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

Good afternoon, everyone, and good evening, if you're overseas. This is Mike Jalonen of Bank of America Securities with our next company, Royal Gold. Very pleased to have Bill Heissenbuttel, President and CEO. I should note that Bill was appointed CEO of Royal Gold on January 2, 2020. Given there's some other CEOs that were just appointed to their companies, Bill is actually a grizzled veteran, it seems. And -- but I should note that Bill has been at Royal Gold since 2006 and has progressed forward at increasingly senior management roles. So certainly well qualified to helm the company. Bill is going to make a few introductory remarks, and we'll turn to a fireside chat and questions. Bill, I'll turn it to you.

Thanks, Mike, very much. And firstly, I'm very happy to report that Royal Gold's employees and families are healthy, and I do hope everyone on the phone has been able to remain similarly virus-free. It's interesting working for a royalty and streaming company because the royalty model is very conducive to working remotely. And I'd point out that our structure was already remote. We may only have 27 employees, but we have 4 offices. My Head of Business Development sits in Lucerne, my COO and head of IR is in Toronto, and the whole BD team is spread between Switzerland, Toronto and Vancouver. So we're quite used to working over the phone. Obviously, we don't need to manage mines, factories or a big staff. And one of the inherent advantages of our model is that the high-margin business we have, it allows us to avoid tough conversations, tough decisions like salary reductions or staff furloughs. So we're able to just focus on the business and try to do business as usual, just sitting in different locations. I'll say that the impact of COVID-19 has been relatively minimal so far for us. We had a couple of our more material operations, Mount Milligan and Rainy River, either close or reduce throughput, but they have -- are really in the process of returning to normal operations. The 4 operations that are closed for us are Peñasquito and Dolores, obviously due to the Mexico government decrees and then Holt and Voisey's Bay. Although with Voisey's Bay, we've heard that while the mine is closed, the Long Harbour metallurgical facility continues to process stockpile concentrate. So the 3 mines I mentioned as being fully closed represented less than 10% of our trailing 12-month revenue. I think one of the other interesting impacts of COVID-19 is been its impact on base metal prices. Though we've never really talked about it very much, but our portfolio is a bit unique relative to some of our competitors because the properties that generate the revenue are predominantly precious metal focused in terms of revenue. So we don't have a lot of byproduct streams or base metal royalties. So we're a bit less exposed to low base metal prices that might impact underlying base metal operations. We just came off our third fiscal quarter. If you remember, we're a June fiscal year-end, so just a couple of notes on the quarter. We saw the release of the Mount Milligan and the Rainy River technical reports, and that really eliminated uncertainty surrounding the new mine plans for both assets. There were lots of rumors going around for a number of months, and it's nice to get that information into the market. While both saw a reduction in mine life, the production over the remainder of this new mine life, it actually could be higher than what we would have seen under the old production profiles, and we think both still have upside potential beyond that newly defined life. In terms of our financials, metal prices are really helping quite a bit, and they actually pushed our revenue to a record quarterly figure. But notwithstanding those good results, we did, in early April, draw down $200 million on a revolving credit just as a precautionary move. We had no specific purpose for the money, but we really wanted to ensure that if we lost a number of key properties to COVID-19 that we had sufficient liquidity to meet all of our commitments looking out a year. We weren't looking out 3 months. We weren't looking out 6 months. We were taking a longer-term view. And those commitments would cover our Khoemacau investment, our general and administrative expenses and our dividend. So as cash flows continue to come in and the commitments are met, I think we will return to our previous strategy of paying that revolving credit down over the next few quarters. The other thing the draw actually allowed us to do is give us a chance to test our bank's liquidity and make sure that if we need further draws that the market would be open, and we've had no issues with our banks meeting that funding request. So that gives you a little bit of background of what life's been like for Royal for the last few months. And Mike, I'm happy to start taking questions.

Okay. For investors on the line, just note, there is -- as you probably see, there's a slide deck that you can look at. Bill won't speak to it specifically, but I just wanted to highlight it. So Bill, you have been CEO for -- since January 2. Royal Gold has been around for, I don't know, geez, since what, the '80s. Is there -- under your leadership, is there any change in the corporate strategy of Royal Gold? Or is it steady as she goes?

Yes, Mike, I think we're a year or 2 away from being around for 40 years. So your question is one that was asked of me when I was -- when my position was announced last September and I was talking to analysts like you and a number of investors. And I think the Board chose me for a particular reason. And that is that the strategy we had was working. There's no reason to fix something that doesn't need to be fixed. So under my leadership, we're going to continue to focus on the royalty and streaming model. We're going to continue to focus on precious metals and with a particular focus on gold. And we're going to continue to pay for that growth using sort of a conservative and accretive, we hope, approach, and that's using cash on our balance sheet, operating cash flow and moderate levels of debt and then -- but keeping equity really is that last option. The changes I've made since I came on board are really a lot of internal things that people from the outside, quite frankly, wouldn't even notice. So in terms of strategy and focus, same as it was 3 months ago, 3 years ago, a decade ago.

