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

Thank you, Scotia, and thanks for the opportunity to present at the conference today. We have a long-standing relationship with Scotiabank, and we're very happy to be part of this conference. So I will start the presentation on Slide 2 with forward-looking statements. Please make yourselves aware of the language on this page. Now before I start going into the overview of Royal Gold, I just want to make a few comments on our September quarter. We released our results a couple of weeks ago in early November. It was another quarter of record revenue and cash flow for us. Revenue of $174 million and cash flow of $130 million for the quarter. We had strong performance across the portfolio, particularly from the royalty segment. And we saw first revenue from a couple of growth assets. Khoemacau produced its first silver deliveries for us. And NX Gold, we received our first deliveries of gold in that stream as well. We also increased our GEO guidance range for the stub period ending December 31, from 180,000 to 190,000 GEOs. And as a reminder, to all of you who know Royal Gold, we have had a June 30th fiscal year up until this year, and we're currently transitioning to a calendar year-end effectiveness this December 31st. So Slide 3 here shows Royal Gold at a high level, and we are a high-margin business that generates consistent cash flows from precious metals. We've been in the business since the 1980s, and we celebrated our 40th listing year on the NASDAQ and 40th anniversary this past summer. Our model provides exposure to precious metals without many of the risks that come with investing in operating mining companies. We have 2 main operating segments: streams, provide about 70% of our revenue; and royalties that provide about 30%, but both provide the same thing, which is really the opportunity to invest in top line production from mining assets. We have a diverse portfolio of about 200 properties, 44 of which are in production today, and 85% of our revenue approximately comes from precious metals and 75% from gold. We have a $7 billion market cap, 28 employees, so it's a very efficient business model, and we have a very strong balance sheet. By the end of September, we have $1.1 billion of liquidity available for us, which positions us very well for new acquisitions in the market today. Now on Slide 4, I've already spoken to some of these points, which are the key attributes of Royal Gold. There are 3 things that I really want to highlight. First is that our business model is designed to provide optionality to metals prices and reserve growth without many of the commitments that an operating and mining company has: so no capital; and no operating cost commitments. When we look at new opportunities and investments, we're always looking for those that can provide upside over the longer term. Secondly, we think about our business in terms of per-share metrics, and we aim to fund our growth using cash on hand, operating cash flow and a revolving credit facility in that order, and equity is our least favored funding for financing growth. And the whole idea here is to show accretive per share growth for our shareholders. And then finally, we're committed to our dividend. We've paid a dividend since 2000, and we've increased it every year since, which is unique in the precious metal sector. Now on Slide 5, you can see here why we think we're a good alternative for investors who are looking for conservative exposure in precious metals. On the left-hand side, you can see our Beta to Gold, 1.8, which is pretty strong. And on the right-hand side, you can see our share price performance since when the GDX was formed in 2006, and we've had very excellent performance against -- compared against the gold price, the GDX and the general market indices over that time period. And Slide 6 here shows the ways you can invest in gold and how Royal Gold is positioned. And what we've tried to provide is exposure to gold and optionality with -- while reducing risk, and that's through holding a diverse portfolio, that has no direct exposure to capital and operating costs. There are other ways to invest in gold, and you can buy physical metal, but it doesn't provide upside and it doesn't provide a dividend. You can also invest in operating companies, right, those will give you exposure to operating and capital cost risks. Now, I'll spend a few minutes on the next slide, just talking about our portfolio, optionality and efficiency. Slide 7 here shows really the key to our model, which is providing shareholders optionality to reserve and resource growth. We have 2 examples of assets in our portfolio shown on the slide. We have PV, Pueblo Viejo on the left-hand side, and Wassa, on the right-hand side. And both of these were investments we made in 2015. And in both cases, today, total reserves and resources are higher than at the time that we did the acquisitions. And that's in addition to the production that has allowed us to recover 65% of our investment in PV and 100% of our investment at Wassa. But there are growth projects underway in both assets today. At PV, Barrick and Newmont are looking at an expansion to maintain production levels at similar levels to where they are today, but also extend the mine life to the mid-2040s. At Wassa, new resources have been outlined that could extend the mine life by another 11 years on top of the existing 6-year reserve life. And in both cases, Royal Gold is not required to fund the capital or invest any further to get exposure to this upside. So this is growth that we don't have to pay for. And is this kind of exploration and production upside is key when we look at new opportunities, and it's definitely a key feature of our business model. Now on Slide 8 here, I'll just show our -- the efficiency of our business model. As I said, we have 28 employees. Last year, we produced over $600 million of revenue. We have a market cap of about $7 billion. So on a per-employee basis, we compare very well regardless of whether it's large metals companies, precious metals companies or tech companies in the marketplace today. And on Slide 9, you can really see that our low employee count means we have a low fixed cash G&A, which clearly contributes to that efficiency. Last year, we had an 80% EBITDA margin, and G&A was about 4% of our revenue. And our G&A is made up mostly of salaries, professional services and office rents. So cost inflation is not something that we see is causing a significant risk to our margins. And that's further shown here on Slide 