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

Good morning, everyone. I'm Tyler Langton. I cover the precious metal stocks here at JPMorgan. With us this morning, we have Bill Heissenbuttel, who's the President and CEO of Royal Gold. So good morning, Bill, and thanks for joining us this morning. Greatly appreciate it.

Thanks, Tyler.

And I think to start, I think Bill was going to provide just a brief sort of overview of Royal Gold as well as the sort of the streaming and royalty industry and then we can kind of move into some Q&A. So with that, I'll hand it over to you, Bill.

Yes. Thanks, and thanks to everyone for taking the time to participate in the presentation today. I'd especially like to thank JPMorgan for the opportunity to participate in the conference. I will be making forward-looking statements during my talk, and I ask you to be familiar with the safe harbor statement, which can be found on our investor presentation on our company's home page. We are the oldest continuously publicly traded royalty and streaming company in the precious metal space. We just passed 4 years of being publicly traded on NASDAQ, and we've been dedicated to the royalty and streaming business for 30 of those 40 years of our public life. We have a broad portfolio of almost 190 properties, 12 countries, and we earn the majority of our revenue from gold, for fiscal 2020, which actually ended on June 30 of last year, we had revenue just south of $500 million. We have a significant liquidity reserve of $1.2 billion, and we have no outstanding debt. The business model really provides some unique and attractive attributes for investors. We provide shareholders with exposure to the gold price, but really more importantly, it's the cost-free resource upside. And that resource upside really differentiates us from an investment in the ETF, where 1 ounce will always be 1 ounce. But we also offer this exposure to gold without the ongoing operating and capital costs that are faced by mining companies. And as many of the miners may be dealing with inflation-induced cost increases, our margins remain very high against that revenue figure of $500 million that I provided to you, I will point to our cash, general and administrative expenses of only $21 million. And our cost base is largely immune to inflation increases. So we have a portfolio of 40 producing properties. They provide revenue diversification, which is important in all times, but particularly useful in a pandemic. when the impact of the COVID-19 virus can slow or close operations in various parts of the world. Our key portfolio events this year include the recent PEA results issued by Golden Star on the Wassa mine, which now contemplates a possible 17 years of production ahead of us. We then have the start-up of the Khoemacau Project, our silver stream investment in Botswana. And then finally, at Pueblo Viejo, where Barrick and Newmont are in the middle of an expansion that is forecast to maintain production over the next 20 years. And I will say we manage this very diverse portfolio with a limited staff headcount of 28 people globally. Our most important business focus really is the identification, negotiation of new precious metal investments. In that -- in those investments, we look for good geologic upside, because the conversion of resources to reserves, the identification of new resources is really where we can earn returns above the returns calculated on day 1 of an investment. We've shown ourselves to be efficient in our capital allocation, and we continue to maintain a very disciplined approach to our technical, legal and financial due diligence. And we've been able to adapt our due diligence to a virtual world and have been able to continue with our business. Now part of those due diligence efforts really entail the assessment of the environmental and social policies of our prospective partners. Although we are a passive investor in all of our transactions, we treat these issues with particular importance and have walked away from investments in the past solely due to environmental or social issues. And we also try to support our operators in this area by contributing to select community support programs as evidenced by recent arrangements. We have concluded the target community means around Wassa and Pueblo Viejo. As I mentioned, we have the liquidity 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, a revolving credit facility, and if necessary, equity. And we look at capital sources in that order. We have not done an equity issue since 2012, and our share growth has been minimal since that time. With higher gold prices recently, we've been able to see strong cash flows that have allowed us to continue a tradition that dates back 2 decades. We have paid an annually increasing dividend since 2001, and that is a record. We hope to continue over the long term. So Tyler, that concludes my prepared comments. I look forward to sharing further thoughts with everyone in the fireside chat portion of the presentation.

