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

Well, thank you, and thanks to Scotia for the invitation to present to this conference. Bill Heissenbuttel had technology and connection issues, so he asked me to present on his behalf. So I appreciate your time and attention, and I hope everybody is doing well. I will be making forward-looking statements during this presentation. So please draw yourselves to the slide and make yourselves aware of the language on this page. So I'll start with a brief overview of our company. And for most of you who are -- assuming most of you are familiar with Royal Gold, this explains our business at a very high level. We're a dedicated royalty and streaming company. And we have 2 main operating segments, streams and royalties. Streams comprised about 70% of our revenue, royalty is about 30%. We have a diverse portfolio of about 200 properties, 40 of which are in production. And about 80% of our revenue comes from gold and another 9% from silver. So around 90% of our revenue is from precious metals. We have 28 employees in our company, and it's a very efficient model. Our 2020 revenue was about $500 million. We ended the last quarter in a net cash position, and we have access to over $1 billion of liquidity. Now I'll just move on to some of the other attributes of our company. I've already mentioned a couple, but I'll highlight three. Firstly, our model is designed to provide optionality to metals prices and reserve growth without a lot of the -- or without any of the ongoing capital commitments that an operating company would have to face. We have a very experienced technical and commercial team. When we look at new investments, we look at those that can provide upside over the long term. The second attribute I would mention is our dividends. We paid the dividend since 2000, and we've increased it every year since. And finally, we think in terms of per share metrics. We aim to fund our growth by using cash on hand, operating cash flow and our revolving credit facility, generally in that order. And equity is our least favored method of financing future growth. So the whole idea is to create or show accretive per share growth. On Slide 5, this demonstrates why we think we're a good investment for those who want gold in a conservatively managed vehicle. We offer very good leverage to gold. And we have, over the past several years, shown a modestly positive tie to the general market. We've outperformed the GDX since inception. We've outperformed the gold price, and we've also outperformed general market metrics on -- with our share price performance. So we're very proud of that over the past several years. Now I'll spend a moment just talking about gold. I know most of you are familiar with metals and commodities generally. But we do have some slides in here with information from the World Gold Council that just show some of the unique attributes of gold that often go unrecognized. On this slide, you can see that gold is a very strategic portfolio asset. It's highly liquid. And when you separate it from general commodities and you look at it specifically and compare it to other asset classes, it's actually shown very competitive returns with other asset classes over time. Just looking at some of the other advantages of gold as well, especially in an environment like what we're facing today, where you see very low interest rates and political and social risks that are high, gold offers some unique performance advantages. And when you consider the lower volatility that gold provides, it's a pretty attractive asset to consider in an environment today with economic and political turmoil. Thinking about other gold investments and the way you can invest in gold and how we're positioned. The important thing to note about what we provide is we try to provide shareholders with exposure to gold and optionality with reduced risk as well. And so there are other things you can do, other ways you can play gold. You can invest in ETFs and bars, coins and physical metal, but you won't get the upside from exploration potential and you won't get a dividend. Conversely, you can invest in operating companies or exploration companies, but you won't get that exposure to operating and cost risks, which is obviously a higher risk. So what we try to do is provide all the benefits with all of those investments with a lower risk profile. Now talking about optionality. I'll just give you a snapshot of an asset that we were involved in for a number of years. And we don't have any capped royalties in our producing portfolio today, but this was an asset that did have a cap, unfortunately. It was a nice producer for us, and we lost it in our portfolio just over a year ago. But the fact that we had a cap and it reached the cap allowed us to dissect this investment and really kind of understand where the returns came from. This was a royalty that we acquired in 2005 on a project that was being brought into production by Alamos Gold in Mexico. And when we made our initial investment in 2005, the mine life was about 6.5 years and 3 million ounces of reserves and resources in the ground. Well, when the operation produced 2 million ounces until the beginning of 2018, we received a royalty over that period of time. But when the cap was reached in 2018, the mine life still had 7 years ahead of it and 4.5 million -- and 4.3 million ounces in the ground. So it was that exposure to the exploration potential that brought resources to reserves into production where we got our outsized return. And our return on the entire transaction was about 36%, and that was due to the conversion of those resources. And of course, as the mine produced over a longer period of time, we also got exposure to the gold price over that longer period of time. So