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

Good afternoon, and good evening for those in Europe and Asia. This is Mike Jalonen for Bank of America. I cover the North American precious metals space for BofA, including the streaming and royalty companies. And I'm very pleased to have Bill Heissenbuttel, President and CEO of Royal Gold to join us today. And Bill, thank you for participating in our conference, and I look forward to having a pint with you in Miami, mid-May 2022, when our conference goes live again.

[ Thanks. I'm going to be patient ].

Yes. This will be -- correct me if I'm wrong, Bill, this is a fireside chat. And certainly, from the audience, any questions, we would appreciate, and I don't see any yet, Bill, but I've got lots of questions.

I guess the first one, Bill, you have an extensive career at Royal Gold. You've -- I think you've pretty well worked in all areas of the company, it seems. And now, you're CEO, January 2, 2020. Congratulations on that well-deserved appointment. Just wondering, given Royal Gold's long history, was there any changes in the corporate strategy under your leadership since you took over? And maybe what's a couple of things you're proud of that's happened under your leadership to drive shareholder value?

Yes, Mike, the really -- and again, as I said, thanks for the invitation to participate. I believe that the Board, as it went through its selection process for the successor to Tony Jensen, was looking at our strategy, focusing on streaming and royalty, that side of the business, focusing on precious metals, gold, in particular. And I think my selection is really due to the fact that we all agreed that it was working. And so when I came in, there was not going to be a right turn or left turn. We weren't going to suddenly become an operating company. We were not going to suddenly go into a diversification effort. So we stayed steady with the strategy. We've continued with our commitment to try to increase our dividend every year. We're now at 20 years. And we have a very strong balance sheet, and that's always been the case. So I just think my selection was indicative of the fact that we liked where we were going and we were not going to change. In terms of things I'm proud of, not so much what I've done, I'm very proud of our team with the way they have handled the pandemic. We had -- we were forced, over a year ago, to go 100% remote. And that was a big change for a company that had been run very traditionally for years and years. And everyone stepped up. I have absolutely no issue with how we managed the business. People were obviously facing their own personal challenges. But the team really pulled together. And I'm very proud of that, even though I'm not the one who did it. The other 2 things I might just mention, we had to step up our game on the environmental and social side of our business, talking about what we do, how we do due diligence, why it's important to us, and we're starting to see those results. People are, I would say, less concerned. We've seen some of our ratings improve, and we've announced a couple of support arrangements with key operators. And so I'm proud to have shone a light on that and made that a focus of our company. The other thing, it's a very small event, but selling Peak Gold, I think, allowed us to get back to our core business. And I'm proud that that was a strategic direction I took the company because it was taking a lot of time; and particularly, I wanted our technical team, too, to have more time to do and focus on our core business.

Okay. I look forward to asking the same question a year from now. I'm sure there will be a lot more positive developments. At the same time, you were promoted, there was also other promotions at Royal Gold, people moved up, Paul Libner, CFO now. Is that a core strength of Royal Gold, the strong management team and a long-term management team?

Well, I think it is. And I put Randy Shefman in there, who became General Counsel at the same time, and he's been with us for 10 years. And I think it's a tribute to our Board. Our Board is focused on succession planning each and every time we get together. And it shouldn't really surprise you when I say when our Board gets together now, even though I've only been the CEO for 18 months, the question always comes up, what are you doing to develop that next layer, so when you're ready to step down, we can have the same smooth transition. So it's a tribute to the Board, it's a tribute to Tony because that was a key area for us. And it's also, I think, one of the strengths when it came to the pandemic. One of the reasons we can work so well remotely, we've all worked together for -- some of us, for decades. So we all know each other. And so I think that consistency in staffing, consistency of hiring really qualified and talented people is a core strength of the company.

Okay. Great. You touched on the dividend earlier. How does Royal Gold balance, with capital allocation, strategy dividends versus potential future acquisitions and on that subject?

Yes. Well, we believe that the best way for us to create shareholder value is by buying new assets. It's no secret that we do trade at a premium, and that if we can buy assets at low discount rate, even at low discount rates, that is going to be accretive. And you're going to see it in our share price. So that's the first place we always look to put money. Over the last year, I have talked quite a bit about the fact that we had some debt outstanding on our -- under our revolving credit. We wanted to pay that down. We had a commitment at the Khoemacau project. We wanted to finish that. So for a year now, that has been a real focus. Now in early April, we paid off the revolving credit. And we think we may have made the last investment in Khoemacau. So capital allocation does become -- and then we find new assets. But if we have more liquidity than we need to compete in the industry, would we return money to shareholders and in what form? And that discussion is ongoing. Coming back to the dividend that I mentioned, it's 20 straight years where we've increased that dividend and we haven't pulled it back. And I think we may never be the sexiest dividend story in the world, but I like our 20-year track record of increasing and then not having to worry about reducing it later.

