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

Good morning, everybody, and welcome to our next session at the TD Annual Mining Conference. For this session, a Q&A session with Bill Heissenbuttel, CEO of Royal Gold. Bill, thanks for joining us today.

Thanks for having me.

Bill, there's a lot going on in the gold market these days after yesterday's Fed announcement and a lot of volatility. Where do you see things heading this year in the gold price? I know that's a difficult question, but let's get it out of the way.

I'm always amazed at how markets react. I don't know how -- what the Fed said yesterday could be a surprise to anyone. They signaled it in the fall, but they expected there to be 3 rate hikes. You're looking at U.S. inflation at 7% and somehow when the Fed put some time definition around a rate hike, the markets react as if it was a surprise. So I found yesterday quite interesting. My question is you didn't see this coming? So I think during the course of this calendar year, you're going to see real rates are probably going to move up, which isn't positive for gold. But at the same time, what's Russia going to do in the Ukraine, how many more missiles is North Korea going to fire? And so I think there are political events that may actually lead to a sort of a different current -- crosscurrent to the rate environment. So I don't see a whole lot of movement. I will say that if rates go up, that is actually to our advantage, to our business advantage because one of our greatest competitors over the last couple of years has been the debt markets because interest rates have been so low and people have found that as an attractive source of capital. So real rates going up isn't entirely bad for our business.

It brings up an interesting point, Bill, in that there was quite an active year last year in the streaming business. There's a lot of deals that got done. There was a particular flurry at the end of the year, particularly from the bigger players in the streaming market. What do you attribute that to? Why were so many deals getting done? Was it just the dynamics in the market? Or were there people looking for growth? What do you think the factors were behind that?

You can never really assess the ebb and flow of the streaming market. I get the questions we did 3 transactions in the space of about 3 months. And we really hadn't announced anything since 2019, and they say, well, why did that happen? Did your due diligence standards go down? Did you get desperate? And I said, wait now, we just had 3 transactions that we quite like to come up at the same time. It could be -- if it involves a base metal company, maybe the base metal companies looked at the gold price in particular, and just said, this isn't a bad price to try to lock in or do a deal based on these prices. It could also be companies being comfortable with where metal prices are and deciding to embark on project development. So there isn't one thing, if I could predict the business, I'd probably look a lot smarter, but these things just come and go at different times. And sometimes like 2015, you just get a flurry of activity.

I know you get this question all the time, Bill, it comes up on every streaming conference call. But does this -- what happened at the end of last year? And there were a number of deals done. Is this suggesting that 2022 will be a very busy year for streaming deals? Or do you not have that kind of visibility at this point?

All I can look to is our business development pipeline, the number of transactions that we're looking at. I think you'd be surprised at how consistent that flow is. Now sometimes, you get a lot of transactions, and we look at them and say, we're not interested. It doesn't meet our investment criteria and it may not meet the investment criteria of our competition. And then you'll see the business fall off. But I'm pleased with the business development flow, the opportunities that we're looking at. When and if those transactions suddenly be -- are complete and announced, I just don't know. I always go back to comical. I think we started talking to Cupric Canyon a number of years before that transaction was announced. Then they went on. They had to hire a project management team, the project management team wanted to have another look at the feasibility study. So just because I'm looking at something today doesn't mean it's going to happen in 3 months, 6 months. It could be 3 years.

Sure. I might count the big 4 or 5 streaming companies have between them $4 billion to $5 billion of available liquidity to deploy into streams. And there's a whole slew of smaller streaming companies behind that with liquidity. That would appear to be setting up for an extremely competitive environment for the streaming business and potentially assets getting bid up. Are you seeing that? Are you getting that sense?

It's been competitive for years. I don't think we're in a new dynamic. I go back to what I said. It's not just the streaming companies, but when interest rates are low and the debt markets are open and for some companies, the equity markets are open, it has been very competitive. I'm kind of used to working in that environment. So I don't sense that the returns are getting pushed down to a point where they're just unacceptable. I do think one of the things that we're able to do is look a little bit beyond what you might read about a particular asset and see a future. And I point to NX Gold and I point to Red Chris, as a situation where we were able to look through what a general investor might see. And so we think there's a lot more there. And that's where I think we can differentiate ourselves and earn a proper return for our shareholders.