10. If you compare us to the average producer, you can see that our cost structures are quite different. Producers are exposed to inflation and input costs. So that's labor, energy, other site costs, and many of those increase when commodity prices increase. Our G&A costs are pretty steady. As I said, it's salaries, services, office rents, things like that, and those are things that typically don't move in a big way in short-term periods. So our margins are a lot less exposed to inflation pressures, and we're not directly exposed to the operating and capital pressures at some of our operating [ peers' space ]. Now Slide 11 here shows you -- it gives you a sense of our portfolio, the portfolio that drives our performance. And our portfolio is weighted towards lower-risk and more mining-friendly jurisdictions. Our principal properties are the ones that provide the bulk of our revenue, and those are shown on the right-hand side of this slide. If you look at our portfolio and its diversification, obviously, diversification provides stability. And our largest country exposures are to Canada, the Dominican Republic, Chile and the U.S.A., so all of those are pretty mining-friendly jurisdictions. Our revenue comes from 44 operating assets, as I said before, and that portfolio of breadth compares very well to any mining company. And it's that revenue diversification really that reduces our exposure to single asset underperformance. And then finally, our underlying assets are predominantly precious metals. So we're not dependent on base metals, fundamentals for the viability of our revenue. And on Slide 13 here, you can see that our portfolio spans the various stages of mining project development. We have 146 assets in the portfolio that are not producing, that are in various stages of exploration, evaluation and development. And we would expect there is potential for organic growth from any of those assets that move up through that triangle from that the stage that they're at, to production. And King of the Hills and Bellevue Gold are 2 examples about those. They've been in the portfolio for quite a long time. And more recently, the operators have been really pushing to get those projects into production, and we expect to see revenue from those projects within the next several months. Now to continue on the theme of organic growth, this slide shows some of the key catalysts that we see from various assets and portfolio. In the light blue color, you'll see assets that are contributing revenue to us today, and we do see potential for mine life extensions and production increases at those assets. I've already mentioned Wassa and PV, where there are significant projects underway at both of those assets. But Penasquito is another good example. It's been in our portfolio since 2007, and it contributed about 8% of our revenue last year. And since the acquisition of Goldcorp, Newmont has done a really good job of both improving our recoveries and just generally improving operating performance at that mine. And they've also done some exploration that indicates that the mine -- the life may be extended to 2040 or so. Khoemacau is our newest producer as well, and we expect revenue to grow as that operation continues to ramp up. Other assets where there is potential for revenue in the near-term within the portfolio as those projects advance would be, King of the Hills and Bellevue, which I've already mentioned, but Cote and Manh Choh are 2 others where we have significant royalty interest, where we expect to see production in the next little while. So it's the current metal price environment that's really supportive of new project development and a lot of producers or the owners of these assets are looking forward to getting these assets into production to capitalize on the high metal price environment. Now on Slide 15 here, I'll briefly review 4 of the assets where we think they're -- in our portfolio, where we think there is attractive growth potential. The first comical on the left is our stream -- silver stream in Botswana. We got involved in this asset in 2019, and we now own a 90% silver stream on this asset. First concentrate was produced in June, and we received our first silver deliveries last quarter. The project is ramping up to full production, which is expected in the third calendar quarter of 2022. This is a 20-year mine life and total silver production is expected to be about 1.2 and 2 million ounces of silver per year. The next asset here on this slide is Red Chris, and we have a 1% NSR royalty on this operating mine in Northern BC. Newcrest has done a lot of work in transitioning the mine from a small open pit to a large underground bulk tonnage operation. And they're expecting to convert the asset to a block cave within the next 5 to 6 years. They've done a significant amount of exploration here, and they've defined a world-class deposit, that's 1.2 billion tonnes of resources containing 15 million ounces of gold and 4.3 million tons of copper. And this is something that the asset is in production today, so we're receiving royalty revenue, while Newcrest is developing the transition plan for this asset, which will hopefully produce for many decades. NX Gold is the next one shown on this slide, and we acquired a 25% gold stream on this asset earlier this year and it's operated by Ero Copper in Brazil. Since the announcement, Ero has done a lot of work on exploration, and they've released some very good exploration results, near the mine as well as on the large land package, but all within our area of interest. The mill is running at about 60% capacity today, and there is potential for higher gold production if Ero is able to convert some of those resources and exploration potential to mill feed. So this is something, again, we're receiving revenue today, and we're looking forward to the operator doing more work to really define that production upside. The final asset on this slide is Cote Gold. We have 1% NSR royalty on this mine. We acquired it in June. And this is IAMGOLD's principal development project in Northern Ontario. Cote will be an open-pit mine, and IAMGOLD is estimating about 500,000 ounces per year of gold production in the first 5 years, and the mine life will be around 18 years. Project is currently about 36% complete, and first production is targeted in late 2023. Our royalty is on about 70%, with a deposit on the Chester 3 claims, but we also have other land packages off to the North and Northeast of the main deposit. So this royalty will provide our shareholders exposure to a large and