the exploration and production upside is really a key feature of our business model, and it's something we strive to acquire every time we make an acquisition. Now I mentioned that we have a pretty -- or a very efficient business model. We have 28 employees, and we produced over 500 -- or just about $500 million of revenue last fiscal year, and our market cap is about $7 billion. So on a per employee basis, you can compare us to major gold mining companies, major mining companies and some of the more well-known tech names in the marketplace, and you can see that we're an extremely efficient company on an employee count basis. Now the low employee count also means that we have a very low fixed G&A, which further contributes to our efficiency and high margins. We had an 80% EBITDA margin last year, and our G&A was about 4% of total revenue. Now during COVID, what the impact is for us is there wasn't really one. We have 4 offices around the world. We're spread out. So we're kind of a remotely managed business to begin with. But the fact that we've got such a low G&A allowed us to continue focusing on what we do best and focusing on growing the business rather than thinking about what we need to do to retrench or restructure to be able to absorb some of the impacts of COVID. So COVID, fortunately, for us, has not been something that's affected our business on the negative side. I'll just talk a moment or 2 about our portfolio and what drives the performance that I've talked to. As I said, we have 40 assets or so that produce revenue and about 140 in various stages of development from exploration through to construction. And as you can see on the map, the portfolio is generally North and South America-focused and is definitely in some of the more mining-friendly jurisdictions around the world. And it's -- when we talk about diversified portfolio, we look at it by geography, and our largest country exposures are Canada, the Dominican Republic, Chile and the U.S.A., so all arguably very mining-friendly jurisdictions. And revenue is spread out, as I said, amongst 40 operating assets. Now 75% of that revenue comes from 6 large contributors, and 25% comes from 34 smaller contributors. And revenue diversification is important at all times but especially during COVID. We had some interruptions in April and May at specific assets, but our overall revenue was relatively unaffected as a result of COVID. And as I said before, 80% of our revenue comes from gold. But the underlying assets that -- underneath this portfolio are, generally, they're about 80% precious metals assets. So that means that we're not dependent on base metals' viability or fundamentals for the viability of the revenue in our portfolio. I'll just give you a brief update on some of the recent developments in our portfolio. And in September, the September quarter, we had an excellent operating quarter. None of our operations really had any negative things to talk about, and they all performed extremely well. And we had good progress at Khoemacau in Botswana. And at Khoemacau, specifically, the construction is about 70% complete, and we're expecting the first concentrate to be shipped towards the end of the third calendar of 2021. We've put in about 175 -- $179 million, excuse me, of a total $212 million to $265 million investment for an 80% to 100% silver stream from the project and at an 80% rate, which is the low end. And that would add about 15,000 GEOs at full production and at current spot prices. So this is a meaningful piece of growth for us in our portfolio, and it's a relatively small deal. So I think that's one of the advantages of where we are in the marketplace and our size. We have access to liquidity, but we are still small enough to do a small deal like this that can actually add meaningful growth. At PV in the Dominican Republic, Barrick is doing a lot of work on expanding the plant and tailings facility capacity as well. So this is something that will extend the mine life into the 2040s at a much higher production rate. And Barrick has talked about this a lot recently. It sounds like they're making very good progress, and they expect commissioning to -- in 2022. And this -- again, to our model, this is growth that we do not have to pay for. Barrick is doing all this work. We've already made our investments. So this is something that will be very attractive from a return perspective to our shareholders. On the Peak Gold joint venture, this is something that we had a direct asset interest in until September of this year. And we sold our interest to Kinross in return for cash, and so we're very pleased with the sale. We also received royalty consideration as part of this as well. And Kinross, being a very incredible and experienced operator in Alaska and as the ideal partner, they're going to use the Peak project as a satellite to the Fort Knox operation. And what that means is it should shorten the permitting time and actually shorten the time to first production, which is when we'll receive our first royalty payments from this property compared to if it were being developed as a stand-alone project. So we're very pleased to see Kinross stepping here. And then finally, at Wassa and Prestea, around the same time we announced the Peak transaction, we announced the separation of these 2 streams. And what this allowed Golden Star to do is sell Prestea and Bogoso to Future Global Resources. And then Golden Star can focus on Wassa, which is really -- is -- we have 10 million-ounce potential at Wassa. That's the real driver of the Wassa/Prestea stream, and we're very pleased to see Golden Star is now able to focus 100% on that. And we've got a new owner at Prestea/Bogoso. We'll be able to focus 100% on some of the issues they've been facing there. So very much a good