Yes, I guess maybe just to start since we are at our Energy Power & Renewables Conference. I know obviously, Royal Gold is more focused, obviously, on gold, as sort of the primary focus. But I guess can you talk a little bit about your thoughts on sort of investing in streams, sort of other metals that are sort of tied, sort of electrification and decarbonization, sort of like obviously some sort of silver with Khoemacau, but even other metals like sort of copper, nickel, cobalt, just kind of your thoughts there.

Yes. I mean as you said, we're focused on precious metals and gold in particular, but we have never ruled out doing streams in other metals. If we find an opportunity with an excellent asset that happens to be a base metal asset, we would certainly consider it. I think one of the interesting things about the way we do business, the way we're set up is we actually have to take physical delivery. We cannot financially settle a stream, which means that when you're talking about things that trade on an exchange, that's relatively easy. If we ever got into something where you actually knew how to market the metal, that might be a little bit challenging for us to do. So -- but we're obviously -- we're open to quality opportunities, and in a lot of ways, the base metal opportunities may have very long mine lives, which is a plus for us.

Right. And then I guess -- Just maybe switching to sort of deal activity and then in terms of what you're seeing in the market. If you could just comment, is it more sort of primary base metal assets, sort of basically copper with gold as a byproduct, or sort of more precious? Just to kind of get a sense of sort of the type of activity levels that you're seeing.

Yes. I will tell you that our business development team and the technical folks who support it, they have been busier over the first 6 months of this year than I've seen in a while. And it's both the base metal and the precious metal side. We always like to say streaming really has -- streaming can be applied anywhere you need capital, which basically means you can build a mine, you can finance mergers and acquisitions and you can deleverage balance sheets. Now with metal prices where they are, we're not seeing balance sheet restructuring. That's just not necessary. But what we are finding is you've got very healthy balance sheets that are well positioned to invest in new assets. So I'm very encouraged there between base and precious metals, base metals will always be core to what we do because you can take a small byproduct, a gold stream that would only produce 5% to 10% of the revenue of a base metal mine and turn it into hundreds of millions of dollars of investment. So precious metals, we have proven, you can stream your primary metal. You just have to keep those streams pretty low just in terms of looking after the cost profile of that operation.

And then is -- when you think about sort of streams that you're seeing, is it more to fund growth projects, have companies started to look at you sort of using streams to fund M&A at all? Or is it still more around sort of organic growth?

Yes. If you were to look historically at where streams have been, its project development is #1, easily #1. A close second, I'd say, is balance sheet restructurings. And the only reason I say that is in 2015, those were almost all of the transactions we were -- the industry was doing as a whole. And that was with Glencore and Teck and Barrick. And so those were very large transactions, but you don't see a lot of them. M&A is the one area I would love to see us exploit a little bit more. It's interesting to note that our first stream, which was about Milligan, was actually an M&A transaction where Thomson Creek was buying Terrane Metals. And the vast majority of the proceeds was for the acquisition, we just haven't been able to reproduce that as much as I would have liked.

Right. I guess in terms -- and Royal Gold is a royalty instrument company obviously have less risk and less exposure. But do you see, I guess, geopolitical risk for the industry increasing, I guess, number one. And then again, since you're diversified, there's less exposure to any one single asset. But when you're, I guess, also looking at new investments, is giving you more of a pause potentially at this point in the way you sort of analyze assets?

Yes, it is. It's unfortunate. When I started in the mining industry, financing the mining industry, I was part of the project finance world that financed a lot of the copper deposits -- copper projects in South America. South America was opening up in the '90s, and I look at all that Chile has accomplished, and you look at where Peru has gone. And now you look at those countries now, and I never thought I would be sitting here saying we ought to really talk about Chile as to whether or not we want to invest there, which is unfortunate. The flip side to that is, my view is the mining industry sees this all the time or from time to time where governments want to raise tax revenue or royalty revenue. Now I think it's a COVID-19 impact. But in the past, when the gold prices were going up in 2010, 2011, you had government saying we want more sharing, what I've always found is that the industry always seems to find a way through. Outside of outright expropriation, there's a lot of give and take, and the mining industry seems to adapt. So Yes, we're a little cautious short term, but our business is a long-term effort. So I would hesitate to say I've taken a country completely off the map in terms of investments. And it's not just foreign political. If you look at what was going on in Nevada just very recently, constitutional amendment that didn't quite pass to increase Nevada's net proceeds tax, it's happening everywhere. And it's just something we need to be mindful of in our new business due diligence.

