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

Well, hello, everybody. It's a great pleasure for me to introduce Dan Breeze. He's the Vice President of Corporate Development for Royal Gold, Inc. He has 20 years of technical and commercial experience across international markets. And before joining Royal Gold in 2019, Mr. Breeze worked for some of the best analysts and salespeople in the world, some of the most handsome I might add at BMO, most recently serving as the Managing Director of Equities for BMO Capital Markets based in Zurich, Switzerland. So Dan, maybe in your new role, you can walk us through some of the slides here, and we'll have a couple of questions at the end here. Take it away.

Thanks, [ Brian ]. That was quite the introduction. I appreciate that. We also appreciate the opportunity to be participating in the World Gold Forum again. So thank you for the invitation and to the organizers for making us a seamless virtual conference. I'd also like to thank the audience as well for listening to the presentation ahead of time. I am going to make some forward-looking statements during my presentation. So I just ask you to be familiar with our safe harbor statement here. This presentation is on our website. And I'm going to touch on a broad list of topics over the next 10 to 15 minutes. I do want to highlight that Royal Gold will host an Investor Day next week, April 20. That's going to start at 9:30 a.m. Eastern Time. It will run for about 2 hours, and we'll save some time for Q&A afterwards. So we welcome you to join the whole management team to learn more about our business, and we're happy to address any questions you have at that time. For those that may not be as familiar with our story, I just want to give you some high-level background on the company with this snapshot slide. We are a dedicated stream and royalty company. We have a broad portfolio. We have about 190 properties right now. They're located across 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 strong. It's significant. It's $1.2 billion right now. And we are currently net cash positive. Most of our revenue, as you can see, is generated from streaming, the balance coming from the royalty side of our business. I want to give you a little bit of an overview of the key attributes of our business with this slide here. Our model is really providing shareholders with exposure to the gold price and resource upside without the ongoing capital commitments required by the operating companies. So it's a very high-margin and very efficient business model, and that leads to the impressive market cap and cash flow per employee with limited overhead. I'm going to come back to this in some more detail with some examples for you. We have a diversified portfolio with our current 41 producing properties, and we are very careful and efficient in our capital allocation. We continue to maintain a disciplined approach to our technical due diligence, and we also have a very strong and experienced commercial team to work along with that team. Our liquidity would allow us to complete even the largest stream transactions that we typically see in the industry, and we do that and thinking about it from an accretive basis. So we look to cash from operations. We look at our revolving credit facility. And if necessary, we look at equity to do the funding sources. We have not done an equity raise since 2012, and our share growth has been minimal since that time. And we actually have the lowest share count in the GDX at the moment. So we're very proud of these attributes as well as the history of paying a growing and sustainable dividend all the way back to 2001, and I'm going to come back to this point in some more detail at the end of the presentation. So I want to talk about this slide in some detail, and this is perhaps one of the most interesting slides in my view in the deck. It really speaks to the optionality in our model. And I'll just give you an example here of a transaction that has run its full course in our portfolio. We purchased the Mulatos royalty in 2005. It's a 1.5% NSR, net smelter return, royalty. And at that time, the mine had reserves and resources of roughly 3 million ounces and a mine life of 6.5 years. At the end of 2018, just before the royalty cap was reached, the reserves and resources were 4.3 million ounces, and the mine still had 7 more years of life in it. You can see, and I'm looking at the bottom left -- sorry, the bottom right-hand side of the slide here. You can see that the contribution from the resource conversion to our overall returns looks relatively small, but that's in part due to the fact that some of the conversion of the ounces will be seen in production after achievement of the cap. So we started off looking for an 8% return. And through resource and gold price optionality, we actually achieved a 36% annual return over that investment period. The next 2 slides highlight the efficiencies that I talked about in our business earlier. And it probably doesn't surprise you that our enterprise value per employee and the revenue per employee exceed those of the operating mining companies. You can see that in the upper half of this chart. I find it interesting to look at the same metrics compared to well-known tech companies, and you can see how Royal Gold stands out materially versus those companies, and that's shown in the bottom half of this chart. In terms of the financial numbers, that's also where we see the efficiencies importantly. So if you look at our fiscal 2020 year, we achieved EBITDA and operating cash flow margins of 80% and about 70%, respectively. And you can see our G&A expenses were just 7% of revenues. I'll come back to this in a little bit more detail later on in the presentation. In terms of where our portfolio is located, you can see where the key or principal properties are found. They're listed on the right-hand side. But the map just shows that we're located in many parts of the world and certainly in the well-known mining jurisdictions like Canada, Chile, Ghana and the U.S. More specifically, Canada represents a little more than 30% of our revenue, and it is the largest contributor by country. And by asset, I'm looking at the middle chart here. You can see Centerra's Mount Milligan mine contributes to the largest portion of our revenue. And I'm going to move over to the right-hand side in terms of the chart here to really point out a key point of where we're different, we believe, versus our peers. And that is we're not a company built on byproduct revenue streams. So about 80% of our revenue comes from mines that generate more than half of the revenue from gold. So what that means is we're not dependent on the base metal market fundamentals to determine the viability of our operations. This slide gives some more perspective to the depth of our portfolio. And sitting just below the more than 40 producing properties are layers of exploration, evaluation and development stage assets, and we hope that those move up in time to ultimately produce. It's also important to highlight that the assets in our current portfolio have largely been bought and paid for. And so what that means is it's true long-term optionality in our portfolio for our shareholders. Just want to call out some of the portfolio updates and