transaction. We kept our value whole, and the asset is in the hands of parties who will be focused on those assets. Now I'll make a short mention about ESG. And although our business model does not allow direct operating control, ESG definitely is a core part of our business. We're a member of leading global mining industry groups, and we certainly endorse the principles for responsible development that they've set for the industry. And we've also been very active in community support and supporting local organizations where we live and we work. And when COVID hit in April, we made some charitable donations to charities in Denver, Toronto, Vancouver and Lucerne to address needs specific to each of those communities with respect to medical supplies, food security, homelessness and elder care. In addition to our community support around what we -- where we live and work, we also -- we're very proud to be partnered with industry leaders who have a strong commitment to communities where they operate. And it's a real part -- the core part of our due diligence activity is looking at how partner companies manage their relationships and their impacts on host communities. And we build language into our transactions to ensure that operations are managed to the highest possible standards. And where it makes sense, if we can contribute to help fund initiatives that our partners are making in these communities, we're very happy to do so. So ESG is definitely a part of how we see managing our business sustainably in the future. I'll talk for a moment about the market for our financing product. And when stream financing started in 2004, the majority of stream investments, they've been allocated towards balance sheet restructuring and project development, with some towards M&A. And as you can see, there's a bit of a lumpy profile to completion of deals by the sector. And the one thing I would say is that mining is a capital-intensive business, and there's a need for capital at all times. So whether it comes from one of those 3 areas, there's always a need for finance in this business. And we're seeing, right now, some interesting opportunities ahead of us. Now let's talk about our process and to map our activities on the same time line. We're always busy looking at opportunities. But not all opportunities make it through our due diligence process through to completion. And we do have a very extensive process, and we're very disciplined in how we deploy our capital. If we see issues or we see risks that we're not comfortable with or we don't believe can be managed, we're quite happy to walk away from transactions. So you don't see us doing transactions necessarily on a very regular basis, but we are busy looking at things pretty much all the time. We don't have any pressure to do transactions. We feel that we can harvest our portfolio, continue to build the balance sheet and wait. This is a cyclical business. So when -- whatever the issue is, whether it's pricing or whether it's the need for our financing or what have you, we're waiting with a balance sheet that's ready for the opportunities as they present themselves. Now let's talk about our liquidity and our balance sheet. At the end of September, we had about $1.1 billion available to us between our cash balance and our undrawn revolver capacity, which positions us very well in the marketplace that we see today. And right now, our only commitment is the remaining amount to be spent on the Khoemacau transaction. And once we complete that, we'll return our focus to the balance sheet and to repaying any outstanding debt. And so as I said before, I mean, we're very, very focused on our balance sheet, and we prioritize the use of cash towards debt repayment and dividends and then follow that by new business opportunities. We have a 20-year history of deploying capital and growing as well, and we've done that in a very accretive manner to shareholders. And since 2000, we've grown our revenue by 50x, our operating cash flow by 80x, but our G&A has only grown by 13x and our share count only by 4x. And the 3 key aspects of our growth are: revenue growth far exceeds the increase in our G&A expense. And that's an indication of our -- it's a very high-margin, scalable business. And secondly, revenue growth is not dependent on metal prices. So we've been able to grow our revenue despite ups and downs in metal prices. We've also funded our growth without issuing shares in a meaningful way, which is really important. We're one of the founding members of the GDX, and we have the lowest share count with the GDX Index, which is something we're very proud of. Now I'll end my comments on our dividends, and we consider return of capital to be a key strategic objective and one of the things that makes us really unique in the precious metals investment universe. We've paid a growing and sustainable dividend since 2000, and we've increased the dividend every year despite the volatility in the gold price. And we increased it again 2 weeks ago for the 20th consecutive annual raise. So we're very proud of that record, and we intend to continue doing that. We pay a growing and sustainable dividend. And so we look forward -- and we make very measured assumptions about what our portfolio can do. And we never want to be in a position where we raise our dividend and have to pull it back in the future. In total, since inception, we've paid over $600 million of dividends back to shareholders. And we are the only member of the GDX that has increased its dividend every year since the formation of the GDX. So that stands us apart as well, and we're very proud of that record. So with that, I've come to the end of my prepared remarks. I'd like to thank you for your interest, and I look forward to connecting in person, hopefully soon. Thanks.