And as you think, I mean, in terms of providing financing, you'll compete with equity, you'll compete with sort of credit financing as well. Does -- are those sources maybe a little bit more risk adverse than assume a royalty might be just given sort of streaming and how the companies have sort of this perspective and sort of longer-term views that do you think in any way sort of helps sort of the royalty and streaming companies?

Yes. Well, I think the royalty and streaming industry as a whole -- we're always going to be focused on the medium tier company or the smaller company. Let's be honest, except for the very unique situation of 2015, Barrick doesn't need our finance. Newmont doesn't need our finance. Rio Tinto doesn't -- isn't necessarily going to call this up. So -- but by focusing on the middle tier to the smaller tier, those are the companies that may not have access to the debt markets, to the equity markets on a consistent basis. I will say that 2020 was probably the most competitive environment I've seen in a long time because debt and equity were available and interest rates were so low, debt could actually compete with us on a cost of capital basis. And the equity markets also opened up for more companies than we had seen in a long time, and I know we lost transactions that we were bidding on to those markets. So it's been a very interesting year to see those other markets come back. The flip side of that, I will say, is we're much more mainstream. Companies call us. They want to know what we can do. We're not the lender of last resort that we were when I started with the company in 2006.

Maybe just switching to sort of ESG. I mean I think you're sort of -- your rankings have sort of definitely improved over the past several years. I mean can you talk a little bit about sort of what you've done and sort of certain efforts you've sort of made in that area?

Yes. And thank you for noting that our ratings have improved. So look, when I became President and CEO at the beginning of 2000, and I wanted to make it a particular focus of the company because these issues were always important to us. I mean back to 2006, environmental and social due diligence was part of every review that we did. The problem, in my view was we were terrible about talking about it. letting people know that it was important, why it was important, how we focus on and what we do in the due diligence, just making very basic policies available for people to review on our website, had the policies, but they oftentimes they were in sort of private employee handbook type document. So we've done a better job of making that information available, messaging it. And then the 2 agreements that I referenced with respect to Wassa and Pueblo Viejo, that is a new initiative, and that is if our operators are doing well and they have good community relations, we are going to do well, and we should be supporting those efforts. So that is something also something new for us. So I hope to continue that to improve our program over time. I will admit we were behind our competition, and we're making every effort to catch up there.

And I think do you -- when you -- in terms of -- obviously, you can't sort of control the way you sort of the operators who perform at the mine, you can obviously sort of assess the risk. But I guess, are some of the smaller companies that might come to you for sort of capital for sort of streaming and royalties. Do they also sort of rely on you may be increasingly more for your sort of input along sort of ESG lines just given the fact that you sort of see so many other projects out there?

Yes. And that doesn't just apply to environmental and social issues. That applies to all sorts of all aspects of a mining operation because we do have a big portfolio and our technical team is always out, well during COVID-19, we're always out in sites. We were able to -- someone see something in one mine, we're visiting another mine, and that team happens to have an issue. And we say, well, we saw someone else do this. Why don't you consider that? So the environmental and social side is similar, but part of our assessment of management is how seriously do you take it? What is the program? And I hope they're not looking to us for the ideas. They really outed the outfront because they're the ones in the community, talking to them about their project, and they're the ones who are assessing the environmental side. I'd be a little worried if someone was coming to us for an advice upfront on those issues. But we're always happy to help anybody in our portfolio.

Great. And then in terms of, I guess, your assets, I mean, in terms of sort of the growth in sort of gold equivalent ounces you should see over the next several years. Can you just touch a little bit about sort of with several assets that sort of be the biggest sort of drivers of that growth and sort of the outlook you have for those assets?