Is there 1 asset that's in your portfolio today that's generating revenue that has really exceeded your expectations? And then you went into it the typical 5% IRR and you've done something significantly higher than that, that really stands out to you?

The one I would like to point to, and I can't point to a really high IRR right now because it's still early days. But when we made the investment in Wassa in 2015, Wassa had I think the mine plan was out to this year, 2022. And so we were earning a return on a 7-year mine plan, 6, 7-year mine plan. And now I sit here today, we got all of our investment back. And if you look at the 43-101 that Golden Star did released early last year, you've got another 6 years of reserves, and you have another potential 11 years of resources. So could I have sat there in 2015 and said, I think Wassa is going to be 7 years plus 17 years. I probably couldn't have said that with a straight face, but there's that potential. I think our team saw that potential, but not -- I don't think to that extent.

So you've got a couple of big things happening this year. Obviously, the Khoemacau ramp-up is a big impact. And then through 2020 through 2023 and perhaps a bit beyond is the PV expansion. Are there other big catalysts or core assets within your portfolio that are really going to start to have some significant changes in the coming years that you can see from this point?

Well, I think Khoemacau really is the thing we're focused on right now for this year at a 90% stream rate. You're talking about 1.7 million ounces of silver to us, and I haven't done the current gold equivalent, but it's got to be around 20,000 GEOs, gross GEOs to us. And that's really important. You get a bit beyond that in terms of things that will be, I think, material to us. I sort of look at Manh Choh, which is your Peak Gold. Now it's not going to be a number of years of production. But I think it will be meaningful when it comes in, in a few years. You've got Côté coming up and if Sabina can get financing for Back River, that's important to us. It's interesting beyond Khoemacau, I probably have 6 assets that in total -- or individually, at full production might produce a 2,000 GEOs to 8,000 GEOs. And you think, none of that's exciting. You put them all together and you've almost got Khoemacau. And I don't -- I'm not sure if people fully appreciate the single -- the organic growth singles, if I can use a baseball analogy that are in our portfolio.

Can you talk a bit about Red Chris and what you see there in terms of the longer-term potential? And what made that an asset that was so attractive to Royal Gold?

Yes. Well, the one thing I will say is that Red Chris has the potential to be a multi-decade producer. And those assets don't come along as frequently. If you can layer in something you think is going to be in production for 30 years, that is -- that cornerstone asset might be a little bit much it may never get that to be that big. But that's really, I think, number one, what attracted us to it. I think the other thing was, again, coming back to the team. I mean, the team -- our team took public data, formed shapes for a block cave without any real information in the market at that point in time and really hit the estimated GEO production out to almost 2040 in terms of total GEOs. And so I see it as a great long-term source of growth. The royalties that you're going to see from the open pit are going to be relatively nominal. But when you get into the block cave, I think it will be it will be a really important asset towards the end of this decade.

I think there's ability for Newcrest to pull that forward in terms of their production pipeline and get to the block cave quick. I know block caves and a lot of development work upfront that needs to be done that limits your ability to do that, but do you see that bumping up in the priority time frames?

I can't -- I don't know, Greg. I haven't asked them about it all. I have really is the public data that they released on it. And all I can say is I was really happy with that release. And I'll just -- I'll add to that is I think beyond this, I think the 30 years that they identified there's additional growth that they've identified. They just -- they sort of life study something that's going to come along in a few decades.

At $1,800 gold, and I think I agree with your view of where the gold price is going to be. You're going to generate a lot of free cash flow in 2022 and going forward, $500 million a year. You have a good dividend. But is there a case to be made, Bill, to move towards a clear split in the dividend where x amount goes to reinvesting in the business and x amount goes to returning capital to shareholders being like a formulaic framework around that?

