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

Good morning, everybody, and welcome to our session this morning with Royal Gold. Presenting for us today -- it's not a Q&A session. Presenting for us today is Dan Breeze, part of the Corporate Development team at Royal Gold. And I'll hand it right over to you, Dan. We only have 20 minutes, and I'll let you go through the presentation. Thank you for being here, by the way.

Good morning, Greg. I appreciate that and I trust you're well, and we appreciate the opportunity to participate in the TD Conference. I also want to thank the audience in advance for listening to Royal Gold's presentation. I will be making forward-looking statements during my presentation. So I ask that you become familiar with our safe harbor statement here. The presentation is on our website, and I'm going to touch on a broad range of topics over the next 15 or 20 minutes. But please do contact us directly if we could help you with questions or more information, we would be very pleased to speak with you directly. For those that may not be as familiar with our story, I want to give you some high-level background here, and I'll use this snapshot as a guide. We are a dedicated streaming and royalty company. We have a broad portfolio. Currently, we have 190 or close to 190 properties in the portfolio, and those are spread over 12 countries. The majority of our revenue, about 80%, comes from gold. And for fiscal 2020, which ended in June last year, we had revenue of almost $500 million. Our liquidity is significant. We have about $1.1 billion available to us. And our current net cash position, it's positive, which is also something to point out here on the right-hand side. Also, more than 70% of our revenues are generated from stream, and you can see that in the pie chart on the bottom left-hand side, the balance coming from royalties. I want to touch on a few key attributes of our business, and I'll use this slide here as the guide. Our model provides shareholders with exposure to the gold price and resource upside but without the ongoing capital commitments required by operating companies. Our business, it's high margin. It is very efficient. And so what that results in is an impressive market cap and cash flow per employee with limited overhead. I'm going to come back to this point shortly. I want to give you some actual examples of our model in practice here. We have revenue diversification. We currently have a portfolio of 41 producing properties, and this has been very important to the pandemic when the impact of COVID-19 can slow or even close operations in various parts of the world. We are very careful and efficient in our capital allocation, and we continue to maintain a very disciplined approach to our technical due diligence reviews. And that's complemented by a highly experienced commercial team as well. Our liquidity would allow us to complete even the largest stream transactions we typically see in the industry, and we continue to fund transactions on an accretive basis. We look to cash from operations. We look at the revolving credit facility, and if necessary, equity to fund those transactions. But we think about our capital sources in that order I just mentioned to you. We have not done an equity raise since 2012, and our share growth has been minimal since that time. And I want to point out as well that we have the lowest share count in the GDX. We're also very proud of our dividend's history. We've been paying a growing sustainable dividend since 2001, and I'm going to come back to this at the end of the presentation to give you a bit more color on that point. Slide #5 here highlights our strong leverage to the gold price. And you can see the beta number at the top left-hand side. But Royal Gold has also shown a modestly positive relationship to the market in general, and so that provides portfolio diversification that we talk about. The chart on the right-hand side shows our share price. It's outperformed many measures over the long term, including the broad market and the gold price as well. The next 2 slides, this one and the next one, really reflect the work of the World Gold Council, and we're happy to share it here with you. The slides highlight some attributes of gold that we think are perhaps overlooked at times. And I'll start with the chart on the top right-hand side, which shows that over the long term, gold has outperformed many asset classes. Gold has also outperformed many other commodities, and that's shown in the bottom right chart, that's a 20-year annualized return shown there. Gold is also one of the more liquid assets or sectors, I should say, in the financial markets, and that's shown in the bottom left chart. We like the current market for gold. We see it being quite positive when we look at the low interest rate environment that we're in and in the political and social uncertainties as well. But I want to draw your attention down to the bottom right chart. This shows a return analysis, and it indicates that the correlation of gold to the market in general seems to be positive when the S&P is up, but is negatively correlated when the S&P is down. Also, the chart on the bottom left shows that volatility for gold is lower than many markets. So to summarize these 2 charts in our view on gold, it's a large liquid market. It has positive price performance, lower volatility and is uniquely positioned here to perform well in the markets and the environment that we're in today. This slide highlights the unique investment opportunity that Royal Gold offers. And we compare this to the gold alternatives that are available for investors to choose from. We offer exposure to gold without direct exposure to operating costs and capital costs, and that's obviously similar to an ETF. But where we're different is we offer the upside to reserve expansion, and that's optionality that we'll talk about here shortly in the portfolio. We also offer a sustainable and growing dividend that's unlike an investment directly in physical gold. And in addition, the lack of exposure to costs separates us from operating development and exploration companies. So I mentioned the word optionality, and I want to give you an example here in our portfolio and how it works over the long term in our business model. We use this example here. It's a transaction in our portfolio. It's run its full course in the portfolio, and I'll give you a little bit of background about it first, and we'll just talk about the returns after. We purchased the Mulatos royalty in 2005, this was a 1.5% NSR. And at that time, in 2005, the mine had reserves resources of roughly 3 million ounces and a mine life of roughly 6.5 years. At the end of 2018, that's just before the royalty reached its ounce cap, the reserves and resources were 4.3 million ounces and the mine still had 7 more years of life to go. The contribution from the resource conversion to our overall return looks relatively small, and I'm looking at the graph on the bottom right-hand side right now. But this is just in part due to the fact that some of the conversion of ounces will be seen in production after achievement of the cap. So to step back, we expected an 8% return on this investment, and through resource and gold price optionality, we actually achieved a 36% IRR. Quite, quite interesting. I like looking at this chart, it might -- maybe you've seen this before in our previous presentations, but it does highlight efficiencies -- we talked about this earlier, of the business model. And perhaps not overly surprising is that our enterprise value per employee and the revenue number per employee exceed those of the operating mining companies, and I've shown that here at the upper half of the chart. But what is also interesting is our efficiency far exceeds the well-known tech companies, as shown in the lower half of the chart. We've put this against Amazon and Apple and Facebook as some examples there as well. This is also another way to think about our efficiencies, and it shows up in our financial numbers. And for our fiscal year 2020, we achieved EBITDA and