Okay. Well, thanks for that. Maybe staying on the management succession. Relatively at the same time of your promotion, there was a number of other internal promotions at Royal Gold. Paul Libner becoming CFO, he had been in Royal Gold since 2004, moving up the chain. So is this one of the core competencies of Royal Gold, a stable long-term management progression?

Yes, I think it is, and I got to give credit to Tony. I got to give credit to the Board. And although it may sound a bit odd to say credit to the senior management team since I was part of that earlier, but we -- I think everybody did a very good job of developing that next level. When we talk about succession planning, it's not just the CEO. It's the next level and a level before -- below that and continuing to bring people along and educate them. Tony did that for me. Bruce Kirchhoff, our VP, General Counsel, until the end of December, did that for Randy Shefman. Randy has been with us since 2011, so he's another long-term employee. And I tried to bring Paul on when I was the CFO. So Royal has had a bit of turnover over the last couple of years. But if you were to look at the decade before that, we had very little turnover. And what that allows you to do, it really does give people a chance to develop over a long period of time instead of being thrown into positions where they have to learn as they go. So I think that is a strength. Now you might say, well, now, we've got to rebuild that succession planning. And that's actually something that even though I've only been in the seat for 4 months, that's something that I'm doing and asking the folks who now work for me to start thinking about that next level. And I got to tell you, I look around our company, and I -- we've got some really talented people. And so even though we've kind of drawn on the succession planning pool, there's still a lot of really talented people within the company for even further succession planning.

Okay. And we actually have a couple of questions that just came in. And basically, first one is on looking at M&A. Do you see better opportunities with precious metal byproducts or in active mines or for nonproducing projects at deep mines. That certainly was one of the themes, as you know, for the streaming royalty conference calls of the last week where base metal companies went into financial issues, are looking for streams. Just wondering what -- how Royal -- what you're seeing there with Royal Gold?

Yes. Obviously, the base metal side of things reminds me a little of 2015. Only at that point, it was really leverage that was impacting a lot of companies. And now we've got low base metal prices. Obviously, when you're talking about low base metal prices and financial distress, the one thing that you want to be very careful about is what you're getting yourself into because it's usually the higher cost producers that feel the earliest pain. So you have to be pretty selective, but we are seeing companies that meet liquidity events. On the same time -- at the same time, a gold price of around $1,700 to the extent capital could be made available, it might not be a bad time to see project development. And the one thing that we proved over the years is you can do gold streams on gold mines. I don't mind doing byproduct transactions. I think that's the natural fit for a precious metal streaming company. But as long as you keep the stream low enough on a precious metal mine, there's no reason you can't use our product. And you look at Golden Star and Pueblo Viejo and Rainy River, and it absolutely can work. So yes, the acquisition front, the investment front, I'm very happy with the flow of opportunities that we're currently seeing.

What range of deals that you focus on because Franklin and Wheaton have intimated deals up to $1 billion, what would be Royal Gold's sweet spot, more like Khoemacau, which I believe is just over $200 million?

Yes. I mean, if your question is, could we do $1 billion? Sure. That is an investment size that I think we would be comfortable with. The only thing I think you really need to think about in this environment is, where I say we're going to use cash -- existing cash and moderate levels of debt, you just have to be aware of the fact we're a passive investor. And passive investors don't control the operations that provide the revenue. And so you always got -- you have to keep one eye out open and ask yourself, "Okay. If this mine were to have a COVID-19 issue and close for a number of months, so you had 2 or 3 of them, what does that do to the cash flow profile?" So I think you'd find us be a little conservative with how we finance it, but I wouldn't shy away from $1 billion. I typically talk about the range of $100 million to $500 million only because that -- to me, that's the sweet spot of the industry. You go back to -- go all the way back to 2004 when we started this thing. The number of $1 billion-plus or close to $1 billion-plus transaction, you might need more than one hand to count them, and I can say we're -- we were bidding on all of them even when we were a lot smaller. But it's just -- it's a -- to me, it's a natural fit. You're going -- there's a hundreds of millions of dollar transaction that we talk about as the range is really where we found the industry to be. And the nice thing about that is we could do 2 or 3 of those very comfortably. The other issue with a $1 billion transaction is you just -- you don't want to create a concentration issue in your revenue base. So yes, that's my view on -- it's not so much we're focused on $100 million to $500 million. That's just where I think a lot of the transactions will be.

