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

Good morning, good afternoon, everyone. My name is Jackie Przybylowski, Managing Director at BMO Capital Markets. Our next presentation will be from Royal Gold, a U.S.-listed precious metal stream and royalty company. And speaking on behalf of Royal Gold will be Dan Breeze, the company's Vice President, Corporate Development. Dan will give an update on the company, and we'll finish our time with Q&A. Welcome, Dan. I'll turn the presentation over to you.

Thank you, Jackie, and thank you for hosting us, and it's great to see you, and we appreciate the opportunity again participating in the Gold Forum Europe Conference. I'm going to make some forward-looking statements with this presentation. And I just ask you to be familiar with our safe harbor statement here. I will cover a broad range of topics over the next 15 minutes or so. This presentation is available on our website. And I also want to highlight that Royal Gold will host an Investor Day on Wednesday, April 20, from 9:30 a.m. for about 2 hours or so. Details are on our website, and we welcome you to join the management team and learn more about our business, along with the Q&A session. For those that are less familiar with our story, this slide provides a high-level overview of Royal Gold. We are a dedicated streaming and royalty company. We have a broad portfolio, currently consists of 190 properties located in 12 countries. The majority of our revenue, about 85% comes from precious metals, which almost 75% comes from gold. Close to 70% of our revenues are currently generated from streaming. You can see the pie chart on the left-hand side here with the balance coming from royalties. We recently transitioned to a calendar year end. We had very strong results last year in 2021. You can see on the right side some of the numbers. We are debt free. We have $1.2 billion of liquidity available at the moment. Our market cap is a little bit more than $9 billion at the moment. And we have 29 employees. And so this really highlights the efficiency of our business model. I'm going to come back and talk about this in some more detail in a few slides. The next slide summarizes the core attributes of Royal Gold. And I really want to just focus on 3 here. Number one, our model is designed to provide optionality to metal prices and reserve growth without the ongoing capital commitments. And when we look for investments, we look for those that can provide upside over the long term. Secondly, we are focused on per share metrics, and we aim to fund our growth through cash on hand, operating cash flow and our revolving credit facility, and that's the order that we prefer. Equity is the least preferred source. We actually haven't raised equity in 10 years, and we currently have the lowest share count in the GDX index. Finally, we're committed to the dividend. And we've been paying the dividends, growing a sustainable dividend since 2000. It's unique in the precious metals sector. And we made our 21st consecutive annual increase last November, and that earned Royal Gold a place in the S&P High-Yield Dividend Aristocrats Index earlier this year. We're the only precious metals company in that index, and we're now alongside of other high-quality companies like IBM, McDonald's and Pepsi. This slide summarizes what Royal Gold offers to shareholders versus other gold investments. And what we provide is exposure to gold and exploration resource growth optionality while reducing risk through a diverse portfolio. And you can see we don't have any direct exposure to operating and capital costs. There are other gold investments available for investors. If you look at physical gold, it does not provide exploration upside, it doesn't pay a dividend. And looking at the operating companies, they have exposure to operating and capital cost risks and therefore, exposure to inflation as well. And we'll look at that in some more detail in the next slide. So takeaway here is Royal Gold is a uniquely positioned gold investment for investors to consider. So this next slide is very topical subject of inflation. We are insulated from the current cost inflationary environment compared to our producing peers. The producers are exposed to input cost inflation. You can see on the right-hand side, the bar there, whether it be labor, energy or site costs. And these costs generally increase when commodity prices increase as well. Royal Gold, on the other hand, our direct exposure to inflation is small. It's constrained to G&A, as shown in the bar on the left side. And that segment tends to be quite steady. So what that means is it translates into our margins to be much less exposed to inflation pressures because we're not directly exposed to the operating unit. So that's a big difference between our model and what we see from the operator perspective. Slide 7 here highlights the importance of sourcing long-term optionality from reserve and resource growth from the investments that we make. And we have 2 examples here in the portfolio. The first one is Pueblo Viejo or PV. Those operations are in the Dominican Republic. It's on the left side here and Wassa, the Wassa mine in Ghana, which is on the right side, we made these investments in 2015. And in both cases, adding the potential resource conversions to current reserves are higher than the reserves at the time of our investment. You can see that with the bar charts here. Also, there are growth projects underway at both assets. At PV, the operator, Barrick Gold, currently is looking at an expansion to maintain gold production levels and extend the mine life to the mid-2040s. And at Wassa, the most recent study there outlined new resources that could extend