Okay. I guess we should touch on the subject of M&A opportunities, acquisition opportunities for Royal Gold. You just had your -- an Analyst or Investor Day recently, which I participated in. And we talked extensively about what Royal Gold is looking at. Maybe you could elaborate on that point and size of deals.

Sure. So we've always said that the core deal size is between $100 million and $500 million. This is not an industry where you typically see multibillion-dollar transactions. So the $100 million to $500 million is what I think investors should expect to see, not just from us, from others in the industry. I've always said streaming really has a series of purposes. There's project development, there's financing, mergers and acquisitions, and there's balance sheet leveraging. Given where base metal prices are and what gold prices are, we've got a lot of healthy balance sheets in the industry. So I don't -- you're not going to have balance sheet restructuring, financings in this environment. But with metal prices where they are and with balance sheets as healthy as they are, I do expect you'll see some project development opportunities, both on the base metal side and the precious metal side, and that's where we're focusing a lot of our time.

Okay. Now it seems to be a reoccurring theme from the streaming and royalty companies, that they mentioned M&A is an avenue where you could help out with your capital to get a merger going, but I haven't seen that happen yet. Correct me if I'm wrong, maybe I have missed them, but just wondering -- and M&A actually has been hurt, as you know, because of lack of due diligence. And so just wondering how that all ties them together for financing M&A.

Well, what's funny is the first stream we ever did was actually an M&A opportunity. The primary purpose of the Milligan stream was to finance the acquisition of Terrane by Thompson Creek. But you're absolutely right. Of the 3 legs of that stool, M&A is the hardest one, and it's the one you don't see as much.

I guess you probably can't say that they're coming.

I can say we're always trying.

It's interesting, you mentioned earlier Royal Gold has a premium multiple. Your peers do, at least under my numbers. So I get a lot of pushback when I say that to the -- your peers, but that's my analysis. And so the competition certainly is heating up in this sector, the private money. You've got your peers, I won't say the names, but you know who they are. And then -- even then you've got about, must be 10 or 15, new royalty and streaming companies, of which probably can't compete for $500 million, but the space is starting to get pretty crowded. So just wondering what your thought process there is, how do you compete.

You know, we've been doing it for a while. I'll take you back a little over 10 years. And who did you have yet? International Royalty, you had Gold Wheaton, you had Lumina, you had Silverstone. So we're an industry that has always attracted new entrants. I think the difference today is when you look at all of those companies that disappeared 10 years ago, the likes of us buying a couple of them, those are tough transactions. And I don't want to speak for my competitors, but it's probably more accretive to grow asset-by-asset than buying another public company. We're not in the position where we were when we bought IRC, where we wanted a bigger portfolio. We very much like our portfolio. So it's kind of a long way of saying, we've always had a lot of competitors, and we're quite used to it. I think the difference in the last 18 months has not just been competition within the streaming space, but competition from other capital sources. If you look at where interest rates are, debt is attractive and available to many mining companies, and in fact, the equity markets have opened for many -- opened up for many mining companies. I think that is a situation we had not seen in years and years. So I actually think our bigger competition are the capital markets, and I can tell you, we probably lost a couple of transactions in the last 18 months to other sources of capital that might not have been available 2, 3, 4 years ago.

Okay. And I remember when I first started covering this sector in the -- I hate to say it, 1988. And Royal was around then. Company -- the few that were around were buying royalties at 3x cash flow, and now it's like 10x, 12x. So I guess, you and -- I guess you all [ backed into it and ] bought everything. Hindsight 20/20. And now, actually, maybe I'll swing over to ESG. You mentioned that under your leadership, Royal Gold's ESG game has been stepped up. And maybe you can just provide a little more color on that, please?

Yes. It's critical to what we do. And I made the comment that it's always been a core value of ours. I mean I've been with the company since 2006, looking at the environmental and social impacts of projects where we invest, and we've always done it. It's always been important. We have walked away from opportunities over the years because we might have loved the project, but there was an environmental or social issue. The thing that we were never very good about was telling people what we were doing. And there were questions about do you have proper policies in place. Well, of course, we did, but they weren't publicly available. So we're trying to be better about talking about what we do, what policies we have, but then taking another step. And the 2 investments that we recently announced were supporting Golden Star's Palm Oil Plantation (sic) [ Oil Palm Plantation ] in Ghana and then helping to finance the delivery of hospital equipment to the area around Pueblo Viejo. It really is indicative of how do we help our operating partners make a positive impact because we're a passive investor. We can't do these things directly. We have to go through the operator. The other thing that we're trying to do, when we're negotiating new transactions, is try to actually build that into our financing, where it's not just money upfront to build the mine, but there's also a bit of money that is used to support their efforts in the community. Again, we can't do it directly. We never want to create confusion about who the operator is in these communities. So you'll never find our name around it, but we are in the background trying to make a difference.

