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

Hi. Good morning, good afternoon, everyone. My name is Jackie Przybylowski with BMO Capital Markets. I'm here with Bill Heissenbuttel, who's President and CEO of Royal Gold. Thanks very much for joining me, Bill.

Thanks for hosting.

Bill, you've been the CEO at Royal Gold since January 2020, which has been an interesting period, albeit your first 18 months haven't been exactly what you expected they would have been given the COVID-19 pandemic was declared shortly after your appointment. How has this affected the company and your time as CEO so far? Is there anything you would have done differently do you think if there was no pandemic going on?

No, you're right. This is not what I expected. I always like to joke that Tony never prepared me for what to do in a pandemic. I've worked to spend more hours on safety office reopening protocols than I ever thought I would. I do think it probably highlighted a few strengths of the company. And the first one is succession planning. And the work that was done as Tony approached retirement. When I was always selected I knew the people, I knew the culture, I knew the strategy. And I think that really helped when the pandemic hit, I cannot imagine having been a new CEO in a new company going through this. And I think the Board did a great job. Whoever they picked if it was internal, I think that really helped. I think the second thing is this business model sort of lends itself to working remotely. Our former Chairman, Stan Dempsey used to say, you can run this business out of a garage and I'd say we've come pretty close to that for the last 18 months. And really, the final thing is we have 28 people and we have 4 offices. And I've got my COO, my IR person in Toronto. I've got my Head of Business Development in Lucerne. So we were doing remote work before we knew what remote work really was. And I think that has helped. I missed the personal interaction with my team. But I think the model, the people have all made it pretty easy. As for what I would do -- have done if it had been normal, I don't have an answer for it only because I've had 2 months of normal and 18 months of COVID. So COVID is normal as a CEO for me. The only thing I do miss is the interaction I would have had with other CEOs in the industry, I know most of them but would have appreciated the opportunity to get to know them better in this role, and that just hasn't been possible.

Let's hope there's some normal months in your future.

Yes.

In all of our future. Growth is always an important topic for you, for your peers, for the whole industry really. You've made a few transactions recently. That includes stream on Ero Copper's NX Gold, and you've done royalties on IAMGOLD's Côté project and the Newcrest Imperial Chris mine. So before those transactions, though, it has been pretty quiet for Royal Gold for quite some time. Have you recently changed the way you look at growth? Or have you changed your investment criteria or your approach? Or is this really just a coincidence that these transactions all sort of happened at the same time?

Yes. It's interesting, I get a lot of questions that say, well, how many transactions are you going to close in the next 12 months or 18 months, and we just -- we can't time these opportunities. The fact that we had 3 transactions closed in a couple of months, it's just pure coincidence. But the one thing I will say, we haven't changed our strategy. We haven't changed our investment criteria. We haven't changed our due diligence requirements. It's really that we happen to achieve a good deal of success in a relatively short period of time.

Did easing of any kind of COVID restrictions, travel restrictions, help that at all? Or is it really just...

Not really. I think we've been very successful at adapting with remote technical due diligence approaches. And I think in many cases, there are some tools that we've discovered that we will use even in normal times. We will still send people to site, but I don't think the teams will be as big. We can accomplish a lot remotely. As for the 3 transactions, the one thing to keep in mind, 2 of the 3, we were purchasing royalties from third parties. And in those transactions, we've never been able to go to site. We've always had to do remote to diligence. So Côté, Red Chris, really no different than Peñasquito, Malartic, Dolores, Voisey's Bay, it's all the same approach. Lifting of travel restrictions, I would say, I've been really conservative with the team in terms of travel. You can see we're doing this virtually even though it's down the road. And that's just looking at the COVID situation here and determining that I want to keep my people safe.

That makes sense. It's #1 importance. Let's talk a little bit more about growth. And I wanted to dig into something you said on your last earnings call for you that would have been fiscal Q4. You've said you're seeing good potential transactions in around the $100 million to $500 million size range in terms of upfront capital. I know a lot of your peers were asked the same question on their recent earnings call. So the answer is that they give for a little smaller, more in the $100 million to $300 million size range. So I was just wondering, is that $100 million to $500 million range still the case for what you're seeing? Do you think you're seeing things that are maybe bigger than your peers? Or is there any other reason maybe why the discrepancy?

No. I still think $100 million to $500 million is the appropriate range to consider. As you can tell from the 3 transactions that we did, they have been in the smaller size, but it doesn't mean we're not seeing larger opportunities. Are we seeing deals that our competition is not? No. I really -- I don't think so. We're looking for quality opportunities and quality opportunities brings competition. So we don't have any secret sauce here that we're using to find things that others can't find.

