Gold, Wheaton and Silverstone. I think one of the advantages that we've developed is our reputation to work as a partner as issues arise in project development and operation. So as I mentioned, we have the smallest share count on the GDX, not done an equity issue since 2012. Since that last equity issue, we've seen the gold price fall off for much of the time. But our revenue, our operating cash flow and our dividends have all increased by at least 45% up to our last fiscal year-end. So with a relatively unchanged share count, all the measures are therefore showing growth on a per share basis, and that will remain a focus of us as we move forward. So I've spoken about our debt and our overall liquidity. I'll reiterate that our goal is to finance growth from existing cash, cash from operations and our debt facility. Our $1 billion debt facility is available until June 2024. It's provided by a strong bank group composed of 8 institutions, one of which is BMO. Thank you for the support. Our current all-in borrowing rate is 3%, which is a very attractive cost of funds for us. This liquidity is really sufficient for most of the transactions you see in business development. And the majority of the transactions are $100 million to $400 million, and there are relatively few deals that are substantially larger. And it also helps the fact that many of our investments are made for project development, like Khoemacau, which allows us to put money in over time, thereby using future cash from operations in part -- to part finance the total investment. So I touched on our long dividend history before and our increasing dividend rate since 2001. This puts us about 5 years away from being a dividend aristocrat at least according to their dividend payment history requirement. We get questions about payout ratios and yields. And I will tell you, we're really focused on increasing the dividend but ensuring that dividend increase is sustainable over the long term. We've been able to maintain that discipline around dividend increases despite some volatility in the gold price, despite very large investments that we made in the 2015 balance sheet restructuring period. And I think our long-term shareholders understand the strategy and agree that chasing a payout ratio or a yield target might only cause volatility in what has been a historically consistent dividend stream. So I hope I've given you a sense for how we see the business and the company. Our focus really is combining the good business model, an established portfolio, accretive finance growth and that they all combine to provide attractive total shareholder return over time. So this chart compares total shareholder return to the S&P 500 Gold and the GDX since the establishment of the GDX. But it may not surprise you that our returns have been higher than Gold in the GDX, but our relative competitiveness to the S&P 500 may surprise you. Perhaps we can be considered more of a mainstream investment than just a potential countercyclical hedge. I thank you for your time. I'm happy to take any questions.

I'll start off with one, Bill. Maybe we -- the 2 presenters that we've had before you have both been Canadian-listed, Canadian-domiciled royalty and streaming companies. Can you maybe talk a little bit about how Royal Gold is different in the fact that you're U.S.-listed and what that means for your company?

Sure. So yes, we are the -- I think we're the only streaming company that is U.S.-listed. What it means from a streaming perspective, we do our streams through Switzerland as opposed to the Caymans or Bahamas. We've been set up that way for, gosh, it's probably been a decade at least doing it that way. One of the other things that -- I used to be somewhat jealous of the Canadian companies and their offshore vehicles. And then what we saw last year is when U.S. generalists start getting interested in the gold sector, there were really 2 of us: it's Newmont and it's Royal Gold. And I think that's a real advantage. And I think Randy got a question about generalist, and that is a real focus for us is trying to attack the U.S. generalist market because I think we do have a real advantage there.

You've recently moved into the CEO role with the retirement of Tony Jensen. How do you look at Royal Gold's portfolio? And is there anything that, with the fresh set of eyes, would you do differently? Or how do you see the company evolving going forward?

Yes. I can't say I'd do anything differently. I sort of ran business development for 12 years, so I'm kind of responsible for everything as well. The thing I focused on really was the concentration. And when I started with the company, I think our biggest investment was $35 million. And since then, we put almost $800 million in Milligan. We put $600 million in Pueblo Viejo. We just -- we need to continue to add assets to diversify that revenue base. Because right now, if 1 of the top 3 coughs, we get the cold. And I'd really like to see that change.

One question that Randy did get, which maybe is a little bit -- it'd be interesting to hear your take, was the question between royalties and streams. And they definitely have a preference. I mean you guys are a little bit more balanced in your portfolio. Is that by design? Or how do you see the difference?

No. Well, so our history is as a royalty company. And I think the thing that most people would agree is finding material royalties that can drive growth. They're just not there. I mean they've been bought up. They're in the big companies. And so I view stream as the future of all growth. The one thing I would disagree with Randy a little bit is that if you have a royalty, you don't have a relationship. We have great relationships with our operators in a lot of set ways. We're not entitled to information and we go to the site and we develop our relationship, and we do get information that we're not contractually entitled to. But the thing about streams is it is a more tax-efficient financing structure than a royalty. In most jurisdictions, if an operator does a royalty transaction as opposed to a stream, there's going to be an upfront tax cost. And it doesn't make any sense if you're trying to raise money to build a mine to lose some percentage of that to the government. So streams are more efficient for operators, and they're more efficient for the stream providers. So that's where I see all of the growth.