Yes, happy to. The biggest one really is Khoemacau. So Khoemacau is our silver stream investment in Botswana. The mine is expected to start up here in the third calendar quarter. And when we announced the transaction, we basically -- we did an effort -- we made an effort for the market to sort of say, okay, we're going to see anywhere between 1.6 million ounces and 1.9 million ounces of silver to our account depending on where our stream rate sits. And at the prices at the time that was going to represent about 5% growth on our gold equivalent ounce production. So that's probably the biggest one in the near term, and I hope to see that ramp up over the next year or so. The other one is Cortez. We did tell the market that 2021, we expect somewhere between 350,000 ounces to 375,000 ounces, subject to our royalty and then averaging 415,000 ounces out to 2026. And we've told the market, we have a number of royalties. It's all very complicated. But if you use 8%, it's not a bad number. So if you apply 8% to that number, you're looking at somewhere around 30,000 GEOs. For the first 9 months of this fiscal year, our GEOs from Cortez were about, I think, 12. So that's probably another good source of growth. And then we've got a series of smaller projects. We did an Investor Day a couple of months ago, and we tried to highlight those projects, but King of the Hills and Bellevue in Australia, Manh Choh, which is the old Peak Gold joint venture that we had a little bit beyond that. Not big numbers, but when you start adding them all up, it does make an impact for us.

And are there any assets maybe at some of those small ones that you just -- that are -- you think are maybe under appreciated by the market or I guess, sort of even longer term with sort of potential sort of development projects if the operators kind of go forward, I mean just kind of sort of if you can talk a little bit about the leverage to those?

Yes. Well, in terms of things that maybe aren't appreciated by the market, I always say maybe not -- we're not getting credit for it. There is a show-me approach in the investor field, especially the development projects. So I would say, first and foremost, Khoemacau. Khoemacau is owned by private equity. We have tried to provide as much information as we can about that project to keep people updated. But it's not like you can reach out and hit and click on a 43-101 report and read all about it. So with that starting up later this year, I hope we'll get a little more credit for that asset. Another one might be Wassa. The PEA, obviously, PEA is an earlier stage report. So I think there -- you look and say, lots of 6 years of reserves in production going forward, maybe another 11 beyond that. And that kind of goes beyond our wildest dreams when we made that investment in 2015. But I don't think the market is necessarily putting 17 years of production out there. And the final one, I haven't talked about it in years, but I'm really happy every quarter, Barrick comes out and says they're working on Pascua-Lama. I'd much rather have more talking about it than it never getting a mention. So that's really long term.

And I guess maybe there's been some sort of talk in the news more recently about a global corporate minimum tax and sort of items like that. And I guess could you talk a little bit about, both, how -- if that goes forward and obviously there's lots of different forms it could take, but just sort of how you think about sort of potential impacts on both sort of the royalty side of your business and sort of the streaming side of your business? And I guess, obviously, you're sort of U.S. base corporation. So how that sort of differs?

Yes. If we're just strictly talking about a minimum sort of global tax of 15%. I'm all for it, bring it on. It puts us on an equal footing with our Canadian competitors. We already pay under the GILTI regime in the -- under U.S. tax law. We are currently at a minimum tax of -- a little north of 13%, and that's scheduled to go to 16% in 2026. 15% -- it doesn't matter. I mean we're already there effectively. The companies that will impact are the Canadian ones that use Barbados are the Caymans for their offshore investments that's Franco, to some extent because they do have a royalty portfolio, it's not all streaming, but in particular, Wheaton, because that's all streaming and anything done outside of Canada, I believe they run through 1 of those 2 jurisdictions. So that would impact them. But as you say, we have to see this play out. I don't know if Canada is going to adopt it. I don't know if Canada would provide exemptions for certain businesses. So again, all for it and it really would not impact us.