In this environment where maybe debt is a little bit easier for mining companies, commodity prices have been a little bit higher, maybe there's more competition in the royalty streaming space. Is it more challenging or more difficult for you to identify opportunities and to get those at attractive prices?

Identifying the opportunities isn't the issue. Winning the opportunities is the issue. And I think you're absolutely right. I've remarked that really since the beginning of 2000 -- notwithstanding COVID-19, It's been one of the most competitive environments I've ever been in, and I've been doing business development with Royal for 15 years. And as you noted, we have more royalty and streaming companies. But I'd say that's not really the issue. It's that interest rates are low, debt markets are open, equity markets are open, for some cash flows are strong. But I think there will always be a place for streaming. This is the mining industry. The mining industry always needs capital. And the way we structure a lot of our transactions, where we sit between the senior secured project finance as a secured subordinated creditor. We're able to reduce the size of the project finance, which reduces the potential for financial distress, and we might also reduce the equity that needs to be raised. So hopefully, any equity issue is not as dilutive. So yes, it's more competitive. But again, I think there's always a spot for us, somewhere in the capital structure.

In your last earnings, you noted that your available liquidity is somewhere around USD 1 billion. Can you maybe talk about what the largest transaction you'd be comfortable with, with that amount of liquidity? I'm sure you could potentially do something bigger. Is there any kind of concentration risk that you're trying to avoid? Or what would be the size that you kind of start worrying about the concentration risk?

Yes, I'd probably say $1 billion. We could certainly finance something bigger. But concentration is something we talk about all the time. And for us, it's a strategic focus to reduce the concentration we have right now. We do have a couple of key revenue generators in our portfolio. So you write anything much north of $1 billion. I take one concentration problem then I create another one, which I don't really want to do. The other thing that $1 billion allows us to do is comfortably finance it within the available liquidity and not have to go to the equity markets. I think we've been consistent when we said that we would -- the max leverage we would want to see as a 3x debt to EBITDA, and $1 billion would probably put us between 2 and 3x EBITDA. So it fits very comfortably within the financing strategy as well as our view on concentration.

Thanks. I think we've talked a lot about growth and new growth. We haven't really talked so much about the assets already in your portfolio. And I know often that's the market maybe overlooks what you already have in your portfolio. It's definitely worth talking about. Mount Milligan and Rainy River seem to be reaching a steady state. And the Khoemacau mine is -- project has just started production. It looks like that came in on time and almost on budget, which is a great achievement, especially during this difficult time. From an outsider's perspective, we don't know that much about Khoemacau, I'd say it's maybe more difficult, more higher risk for us to look at just because we're less familiar with the asset and with the operator and maybe also with the jurisdiction of Botswana. As somewhat a little closer to the project, can you maybe talk about the risks that you see or you saw with the project and what you did to mitigate those risks or that exposure to you during the construction?

Yes. I will actually want to go back to the start of your sentence about our portfolio. And I will say, over the last year, our portfolio has performed extremely well. And I'm sure you can remember the days when Royal Gold was talking about Milligan water and earthquakes at Andacollo and oxygen plants at Pueblo Viejo. And other than some silver recovery issues at PV and a delay at the pace fill plant at Wassa, we had a great year. I mean -- and in the fourth quarter, in particular, you look at what Peñasquito, Cortez and Voisey's Bay did, I looked at it and I don't really remember the portfolio hitting on all cylinders like that. So it's really nice to see. As for Khoemacau, you're right, they've done a great job with the construction. And I think it would be easy to underestimate the COVID challenges that they have had to deal with. And to bring it in, as you say, almost on budget is quite remarkable. On balance, our view is Khoemacau is actually a lower risk opportunity. We think the asset is very high quality. People who look at Botswana, maybe haven't studied Botswana, but have the view that of the countries in Africa, it's a great place to invest. And really where I should have started in the discussion, is the people. We knew the people in prior lives. And so we looked at the quality of those individuals of the team. I think it was a pretty easy investment decision to make. I think the higher risk perception really is just an absence of information. It's a privately held company. There's not a lot of public data. And what we've tried to do with our each of our quarterly calls is bring more information and bring more information to the market. As far as how do we protect ourselves in construction, we didn't do anything different than we do in all of our other development assets. You time your investment, you time it based on construction progress, and you always have an eye on what's it going to cost to complete and what's the available liquidity. So you may -- we may be at a point where the construction is 50% done, but we don't want to fund the 50% because 50% is much larger. And now there's a hole at the end. And we want to fill those holes before we get there. We didn't have that issue here, but it's the same approach we take with every one of our developed assets.