Do the operators come to you to say, Bill, can you help our ESG efforts? Or do you -- Royal Gold put its hand up to its operators and say, hey, we're here to help?

Well, the initial part of this effort was really us because contractually, we're not required to do it. It's not -- we don't have anything in our Wassa contract that says that we'll make contributions for a community support program. So we were the ones that approached them. I -- what I would think is other companies where we have royalties or streams might call us up and see if there's a dialogue, and we just -- we set a budget and we say we're willing to make these contributions.

Okay. Well, that's great to hear. Congratulations on all your efforts. And that's -- actually, one asset we haven't discussed yet, Bill, Khoemacau. And it's your next leg of growth. And maybe you can just spend a few minutes. And actually, if you could go back to the start, how the deal came about, where the mine is and what the GOE impact will be to Royal Gold, if you don't mind.

Yes, I'm happy to because it's a very good example of how you have to be patient in this industry. Mike, you participate on all of our quarterly earnings calls and everyone says, "How is the business development environment?" We all say, "Oh, we're really busy." And then you don't see a transaction for quarter-after-quarter, and people wonder what we're talking about. The discussions with Khoemacau, with Cupric Canyon, probably went back 3 years before a deal was announced. And really, it comes down to people. We knew some of the people who were the founders of Cupric Canyon. I continue to give a lecture at the Colorado School of Mines in a class taught by one of the fellows who started Cupric Canyon. So there's a long history there. And they -- so we're in this dialogue as they continue to hire new technical people. They say, well, we want to go back and look at the feasibility study. That delays things a bit more. So it was really 2019 before they were ready to enter into a financing. The project, as most people know, I think, is in Botswana, is a copper-silver project. So this is the first silver-only stream that we have done. And the mine is, at the end of March, was sort of 92% complete. They're going to start up soon. We expect first concentrate in the third quarter. And the way the contract works, we would hope to see first silver deliveries a couple of months after start-up. So we have funded about $222 million, $223 million under our stream. That entitles us to 84% of the silver. We'll pay 20% of the cash price for that silver when it is delivered. And we've also made a small sort of project finance loan. And those -- part of that funding was to sort of handle some small cost overruns that the project saw, all due to COVID-19, restrictions on travel, having to put people up to quarantine somewhere, but we're close. In terms of what it will mean to us at full production, this mine expects to produce 1.9 million ounces of silver at an 84% level, that's sort of 1.6 million ounces. To pick your silver price, but at $25, that's about around $40 million of gross revenue to us. So when you take off the 20% cash price, you're somewhere a little over 30%, again, at $25 an-ounce silver. So that gross revenue of $40 million, just to put it in comparison, our fiscal 2020, I think we did about $500 million in revenue. So you'll see it in full production.

Okay. I know, at your Investor Day, there was talk about how the operator could expand the mine down the road. Or -- and just wondering what your thoughts were there. That seemed very positive for Royal Gold.

Well, it is. Of course, it is positive to have an expansion. The contract has a lot of details about how throughput works, and I won't get into all of that. But what I would say is let's get the thing started. In terms of worrying about an expansion a couple of years from now, I think there -- we talked a lot about it on the Investor Day, but what these folks are focused on, let's get this thing up and running first, then we'll figure out what the expansion means.

Okay. And moving to -- bringing it into Canada, Mount Milligan. Centerra's recent quarterly call, they disclosed that. There's a new life-of-mine study underway on Mount Milligan. Improved recoveries, exploration results, better cost, and that will come out, sounds like, with their third quarter results in late October, early November. I know Centerra has other issues right now. Don't worry about those. But just wondering, like obviously, you have a very strong stream in copper and gold, what do you think is happening there from your view and -- of the mine life could be extended in a few years. So a lot in there, sorry, just wondering your view.

No, I appreciate the question. Obviously, everything they said was great. And hats off to them. But the cost improvement is [ a real testament ] to what they've been able to accomplish there. The recoveries, as I understand it, are based on things that they are changing to the process. So again, managing -- they're managing the asset very well. I can't sit here and predict what the new reserves might be and what the new mine life might be, but having lived through the release of the technical report last year, where we had a reduction in the reserves and a reduction in the mine life, everything I'm hearing now is great and maybe we'll be moving in another direction. Just remember, it is a low-grade operation. So if you factor in metal prices recovery, better costs, you could see a meaningful impact. To what -- relative to what we saw in the last technical report, you may see something quite positive this year, and I'm hopeful that we do.

Okay. And again, now just turning to Wassa, with Golden Star, again, going back to your Investor Day, it looks like great potential to extend that mine life at depth with -- and on higher production. So just wondering what your perspective there is.