Yes. It's really hard to put a framework around it because you just don't know what is sufficient liquidity for reinvestment. And I go back to 2015, if you had asked me in January of 2015 if we were going to invest a net $1.1 billion in a series of assets, I would have told you you're crazy. I just didn't see that coming. So it's a balance. I still think the best way for us to create value for the shareholder is by reinvesting in the business and always having that liquidity available is really important. That being said, in last November, we looked at our dividend and then increased it by I think it was 17% to $1.40, which was, I think, the highest increase since 2013 or '14, and we'll continue to look at that. We are a little bit different. We don't tie the dividend to free cash flow. But what we've been able to do for over 20 years is increase it. And I'd like to think that we'll continue to do that. But at some point, if we suddenly find ourselves with true excess liquidity, that will be a conversation we'll have to have with the board about other ways of returning that capital. I think I've had that question posed to me for over a decade of working with analysts and investors, and I've never had the situation where I had too much money in the bank account or too much money available under our revolving credit.

And debt, you're not averse to using it, but you don't like to have debt on the balance sheet long term?

Honestly, I don't mind having debt. We haven't done an equity issue since 2012. And our revolving credit is the first place we go when -- if we need external funding. We did a convert a number of years ago. This is the perfect business to service debt. We -- the only CapEx we have is the CapEx we choose to have through the making of investments. So we're all about accretive growth. And if I never have to issue another share, I might be fine with that. And I think this business can support a level of debt.

Bill, you've been pretty clear that you are a precious metals-focused streaming company. There's been a lot of talk about green metals and cobalt and what have lithium and things like that. Is there a place for that within Royal Gold? Or is that not something that you devote a lot of time to?

I always -- I try to be clear, yes, we are a precious metals-focused company. If we see something that's outside of that core area, that for one reason or another is, we just think is a great opportunity. we'll certainly consider it. When it comes to green metals, I think there is, to some extent, -- and I won't speak for the other streaming companies. I will say internally, we're trying to figure out what is our role in transitioning to a low-carbon economy. We don't have direct emissions. We do and we've already bought credits that's covered, but that's low-hanging fruit. And so how do we help our operators achieve that? I think that's where I probably -- we're talking about environmental investments. That's where I'd rather spend my time. My only issue is you look at lithium. I don't know anything about lithium. No one on my team knows anything about lithium. So am I going to get into a completely new market just to say I've invested in green metals? I don't want -- again, I don't want to say no, but that's -- that would be hard. That would take a lot of work to understand those markets. And this is something I hope to have interaction with our investors over the course of this year. What do you want us to do on this front. What are you expecting of us? What's our responsibility?

Right, right. So on that note, when you're in a competitive situation, I don't think it's just what you bring to the table in terms of financial ability. What separates you from the other streaming companies when you're in the room looking at a transaction?

I'll tell you, I'll come back to the technical side. I put our team up against anybody. I think we can see through to value and assets that the operators probably want all of the streaming companies to understand. And that I think is, to me, is the number one differentiator. I think number two, if you're going to compare us to the 2 big companies, it's a little easier for us to show growth, which isn't a bad position to be in, I can just imagine the discussions that the other folks are having about how do we grow a company of that size. And I think more recently, one of the things that differentiates us is we're a U.S. company. And we do have a very large generalist pool of investors we can talk to, but more importantly, with the global minimum tax, we already have the global minimum tax. We already pay effectively a little over 13%. So going from 13% to 15% is not that big an issue for us. So what I try to get across to folks is we don't have that same risk as maybe some of our Canadian competitors that have relied on some lower tax jurisdictions to do their transactions.

But just taking the longer term in your portfolio outside of Red Chris, is there one asset in there that you think really has massive potential that we're not seeing in the market is underappreciating?

Massive potential, yes. I wouldn't expect anybody to appreciate it. But I will say that the Randgold-Barrick merger breathe some analytic life into Pascua. And I know by now Mark took it back to square 1 and started all over again. But honestly, almost the first thing I look for when Barrick comes out with the report, are they still studying it and what are they doing, and they seem to be continuing to work on it. And I just don't know how you walk away from a deposit that has tens of millions of ounces of gold. So no, I don't expect anybody to give us credit for it. I have hopes, maybe not high hopes, but I will say the tone has changed a little bit with the new management team.

Definitely. Bill, that was great. I'm going to have to leave it there. I've got to jump to the next one. We filled the entire 20 minutes. So great job. Thank you.

Thanks, Greg. Take care.

Thanks everyone. Bye bye.