Okay. Second part of the investor question was, preferred jurisdictions you consider opportunities anywhere and why?

Yes. If you looked at our portfolio, you might think that we had a specific strategy to focus on the Americas. What I say to investors is you'll notice that concentration in this region because the streaming product has gotten the most traction in the North American market with North American -- or in the Americas, the mining companies in that region and they just tend to have more operations in this region. There are companies based elsewhere in the world that just have never gotten comfortable with streaming. It's a lot harder to have that conversation. So that being said, we're not averse to looking at other parts of the world. I mean, obviously, we have specific places we're not going to go and everybody on the phone would know what those would be. We have a few investments in Africa. We are comfortable in Ghana. We're obviously comfortable in Botswana. 15 years ago, we did a deal in Burkina Faso, and we had a couple of assets there. I probably wouldn't go anywhere near Burkina Faso today given the political environment. So things change. We have a number of royalty assets in Australia. So we don't look at it and say, "Okay. That country is not in the box. We're not even going to look at it." I would say we start with there are a number of countries that we just won't touch, and if it's outside that set of countries, we'll look at it. And if we need to learn about a country, we're more than happy to do that.

Okay. Maybe we should talk about PV. Mark Bristow was quite effusive on the Barrick call today about what's going on there. And maybe you could speak about the impact of the expansion of the mill processing facility to Royal Gold?

Yes, Mike, and I'll be honest with you, I haven't heard exactly what Mark said this morning. So you know more than I do up to this point. What we have been saying for a number of quarters is that when we made this investment in 2015 because the grade profile dropped off so much as you went over time, one of the things you'll notice in the structure of our stream is we increased the cash price from 30% to 60%. Actually midway through, I think it was the reserve life. And that was because we saw the grade profile dropping, and we didn't want the stream to be too much of a burden. Typically, the way we do these transactions is we'll have a stream percentage for a given period of time. We'll drop it down after the known ounces are delivered to us, but we'll keep the cash price the same. This is a stream where we actually had sort of 2 different things going on where the cash price went up, and that was due to grade. What this expansion basically does is take a lot of those ounces that were spread out over a longer period of time in our model and bring them forward. So I think Mark has been talking about 800,000 ounces on a 100% basis out to 2040. Our model would have shown something pretty substantially less. So what we're hopeful is that if this project continues to go forward, we'll basically get an IRR bump on our investment and we won't experience a degradation of a production profile that we might have seen with the mine plan as it was put to us 5 years ago.

You'd be happy to hear Mark said mid-40s today for PV. So...

Mid -- what was that? Mid-40s, was that?

Mark said mid-40s. Yes. So good news.

Good.

It's getting better by the moment.

I'll have them market for us.

Now one asset that Royal has gone kind of quiet on when, you tried to sell it, was the Peak joint venture in Alaska. And gold prices rocketed up since Royal Gold was looking to monetize the asset. Maybe sell was the wrong word, I apologize. I believe you wanted to get a stream off it. Just wondering what your view on this project is now.

Yes. So you're right. We had a formal sale process in 2019. We weren't able to really surface what I'd say is the combination of value and structure. What we really -- what we were looking for last year was, as you say, maybe some stream. We wanted a certain value, and we just -- we didn't see it, so we decided to terminate that process and just continue on with the joint venture. But we never stopped talking to companies about that asset. Even with me coming in as the CEO, being consistent with our -- my discussion on strategy. The project, it's still noncore to us. We're usually fielding calls with various levels of interest in the asset. So for the time being, we're kind of managing the asset on a care and maintenance basis. Due to COVID-19, there were some restrictions in Alaska on what you could do. So we're kind of -- again, we're sort of a care and maintenance, so we're not spending that much money. But going forward, we're still entertaining any option to dispose of it. And the one thing I can say, our position has not changed. We're not going to build the mine. We're not going to operate the mine. We've taken it to a point, and our goal is still at the right time to dispose of this interest.

Well, the value theoretically should be going up with higher gold. And yes, just maybe I could -- one thing I've been remiss in not mentioning, Bill, of course, is the news last week about Barrick providing the updated mine plan for Cortez, which had a positive impact on your share price. Maybe you could just touch on that and the impact to Royal Gold?