long-life project in a Tier 1 jurisdiction. So 3 of the assets on this slide are producing revenue for us today, but they still have pretty substantial growth potential ahead of them. I'll switch gears on Slide 16, just talk about ESG for a moment. And although our business model does not allow us to have direct operating control, ESG is a core part of our business. We invest for the long term, so sustaining production and making sure that the sustainability of assets when we do our initial due diligence is absolutely fundamental. We build language into our transactions to ensure that operations are advantaged to the highest standards. And where it makes sense, we always look for opportunities to help our counterparties, doing what they're doing around the assets to fund ESG initiatives. None of this is new, but what we have done recently is improve our transparency around our processes, the way we think about ESG. We're pretty pleased to see material improvements and ratings from agencies such as Sustainalytics and MSCI over the past little while, and in fact, we just received an upgrade to our MSCI rating in September to AA. So we're very pleased with that, and we stand shoulder to shoulder with the leading companies in our sector. On Slide 17, here you can see what we've done specifically in each of the ES & G areas. We're an engaged corporate citizen, and we're active in sponsoring innovation and best practices in the mining business. We also donate to charities where we live and work. And on governance, those of you who know Royal Gold know that you've got -- we've got a very long-standing commitment to corporate governance best practices, and we have a strong independent board with relevant industry experience. On Slide 18, I'll just talk for a moment about our product and the need for our product. And when stream financing came into being in 2004, if you look back over time, the majority of stream investments have been allocated towards balance sheet restructuring and project development, with a small part towards M&A. But stream financing has been, on an annual basis, fairly lumpy. But the mining business is a consumer of capital. It always needs capital. And depending on the point in the cycle, the allocation of capital goes to different things. So we're a fairly active business all the time looking to deploy capital. So when project development is not happening, balance sheet restructuring is occurring. When balance sheet restructuring is occurring, project development is not happening. So you tend to have one thing follow the other depending on the points in the cycle. So we always see a fairly consistent opportunity flow ahead of us. On Slide 19, you can see our activity on the same time line. And while we're always busy looking at opportunities, not all of them make it through to completion. We have a pretty extensive due diligence process, and we're very disciplined in the way that we deploy capital. And if we see risks that we don't like: so they could be technical, they could be environmental, legal, social, if we see risks that we don't think will be mitigated appropriately, we're happy to walk away from transactions. We feel no pressure to do transactions and we know that the right transaction will come if we're patient and disciplined. And we will, in during periods of perceived inactivity, we're happy to harvest cash from our portfolio, build our balance sheet and wait for the right opportunities to come. Now part of waiting and is making sure that you have good liquidity available to be able to act on opportunities when you see them. And this slide shows a snapshot of our liquidity. At the end of September, we had $1.1 billion of liquidity available to us between our cash balance and our revolving credit capacity. And that positions us very well for the marketplace that we see today. At the end of September, we had $100 million of debt outstanding on our revolving credit facility, but we paid down $50 million of that in early October, and we expect to pay down the remaining as cash flow over the next period allows. Our only real commitments are with respect to further funding -- potential funding at Khoemacau as well as potential funding at NX Gold, depending on exploration success at that asset. We're very focused on our balance sheet and maintaining a strong balance sheet, and we prioritized our cash towards debt repayments and dividends and then following that, new business opportunities and growth. And you can see on Slide '21, our 20-year history of capital allocation and growth, which is really driven by providing accretive growth to our shareholders. Since 2000, revenue and cash flow growth has been very significant. But there are 3 aspects of this that I really want to highlight. First is revenue growth exceeds the increase in our G&A expense. So we're a high-margin and scalable business as illustrated by that. Secondly, our revenue growth is not dependent on metal prices alone. We've added volume over the past 20 years, and we've been able to extract growth out of that volume. And then thirdly, we've largely financed our growth internally, and that's without a significant increase to our share count. We're one of the founding members of the GDX index, and we have the lowest share count in the index. And we really want to avoid shareholder dilution. So funding our business through internal resources will give our shareholders growth on a per-share basis, that's what we're looking to do, and it's a core objective of Royal Gold. Now on Slide 22 here, I'll end on our dividend. And we consider return of capital to be a key strategic objective, and one of the attributes that we think makes us unique amongst gold investments. We've paid a growing and sustainable dividend since 2,000, and we've increased the dividend every year, despite volatility in the gold price. And a couple of weeks ago, on November 16th, we announced the 21st consecutive annual increase to our dividend, and we increased it this year by 17% over the previous year. We've now paid out $680 million of dividends since we started paying a dividend, and we're the only company in the GDX that has paid an increasing dividend since the index was formed in 2006. So with that, I'll come to the end of the presentation. Thank you very much for your time and your attention. Please contact me directly if you have any specific questions or you can get me through Scotia as well, you know where to find me. I'd be very happy to answer any more questions or discuss anything in more detail. Enjoy the rest of the conference. Thank you.