Well, thank you for asking that question because that -- this is the textbook example of what we and our business try to do. When we made the investment in 2015, I think Wassa's mine life was out to 2022. So if nothing had happened, we would have 1 more year of reserves, of production. We didn't expect that to happen. And -- but where I sit here today, we -- at the end of March, we had 93% of our investment back. We've got a 6-year reserve life ahead of us and if the PEA pans out, potentially another 11 years of production. And if you had told me, when I made the investment in 2015, that 6 years later, I might have 17 years of production ahead, I would have been elated, is probably beyond anything we had expected. So we haven't had to put any money in since 2015, and -- but we're going to see the benefit of all the work that Golden Star has done. So this is what streaming companies are all about, finding that upside. So that, Mike, when we announce a transaction and you say it's an x percent IRR, I would say it can't be an x percent IRR, I'm hopeful, over time, it's going to be x plus y when they continue to find new ounces.

Actually, you jumped to my next question. Maybe you don't want to discuss them, but what -- if you had this increased mine life of -- to 17 years, what would be the IRR? I assume somebody at Royal Gold has calculated that. And on your original investment, it's got to be well into the double digits.

I couldn't give you a number, and I wouldn't want to project a number. The one that we did talk about years ago, you remember, we made a royalty investment at Andacollo and then got refinanced out of it in 2015 when we did a new stream. And the original return was probably mid-single digits. When we got -- we're all said and done, some 6 years later, we had -- I think it was between a 15% and 20% pretax return. That's just an example. The other one that we do have in our slide deck from time to time is Mulatos. And Mulatos, when we bought the asset, and I think in 2005 or so, they had about 6 years of reserves. When the royalty hit the cap, they still had 7 years of reserves. And it's all that in the middle that we never expected, that we didn't value, that leads to these excess returns in these transactions.

I guess Peñasquito would fall into that bucket because, well, as you're aware, mine life on 2032, but Newmont is talking 2040, with some exploration success. And just wondering what your perspective on that would be.

Hey, again, that's a great example. I mean I think when they bought that in 2006, you were probably talking about a western silver feasibility study or something like that at that stage. And we certainly didn't have production going out that far.

Definitely. I remember visiting that asset when -- the [ original prop ] was there and standing on it. It's in the mill now. And…

Exactly.

One property that's got a little bit of discussion at this conference, started by Barrick, of course, is Pascua, where you have, I believe, a 5% NSR. Is it 5.2% on the Pascua side [ for the company, if I got ] the right number? And Barrick's brought it back to square one, as you well know. But my God, the optionality of that project for Royal Gold is pretty high. So Barrick's doing an exploration on the Lama side, and just wondering where you think Pascua could go if, I think, we're going to be talking 5, 10 years. But hey, the royalty is still going to be there.

Exactly, exactly. And we don't talk about Pascua because it is so far out. But I will say I'm really pleased. I think the Randgold-Barrick merger breathed new life into that project. I think Mark Bristow breathed new life into that project. And every quarter he spends talking about it is good news for us because they're working on it, trying to find a way to take that forward. But you're right, the royalty is still there. It's kind of interesting. You look at the royalty we have on Pascua and the royalty option we have on KSM, and there's a lot of metal, maybe not in my lifetime, maybe not in my career. But we're certainly sitting on a lot of metal with very long-term -- on a very -- it's a long-term horizon.

Yes. Definitely. And coming to the end of time here, maybe a question I would like to ask the streaming companies, we talked about one already, Pascua, but what other assets in your portfolio that the market's ignoring, analysts aren't valuing, that could come out and surprise us over the next year or 2 as the operators work on them? Maybe KSM...

Yes. Well, yes, that's longer-term. We talked about a number of assets. And Mike, I think you even made the point to me that there were some assets, particularly in Australia, whether that's Bellevue or it's King of the Hills, that no one focuses on. And I understand it. They're smaller. But you start adding one project with 3,000 GEOs and another project with 2,000 GEOs and another project, and you start adding them up and then you put it on top of Khoemacau. It's meaningful, it's meaningful growth for us. So I wouldn't say there's one asset out there that's going to surprise, but I'm hopeful that, over time, we'll see those 2 assets in Australia. Maybe we'll see [ Manchogue ], the [ Old Tea Gold ] royalty in 2024. And even go a little further out, if Sabina can get financing, you've got Back River, where we've got a royalty. So I don't -- it's not that the market doesn't appreciate it. I think they're all kind of small, and it's hard to focus on each individual one. So we just have to keep talking about them and make sure people understand, in the aggregate, what all these assets can do.

Well, as one of your peers calls Pascua-Lama the best half-built mine in the world. And well, otherwise, Bill, we've come to the end of our time. I apologize. I've got a lot more questions here. But thank you for taking the time to participate in our conference. Hope to see you live a year from now in Miami. And yes, stay safe. So thank you again.

Thanks, Mike. Appreciate the opportunity to participate.

Okay. Great. Thank you.

Bye-bye.