operating cash flow margins of 78% and 68%, respectively. And our G&A expenses were just 4% of revenue. So again, it really highlights that efficient -- the efficient business model that we have to offer. I'd like to circle back on an earlier comment I made about our diversified portfolio. And this map shows the locations of our 41 producing assets and highlights the locations of our principal properties that are listed on the right-hand side. You can see our key assets are spread throughout the world and are located in jurisdictions like Canada, Chile, Ghana and the U.S. So more specifically here on this slide, Canada represents a little more than 30% of our revenue and is our largest contributor by country. The Dominican Republic and Chile represent the second and third largest contributors. And by asset, Centerra's Mount Milligan mine continues to be our largest source of revenue. And that's followed by Barrick's Pueblo Viejo mine and Teck's Andacollo mine. I also want to make a key point here and highlight that we are not a company that has been built on by-product revenue streams. So about 80% of our revenue comes from mines that generate more than half of the revenue from gold. So what this means is we are not dependent on the base metal market fundamentals to determine the viability of our operations. Just want to touch on a few highlights in the portfolio here. But in general, we're very pleased with the most recent quarter. We had all the key operations performing well and our key development project, Khoemacau, made good progress. And on Khoemacau, construction is 70% complete. We have invested almost $180 million out of the $212 million commitment that we made to the project. And we expect Khoemacau will be in production later this year. At the 80% stream rates, we expect the project will produce about 15,000 net GEOs to the portfolio at full production and at the current spot prices. The projects, we've been very impressed as well with how it's been managed. But the project has made very good progress despite the strict travel restrictions imposed there. At Pueblo Viejo, the joint venture has submitted an EIA, and the expansion project for the permitting side will follow as well. We look forward to seeing the tailings storage facility permitted at some point. The expansion is expected to be commissioned next year. And we expect that the mine life will extend to 2045 and potentially convert a significant number of ounces to reserves from resource. At Peak, we sold our interest in the project and our shareholding in a former partner, which is Contango ORE, who sold that to Kinross for $61 million. That was the recent transaction. And this allows us to really refocus on our core business. We're very pleased to see the project go into very strong hands of this operator. And by permitting Peak as a satellite of the Fort Knox mine, we expect the time to first production to be reasonable and our first royalty payment on the project will follow shortly thereafter versus -- certainly versus a stand-alone project as a comparison. And then finally, the sale of Prestea by Golden Star, that allows the company to really focus their attention and capital towards really optimizing that world class asset, which if you include reserves and resources, it's somewhere around 10 million ounces right now, which is a world-class asset from our perspective. This slide here just touches on various commitments to development principles that we've made. And those include the ones that have been put forth by the ICMM and the World Gold Council. We've also made contributions to support local communities around our 4 offices. And this was very timely with the onset of the pandemic. So we've been able to, for example, support and help acquire, distribute PPE, to care for the elderly and for food assistance for the needy. We'll continue to support the areas around our offices going forward as well. We have also always incorporated environmental and social impacts in our due diligence, and we're very proud to be partnered with companies with strong commitments to the communities in which they operate, as you can see some examples here. And we're going to continue to seek opportunities to financially support local efforts of our operators as well. We often get asked about the environment, the business development environment and the pipeline, and we say it's quite robust right now. The current metal prices have certainly improved, the cash flows are coming into the operators and the low interest rates make that market more attractive. We've seen the equity markets open up a little bit here over the last 12 months or so. But we've become more of a mainstream source of capital that's not dependent on market dislocation for opportunities. And we often think about the use of proceeds as falling to the 3 buckets, you can see that on the left-hand side. We think about project developments, M&A and balance sheet restructuring, and what's interesting with these buckets is they tend to move differently. They tend to be more or less popular at a given point of time and based on the metal price environment as well. So that just gives us a very consistent opportunity flow to consider. This is a summary of our own acquisition history. It's one of patience. And our investments have been made when opportunities come about and come our way. But we're not in an urgent situation, where we need to do a deal at just any time. Our investments, as you can see, they tend to be very lumpy and they really don't fit into a quarter-by-quarter or even a year-by-year type of analysis. We often -- and we look at many opportunities, and often, these opportunities never finish or never come over the finish line as well. But we are very, very focused on due diligence. We review the people. We look at the project, the technical aspects of the project, the legal side, the jurisdiction. And we know that mining involves a lot of unique challenges, and we believe that we've got the right team in place to manage those numerous, numerous risks in our industry. Part of the patience story is -- with our investments, is that we have to have sufficient liquidity at all times to easily finance opportunities as they arise. As I mentioned, we have more than $1 billion of total liquidity, and our only commitment at the moment is the remainder of our Khoemacau investment. And after we complete that investment, we will focus on further reducing our outstanding debt. We have taken a conservative view as it relates to cash on our balance sheet and with the onset of the pandemic. And that's really since we don't control the properties that generate revenue for us, so we don't know when or if further production disruptions may occur. Just coming back to liquidity and financing. And I like this slide a lot here. It's a 2-decade view of our results and really shows the 3 key aspects of our growth. First, revenue growth far exceeds the increase in our G&A expense. And that's an indication of a high-margin and scale of business that we have. Revenue growth was not dependent on an increase in metal prices. And finally, we have largely financed our growth without a significant increase in our share count. So when you see operating cash flow increases of 80x and our shares outstanding growing by about 4x, we're really able to deliver accretive growth to our shareholders. So at the start of the presentation, I mentioned about our long dividend history, and I want to conclude with this picture of the history. And we're very, very proud of this. The increase in our dividend last November was the 20th consecutive increase in our annual dividend. It was a 7% increase, that's the largest increase in 6 years. And we know that there are other larger percentage increases in the industry, but we think about the dividend as measured because we want to be sustainable and something to think about over the longer term in any price environment. So with that, Greg, I think we're brushing up at the end of the time limit here, but that's the conclusion of the formal comments. Thank you very much. We appreciate the time.