Right. And then maybe we have just a couple of minutes left here. In terms of capital allocation, I know you sort of in the past, you've kind of sort of commented at sort of new streams or royalties as sort of the preferred use of cash. But I guess if you sort of -- if you do fewer royalties or streams or just have more cash and sort of left over after any sort of potential investments? Can you just sort of -- especially with your sort of production profile going forward and where precious metal prices are, could you just talk about how you think of capital allocation, sort of in that case in terms of either sort of dividend increases, buybacks, those type of opportunities?

Yes. And as you say, -- And I think it's really important to understand that the best way for us to create shareholder value really is finding new investments because if cash sits on my balance sheet at 1x NAV and then asset trades at 1.75 or 2x [ weighted ]. There is value that we can create that way. The second thing that we're very -- I'd say, we will defend is our annual -- the regular dividend that we have been able to increase for 20 straight years. And we're not a member of the S&P 500. But if we were to do that for another 5 years, we would technically be a dividend aristocrat, if not officially, and that's something I love to see happen. I have been with the company since 2006, and we've never run into a situation where we just had excess cash and nothing to do with it. But to your point, if we were to be in that position, share buybacks are a little bit tough given our premium special dividends if we find ourselves in that we just don't know what to do with it. I would prefer to look at a special dividend rather than, say, buying an asset that perhaps isn't core to our strategic focus, but we're going to take that as it comes. We're not going to set a policy that says, if we get here, we'll pay out everything above that, I think it will just be quarter-to-quarter talking to the Board about what are we seeing in the market, what liquidity do we need? And is there an excess that we could return to shareholders?

And so I guess, generally speaking, it's more of a preference to increasing this as sort of the dividend that you view as sustainable over the cycle as opposed to sort of linking your dividend in the form of metric, like free cash flow, or sort of other sort of metrics?

Yes. If you look at the free cash flow, you're asking for volatility, could go up, could go down. It's just that's not -- you're talking about 2 decades of doing this increasing. So it really is, we want to increase it. We want it to be sustainable. We don't want to have to pull it back. But when we set that dividend, we are looking at what is the price? What is our cash flow? How long could we sustain that dividend payout in various gold price environment. And what is the payout ratio? And how does that compare to the others in the industry? So it's not some blind -- we're going to go $1.20 and we're going to go 6%. There is more analysis behind it. But I would hate to see us go free cash flow where it's up one year and down the next year. That's just not -- it's not really who we are culturally, to be honest with you.

Right. I think we have 2 minutes left or so, so needed just to finish up. I guess, when you look at the market right now, sort of copper prices sort of very high levels, same thing with precious metal in a lot of prices. I guess when you talk to the producers and the operators, are they generally fairly optimistic in terms of the outlook for prices, just given sort of you can look at sort of solid demand growth and sort of supply constraints, as they're talking to us, so I am kind of curious on their sort of outlook for pricing even though it's tough to tell.

Well, it's funny. When we have those conversations, we tend to focus on what are the company's views on precious metal prices, even for a copper company. We tend not to talk about what do you think, where do you think copper is going? It's really -- if a company is taking a project forward, they've taken a view that the copper price is sustainable and will support the proper returns for that investment. I will say, I think people are comfortable with gold. I think what came out of the Fed last week in terms of interest rates has given everybody a bit of a pause. Where is this going? I mean we saw a pretty big correction. We've seen a pretty big correction in the gold price. But my own personal view, I feel good about gold because as inflation increases -- my view was inflation will increase and the central banks will kind of let that run a little bit to get the economy out of the COVID-19 doldrums and won't be as quick to increase interest rates to try to get it under control. That all means negative real interest rates or at least real interest rates that are not growing. And when that happens, that's good for gold. So I do think people are still positive about the price. And the only thing that we have to worry about is not so much price level, it's volatility. And when the price is more volatile, it makes it a little bit harder for the operator and the streamer to agree on evaluation and whether that's based on all our precious metals. So right now, it can be a little bit more difficult to agree that number that someone is willing to sell the gold for and what we're willing to buy the gold for.

Okay. Perfect. Well, I think that is about all that we have time for. So again, thank you for taking the time today to chat. I greatly appreciate it and take care.

Thanks, Tyler. Thanks, everyone.

Bye.