highlights here with this slide. In general, we're very pleased with the most recent quarter we had. All of our operations are performing well. And our key development project, which is Khoemacau, is making good progress. That project is 85% complete on the construction. We've also completed the investment. We've committed to $212 million into that project, and we anticipate Khoemacau will be in production later this year. At the 80% stream rate, we expect the project will produce about 15,000 net GEOs at full production and at current spot prices. And we're very happy with the team. They've made great project progress despite the strict travel restrictions imposed as well. Moving to the next, the next update is Pueblo Viejo. And this is a joint venture between Newmont and Barrick. Barrick submitted their EIA for the expansion project. And the permitting of the new tailings facility -- storage facility will follow shortly thereafter. The expansion is expected to be commissioned next year. And that will extend, we understand, the mine life to 2045 and potentially convert a significant number of ounces from resources to reserves. Also, over that time frame to 2045, production should be maintained at about 800,000 ounces a year. So quite significant. At Peak Gold, we sold our interest in the project to our -- to Kinross, and that included our former partner in our interest there. We received $61 million in cash, and we also picked up some additional royalty interest on the project as well. So what this sale allows us to do is to really refocus on our core business, and we're very pleased to have sold this to a strong partner. By permitting the peak deposit as a solid deposit of Fort Knox, we expect the time to first production and, of course, our first royalty payment on the project to be shorter than on a stand-alone basis. Finally, on the sale of Prestea by Golden Star, that allows the company to focus management's time and attention and capital towards fully optimizing of the Wassa asset. And there -- that asset has more than 10 million ounces of reserves and resources. So very significant. You might have seen the recent PEA for Wassa. It indicates that there's potential to extend the current 6-year mine life by 11 years. And so again, that really highlights the optionality embedded within the Royal Gold portfolio. Just touching on the ESG practices here with this slide. We're very proud of our continued focus on best practices, and we're very pleased that those efforts are being recognized by leading surveys, as you can see here. And just to highlight one data point, Royal Gold is ranked third out of 115 global precious metal companies at the moment, and you can see the low risk categorization. That's according to Sustainalytics. I'm looking at the top right-hand side in terms of that ranking metric. This slide just -- and there's a lot of information here, but it just frames our focus on ESG at the local and corporate levels. We have always incorporated environmental and social impacts into our due diligence efforts. And importantly, we're continuing to support local charity. So for example, this year, this fiscal year, we have a budget of $1.5 million allocated towards those efforts. We're also very proud to be partnered with companies with strong commitments to the communities in which they operate, and we're always in communication with those operators to see if there's other ways that we could be helpful in their local efforts. Also, I just want to mention our Board. We have a strong board. They're highly experienced. They're independent, and they're also committed to the best practices in the industry. In terms of business development, our pipeline remains very robust. The current metals prices have improved the cash flows for operators. We're in a low interest rate environment. So the debt markets are open. The equity markets are open. And we become more of a mainstream source of capital, and it's not really -- our product is not really dependent on market dislocation for opportunities. Generally, we see the use of proceeds falling in 3 buckets: project development, M&A and balance sheet restructuring. At the moment, the focus is more on project development, a bit more as well on the M&A side. These tend to move independently to some degree. So one is more popular than the others, typically. And so what that allows us to see is a consistent flow of opportunities to look at. And that's what we're seeing in the market right now. This is just our own acquisition history. And you could see it's one of patience. We make investments when those opportunities come our way and that we're comfortable with, but we're not in urgency just to do a transaction at any given time. You can see our investments are also very lumpy, and they don't really fit into a quarter-to-quarter or even a year-to-year kind of analysis. And we look at many opportunities. They just never get over the finish line as well. Our due diligence efforts, that includes a review of the people, the project, all the technical and legal aspects there, the jurisdiction. And then we integrate ESG analysis throughout the review process as well. Mining is obviously a risky business, and we feel very comfortable with the team we have in place to address those risks as we look at the review process with those pieces, as I mentioned. Part of being patient with our investments means that we need to have the liquidity to act when we need to act and transact when we can. And so we look at our liquidity right now. As I mentioned, it's $1.2 billion. We have no further commitments at the moment for our capital after completing the funding for Khoemacau. And our focus right now is reducing our debt -- our outstanding debt right now, which is at $200 million. This is another slide I really like in our deck, and it's a 2-decade view of our results. And it really shows, I believe, 3 key aspects of our growth. The first is revenue growth. You can see it far exceeds the increase in our G&A expense, and that's just an indication of our high margin, scalable business. The second is the revenue growth. It's not dependent on an increase in metals prices. You can see that as it's compared to the average gold price move. And finally, we have largely financed our growth without a significant increase in our share count, as you can see there. So when you see operating cash flow increases of 80x or so, as shown here, and our shares outstanding have grown only 4x, that's real accretion to our shareholders in terms of optionality and overall growth. So we're very, very proud of that history. At the start of the presentation, I mentioned about our long-term dividend history. And I want to conclude with this picture of our history. We're very proud of it. We started our dividend back in 2001, and we've grown that consistently. As you can see, our last dividend increase was in November last year, the 20th consecutive increase. It was a 7% increase, the largest in the last 6 years. And so while we know there are larger increases in the industry across the board, in some cases, we feel very comfortable with this. This approach is sustainable, and it's defensible in any price environment from our perspective. So [ Brian ], with that, that's the end of my prepared comments, but I'm happy to answer any questions.