Can you talk a little about the upside you see at Khoemacau from here? Could the mine grow either in mine life or in size or both? And is there a mechanism, I guess, formally or legally for you to participate in that?

Yes. As you know, our area of interest does not include the whole property. The whole property is enormous. But what we said to the folks at Cupric is we want to have the upside along the extensions of Zone 5, and we really do have -- so is there upside? Absolutely. And they have talked about expansion. Clearly, if there is an expansion, some Zone 5 material would probably be included. So we will see that ultimately, to the extent they go that route. My only caution at this point is to get the thing up and running. And then we'll talk about upside and expansion. -- underground mines always have an issue or 2, and we're just really focused on looking at the progress that they're making on the ramp-up.

Don't get too far ahead of ourselves, right?

Exactly.

Let's talk about capital returns a little bit. I know it's an important topic. And I think, I mean, from what I'm seeing, it's something that we're seeing some diversification in terms of the view companies are taking on the most appropriate ways to return capital. Royal Gold, you've got a steady progressive dividend and approach. Can you talk about why that's important for Royal Gold or why you've chosen that mechanism? Is there any kind of opportunity to maybe supplement your dividend with something more variable or steady and progressive going to be your approach going forward?

Yes, I'd say first things first, we closed 3 transactions we borrowed some money to do it. I think our focus in the very, very short term is let's pay off the revolving credit, let's get the liquidity backup. So I think we're focused there. The progressive annual increase, I mean, we've been doing it for 2 decades. And I really think our shareholders understand it. And I think they appreciate it. And I've never really had one of our investors saying, "I want something that's volatile. I want something that goes up and down with the price of gold." Just let's do it steady state. Let's keep doing what we've been doing because we've been successful with it. So I don't take it off the table. I mean, if we suddenly found ourselves with much, much more liquidity. I think we have to look at it, but I don't want to suddenly change a 2-decade old strategy that's been successful because it's the thing in the market right now. I think people understand how we approach this.

And is that something that's in the back of your mind always when you're looking at future growth opportunities or reasons -- opportunities to spend your cash? Does it affect the construction of your portfolio going forward?

I mean we always look at the dividend when we look at future cash flows and what can we afford effectively. But I would say it's never an impediment to finding an opportunity or finding a way to buy an asset that we quite like. I'll just -- I'll take you back to 2015. On a net basis, we invested $1.1 billion, and there was never any consideration that we might not increase the dividend in November of 2015. So we kind of look at it almost like an obligation that we take into account, but it doesn't hold us back in any way. And that's one of the reasons when we size the dividend increase, we look out 10 years and say, look, if we had no growth and metal prices went down, can we still pay that? Because it's so important to be able to show for us the ability, at least internally, the ability to finance that. So yes, it's a factor, but it's never going to hold back our ability to grow.

I want to echo some of the comments that were made on your earnings call, and thank you for moving to change your [year end]. I know it seems like a silly thing because it's just a month of the year. But it makes my life -- it makes -- I think everybody who follows you life a lot easier to have a December year end. Can you maybe talk a little bit, I mean, about what the implications are for your business or for your news flow and things like that? Because I think it is really going to be helpful, I think, for next year for going forward.

Yes. I think we got more congratulations on changing the fiscal year than we did for having record financial results, which I thought was interesting. So -- but I'm glad that the market reacted that way because I will tell you, it's a lot of work. And this was something that I really wanted to do when I became CEO. But if I can show you the [ GAAP ] chart that has a line item everything we have to do to change our fiscal year-end regulatory filings, tax filings, accounting periods. It's not -- it's something I wanted to approach methodically and not put the team under a lot of pressure and do it in 2020, especially when we're dealing with COVID and trying to figure that out. So it's really something I had in my mind from the start. How it affects other corporate things we do. We have to move our shareholders' meeting. The dividend is interesting. We've always looked at it in November. And we haven't settled on it, but I don't think we would change it, the timing of it, only because the dividend was the only thing we did on a calendar year basis. And the idea of then making the dividend inconsistent with our new fiscal reporting period, I don't know, it doesn't make a lot of sense to me. Well, we haven't settled on it. But for right now, I'd like to stick with November.

And the guidance that you're able to give will be different as well, hopefully, a little bit more expensive.

Yes. And that's not really tied to the fiscal year-end change. If we hadn't changed the fiscal year, I think we still would have adopted this idea that we're going to go out a year, and we're going to move away from quarterly stream estimates to bring us, again, a little more in line with what other people are doing.

That's great. It looks like we're out of time. Before we finish, I will say congratulations on a record fiscal year.

Thank you.

And it's definitely exciting as well. And thanks very much for joining me, Bill.

Thanks, Jackie.