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

Hi. I'm Josh Wolfson from RBC Capital Markets. Here to present is Bill Heissenbuttel, President and CEO of Royal Gold. Bill's been with Royal Gold for -- since 2006 and brings more than 30 years of corporate finance experience to the company. We'll start with a Q&A and take any questions if there are any.

So first off, Bill, perhaps if you could review with us, how has COVID affected Royal Gold's day-to-day business?

Yes. Thanks, Josh, and thanks for agreeing to serve as the moderator of this session. I sort of look at it from 2 perspectives. Number one is an internal perspective, where I think COVID-19 has had very little impact. And I'm talking specifically with respect to our offices, our employees. Thankfully, we have not been touched by COVID-19 directly. And if you think about our business, it actually lends itself quite easily to working remotely. In fact, we have 27 employees across 4 offices. My Head of Operations, my Head of Investor Relations, my Head of Business Development, all work in different locations. So we've effectively been working remotely for years. I will say that the folks here in Denver, who have been working from home, have done an excellent job, and I don't think we've missed a beat at all. With respect to the portfolio itself, we did have some initial disruptions. We had Rainy River, we shut down. Peñasquito and Dolores, due to the Mexican restrictions, we shut down. And we had -- Milligan actually cut back from a production perspective. But I'd say these were all relatively short term. I know Golden Star has had some COVID-19 management issues there. They've had some cases, but it seems that they've done a very good job with that. So I'm happy to report that we really haven't -- we haven't had much of an impact for a couple of months now.

It's very good to hear. So at the end of the June quarter, Royal Gold had announced that the company was first in a net cash position. And with gold prices having increased, our estimates are that company will generate in excess of $300 million after paying its dividend. Naturally, what's Royal Gold going to do with all this excess cash that it's generating these days?

Yes. So we -- when we look at capital allocation right now, we're really looking at 3 things. One is our Khoemacau investment, which we are still in the midst of. I think currently, we have about $147 million invested. If they were to take us to the maximum investment there, we would have a little bit north of $100 million left to invest between now and, say, the middle to -- second to third quarter of next year. After that, one of the things that you may recall is that we drew down on our revolver credit when COVID-19 occurred. We had no idea of what the impact might be on our portfolio. We had commitments, and we wanted to be certain to have enough liquidity just in case we lost half the portfolio. Thankfully, we haven't. But we still have $275 million outstanding on that revolving credit. As we get further and further into the Khoemacau investment, I would expect us to pull that back and pay it down. But as I look forward 12 months, which has always been the standard I use for a liquidity cushion of over $100 million of Khoemacau. We've got about $25 million in G&A. We've got a little over $70 million in dividends. So that's $200 million that we're looking at over the next 12 months is being spent. So that's really where we're focused. And with respect to the dividend, I think you know that our Board typically takes up the dividend in November of each year. So that will be front of mind at our next Board meeting. So those are the 3 areas. Beyond that, let's see what happens with the precious metal prices in terms of our cash flow. I will say I've never -- I've gotten the question a lot over the years, and I have never been in a position where I had so much cash, I had no idea what to do with it. It might be an interesting position to be in, but we're not there yet.

Got it. Maybe back to the comments on the dividend and I guess the current problem that you have of having too much cash. When we look historically what the dividend has been, it's represented about 40% of free cash flow, but with higher gold prices today, by our estimate, it's about 25% of free cash flow. How does the company set its dividend policy? And how do you look at increasing it with that sort of presenting risk that if the gold price were to decrease, you wouldn't put yourself in a position where you'd have to revaluate it while the price is lower?

Yes. Your question is quite appropriate for us because we don't have a specific policy. We certainly don't have a specific free cash flow payout ratio. What we have been trying to do for years is provide a consistently increasing dividend but when that's sustainable. And if you start chasing payout ratios, I think you run into a risk if metal prices do fall, where you're going to have to pull that back. As you know, we've paid an increasing dividend for 19 years. And one of the things we started to talk about is if you get to 25 years, you start to become a dividend aristocrat, not in the index terms because I think you have to be part of the S&P 500, but it's something -- it's a goal that we've got that we would really like to achieve. The thing -- the other thing I would just point you to is go back in our history to the last time the gold price ran. And you will actually see some relatively significant percentage increases in our dividend as gold price, so the first time they went to $1,800. And then when the gold price came off to the early part of, what, 2012, 2013, you saw much lower dividend rate increases because the gold price had come off. And I think there's a lesson there not to chase the gold price if you want something to be sustainable. So I think any dividend increase that you see, I think, will be measured. And it won't be -- we're in the $1,900-per-ounce gold environment, and we can do something very significant. Again, our goal is increasing and sustainable.

And on the topic of dividends, would the company ever consider special dividends in the event that there was windfall gains? Or is that maybe not as consistent with that consistently increasing policy?

Yes. Again, we've certainly talked about things like that, things like stock buybacks and special dividends. I can't tell you we've ever come to a decision on which would be better for our shareholders. But to your point, if we did find ourselves in an excess liquidity position by quite a bit, that would certainly be something we would talk about internally with the Board. And we've just never been there, so I can't really tell you what we would do or what we wouldn't do.

Got it. Relative to some of your peers, which have talked about a very robust transaction outlook, how would you characterize the outlook for transactions today?

Yes. There's a consistency to business development in this business. This industry always needs capital. And I would say since the financial crisis, and particularly since 2015, we've become much more of a mainstream source of capital. So we get to look at a lot more than we used to. I still say we always compare ourselves to 2015 and say it's not as good. I would say 2015 was unique. And so I'm very happy with the flow. I understand that there is a frustration when we talk about and our competitors talk about a great market. We're seeing lots of opportunities, and then there are no deals that are announced. And unfortunately, our business isn't a quarter-to-quarter, we're going to do so many transactions per quarter. I think you've heard us give the history of Khoemacau, where we were in discussions with Cupric Canyon for 2 years before that deal was announced. And there are ongoing discussions right now with companies that have -- actually, we've been in contact with for longer. These things take time. And I know it's hard to be -- for us, sometimes it's hard for us to be patient. Sometimes it's hard for investors to be patient. But there's no calendar we can set to this. I will say there are a couple of -- a few things working against us right now: number one, the bid-ask spread on the metal prices. If you're a streaming -- if gold is $1,900, and how many streaming companies are you going to find that are going to use $1,900 to value their streams, whereas if you're an operator selling that gold stream? Probably you'd love to get that price in the valuation. And any time you have a big spread between the current spot price and the consensus price, like you're going to have a harder time getting to a middle ground on valuation. So that's a bit of a hurdle. I would say low interest rates have certainly made the debt markets of interest to companies that can access those markets. We have seen some equity markets become available for certain companies. Clearly, that is a source of competition for us. And when it comes to operating companies, as you say, we're not the only ones that have increased cash flows. And as companies have these increased cash flows, they may not need third-party financing. So we've got a few headwinds that we're working with, but again, I am happy with the volume of opportunity we're seeing.

Good to hear. From some of the competitors you have, there's been an interest or appetite for doing very large transactions in the work, billion dollars spent in -- thrown in or added a couple of times. The company has or Royal Gold has billion dollars of liquidity today. Would you feel comfortable putting that much capital to work in a single transaction? Or would you feel better looking at sort of smaller opportunities?