Thanks, Dan. We've got a minute or so left. I'll throw in a couple of questions. One on the dividend. You are going to generate significant free cash flow in this gold price environment. And obviously, that gives you the ability to increase the dividend. Is there thought towards putting a structure in place around that dividend linking it to free cash flow like some of the larger producers have done?

Yes. Greg, I don't think so. That's sort of -- we have the history, we want to continue what we've been doing in the past, which is very measured, sustainable. We never want to be in a position where we have to cut the dividend. And we see opportunities in the market. So we want to maintain liquidity so that we're able to deploy capital. And that's really -- the focus of the company is deploying accretive capital in the market. So it's the balance between the 2, but I don't foresee us linking it up to, say, cash flow on a percentage basis.

Sure. And the second question, as we talked about this earlier before we came on was, you're located in Lucerne. I understand why there are reasons behind that from a tax perspective. But does that give you a unique view into deals and opportunities in the streaming business that perhaps North American-based streamers don't see?

That's a good question, Greg. I don't know. We work as a very close team. We have 4 offices. We speak every day. I speak every day with my colleagues in North America and into Denver as well and Toronto and Vancouver. We all know what's going on. We share information. Perhaps there's an advantage with the time zone. I'm able to speak to or speak about opportunities in this time zone in Europe and maybe more easily into Australia, for example. But I think we're working so much as a team that everybody -- it's a global business and industry at the end of the day. And I'm not sure if it gives us a big advantage from that perspective other than just the time zone to communicate.

Right. Dan, we are out of time. Thank you very much. That's a great presentation. We all got some very interesting points that I'll use going forward. So thank you, and…

My pleasure. Thank you very much.

Yes. Thanks, Dan. Bye-bye.