Yes. It's -- usually, this time of year, we do receive a life-of-mine forecast for the asset, and it's a very specific life-of-mine forecast. It is specific to our royalty ground. And while that's great and we can provide that to the market, it's not something that the joint venture discusses publicly. And so there's a bit of a back and forth between us and Barrick as to what we really can say about the asset. But what we were able to tell the market was 175,000 ounces to our royalty interest is expected in this calendar year but then increasing to, on average, 425,000 between 2021 and 2026. And I don't think we've ever given that kind of guidance to the market. And the other thing that we tried to do, anybody -- and Mike, you spent years and years, you probably know GSR1, GSR2, GSR3, NVR1 as well as anybody. But we're trying to reduce the complexity of how analysts have to deal with it, how investors have to look at it. And what we did is we blended all the ounces from all the areas together and we sort of said, if you just use an 8.2, I think it is, percent GSR, on those ounces, it's going to give you a good average in terms of GEOs to us. The only thing I will caution, that 4.25% average does have volatility around it. As you know, most of these ounces are going to be crossroads, but the year-to-year production can vary quite a bit. So we're trying to simplify it. In the long run, we hope we've given you a good estimate. Beyond that, I can't really say anything. What I've told you is what I'm allowed to tell you. And that's -- it's better than it used to be, but I can't really go into any greater depth given our agreement with Barrick.

Okay. Fair enough. And one other asset I have -- I talked about, not directly. But Khoemacau, you have an 80% life-of-mine silver stream on this project. How is the development going? Is it with COVID? Has that been impacted? And when do you start to expect production?

Yes. So we got into the investment in 2019, beginning of 2019. So right now, you've really got 2 main things going on. You've got surface construction and you've got underground development with a contractor. Overall, the project construction was 43% complete at the end of March, and they've committed about 80% of the capital. The government of Botswana did declare a 6-month state of emergency. I believe it was in -- it was March or April. So we're 1 or 2 months into it. Mining was deemed essential. So there's really been no impact that we've seen to underground development that's being done by Barminco. There have been some other delays associated with the decree. And I think Cupric is in the process of sort of assessing what does this mean for the overall project timing. I would say, at this point, they're still targeting a mid-calendar 2021 start-up. So we're $136 million into our $212 million to $265 million total investment. And based on that, I would expect the rest of our commitment to go in over the next year as we approach production there.

Okay. That's like it's running into form quite nicely. Yes, maybe I can -- I asked Randy Smallwood this, the Pascua-Lama question. You have -- on the Pascua side, you have quite a nice royalty. Mark Bristow is talking about it more. Just wondering what your impression of where this could go, just from your point of view.

Well, look, I think having Mark come in, I'd say, has breathed a new life into the project a little bit. We don't talk about Pascua. I'm not going to sit here and tell you I think this or that's going to happen. Obviously, I think it was in the December quarter where they basically said we're -- I'm not going to say we're throwing out all the data, but we're sort of starting over, which is fine. It doesn't factor into how we look at that asset. It's still a great project. We still think it will be an operation at some point. But we're really happy to have a fresh set of eyes looking at it and trying to find ways to bring it forward. You just don't find deposits like that very often. And I'm hopeful that with new leadership, you can hopefully address some of the past political and social issues that ground that project to a halt previously. I'm not sure you'd be able to do that if you have a new voice from the company. So cautiously optimistic might be too strong, but I'm very happy to see Mark take it seriously and try to find ways to move it forward.

Okay. Maybe one last question from me, Bill. We're getting near the end. But again, I'm a bit remiss not to talk about Royal Gold's dividend record, 15 years of dividend increases, the latest being a $0.06 hike to an annual dividend of $1.12 per share. Is there a certain payout ratio that Royal Gold follows? And can we expect more dividend hikes? I guess that's more for the Board's discretion, but the trend is our friend in this case.

Yes. And it's more than 15 years. We start -- we increased -- we've increased every year since '01. And so I always say, although we're not on the S&P 500, if we could keep this up for another 5 years, we would at least unofficially be a dividend aristocrat. As that term -- I believe that term is 25 years of consecutively increasing dividend. So it's a bit of a goal that we've got there. To your question, we don't have a target payout ratio because we believe that approach, that just results in volatile dividend rates. Metal prices move around. You got to -- you take the thing up, you take it down. And as long as I've been with the company, the one phrase I have heard over and over and over again, and it has never changed, is growing and sustainable dividend. And we are the only company in the GDX that has increased its dividend every year, and the GDX started in 2006. And I think our long-term investors really understand -- were understanding the strategy. We're talking about 2 decades of one strategy on dividend, and I think that will continue. Our Board reviews it once a year, typically at the November Board meeting. And again, I can't -- we obviously can't speak to a set policy such that things are going to happen automatically, but I think we've been pretty consistent with the approach for years and years, whether the gold price is going up, the gold price is going down or we're investing billions of dollars or not. It's just -- it's something that is very important to us.

Okay. Well, we're pretty well coming to end of our time, Bill. So I just wanted to thank you and Royal Gold for taking the time for this chat. And we look forward to hopefully being in Barcelona, May 18 to 20, 2021, along with Royal Gold, of course, and yourself.

That would be great. Thanks, Mike. Thanks, everyone.

Thank you.