That's great. Thanks very much for that, Dan. I just wanted to dig into some of the other things that you were talking about in terms of the corporate development. You had a couple of good slides there as well. But maybe something with a little bit more recency. Could you just sort of talk about 2020, 2021, what the change in opportunities has been? You mentioned there was M&A and project development had certainly come up in importance. And you'd also mentioned that royalty funding had become more mainstream. Are there more transactions available now with the higher commodity prices? Or is -- are you more busy at the moment? I guess it's probably the easiest way to ask it.

Well, that's a good question. And that's really what I'm focused on most of the time, is business development. And I would say that we are -- certainly, in my time with the company, we're as busy as we've ever been. What we're seeing right now, it's a unique part of the market right now, where the -- as I mentioned, the equity markets are open. The debt markets are open, and the commodity prices have been quite strong. But the opportunities are continuing. Projects are moving forward. They're finding equity to move those projects forward. And that's where we can be very helpful in terms of construction financing. We need those projects to sort of move up the pipeline, if you will. And so the environment is quite busy. I think there's a real focus in terms of development right now. As I mentioned, that's really where we're seeing the use of proceeds being directed towards for products like ours. And then on the M&A side, there's -- we often look at this where we can be helpful in terms of acquisition financing. We're a great partner in that sense. We're not looking for Board seats or things like that, but we can provide cash in terms of an acquisition. And so those elements are working very well together. So there hasn't really been a slowdown as far as we can see in terms of the strength of the market across the board right now.

And maybe just one final question as we go through the last couple of minutes here. Obviously, you've got a proud history of mostly being in precious metals and actually mostly being with precious metals mines. Do you think that given a larger appetite for larger streams perhaps or larger royalties, perhaps that's going to shift in the future? Or is it already shifting? Maybe just talk a little bit about the future strategy with regards to precious metals.

Yes. Well, the strategy is consistent. And our CEO, Bill Heissenbuttel, assumed the role going back at the start of last year. And the strategy that was in place has been carried over with his leadership. So our focus remains on gold. And we do have copper in the portfolio. We have some silver as well. We mentioned Khoemacau, which is a silver stream that will enter the portfolio starting later this year. But we are focused on gold primarily. We'd like to keep that proportion where it is. And we'll look at other things as well, but we want to make sure that the core is still very much gold focused.

And I think that takes us through all the time that we have today. Thank you very much, Dan. Great to talk to you again.

Thanks, [ Brian ], for the time. Appreciate the questions.