the mine life by another 11 years beyond the current 6-year reserve life. And the key takeaway here is we don't have to pay anything further to get exposure to this kind of an upside. So again, it's embedded optionality in our portfolio. I should also make the point here that through production, we have recovered about 70% of our investment at PV and more than our investment, original investment at the Wassa mine. The next 2 slides, we'll look at efficiencies in our model. And the first one here, I mentioned that we have 29 employees. Last year, we produced a bit more than $650 million of revenue. We have a market cap of about $9 billion right now and no debt. So when we look at enterprise value and total revenue metrics per employee, Royal Gold compares very well to other large mining companies. You can see that on the top part of the slide here, but also against some of the more well-known and highly valued-tech companies, as you can see on the bottom part of this slide. The efficiencies are also reflected in our financials. As you can see here on this slide. Last year, we achieved EBITDA and operating cash flow margins of about 80% and 70%, respectively. And yet our G&A expenses were just 4% of revenue. So again, a very, very efficient model here, as you can see. I want to spend a bit of time in the next few slides looking at our portfolio in a bit more detail. I want to come back to my earlier comments about our diversified portfolio with this slide. This map is showing the locations of our 44 producing assets, including our principal properties. Those are listed on the right side, and they provide the bulk of our revenue. Our key assets, as you can see here, they're spread throughout the world, and they're weighted towards lower-risk mining-friendly jurisdictions. Have a look -- closer look here at our diversified portfolio. Looking at the pie chart on the left, our largest country exposure is Canada, and that's followed by other well-established mining jurisdictions. In terms of revenue contribution by mine, that's the middle pie chart, it's very diversified, and that helps reduce our exposure to a single asset underperformance situation. Finally, looking at the mine type, it's also worth noting that about 3/4 of our revenue comes from primary precious metals -- metal mines, I should say, and the balance comes from primary base metal mines as well. So this provides a very solid base for stable, predictable and sustainable cash flow as per the name of this slide. I want to talk a little bit about the optionality in some more detail. And sitting below that more than 40 producing properties or layers of exploration, evaluation and development stage assets, 146 properties to be exact, each with the potential to advance and ultimately produce over time. It is worth noting that these assets in our portfolio have been bought and paid for, and it really drives the long-term optionality and organic growth for our shareholders. Just continuing on the theme of organic growth with this slide, which shows the key catalysts that we see for various assets in the portfolio, we see potential for mine life extensions and production increases at several assets that are already producing. Those are the blue bars here. I've already mentioned Pueblo Viejo and the Wassa mines. Looking at Peñasquito in Mexico, this asset has been in our portfolio since 2007. It was about 8% of our 2021 revenue. Newmont, as the operator, they've improved recoveries and operating performance since acquiring the assets in 2019, and they've identified exploration potential as well that looks like the mine life will extend to 2040. Khoemacau, that's our newest producer. I'll talk about this one in a bit more detail, but we expect revenue to grow as operations ramp up this year. And then moving on to the brown bars. And this shows the development projects where we have meaningful royalty exposure in the portfolio. Looking at a few of these in more detail, King of the Hills is expected to start production next quarter. That assets in Australia, Bellevue and Côté, we've got royalties on both projects. They're expected to come into production next year. And then looking to 2024, the Manh Choh project and Mara Rosa, both projects are under a relatively new ownership, and they're expected to deliver in 2024. And then longer term, looking -- for example, at Sabina's Back River project, which just secured financing there, we have a royalty interest or royalty interests on Back River, and so we look forward to that assets reaching production in the future. I think as well, it's worth noting that not surprising that the current metal price environment is very supportive of new developments and many operators are motivated to advance projects, which is benefiting certainly a group like Royal Gold. I want to touch on the 4 newest investments in our portfolio with this slide here. These are contributing growth across the board, both currently and into the future. And I'll start with the Khoemacau. I mentioned this asset already, but looking at it in some more detail, it's based in Botswana. We may be investment in early 2019, and we expect to have 100% stream -- silver stream shortly there. We received our first stream delivery in Q3 of last year. The project is ramping up to full production expected in Q4 this year. There's a 20-year mine life, and total silver production is forecast to be 1.8 million to 2 million ounces a year, and that will all go to our accounts. For Red Chris, we have a 1% NSR royalty on this operating mine. It's located in Northern British Columbia. Newcrest is the operator, and they're transitioning the mine from a small open pit to a large bulk tonnage underground operation in the next 5 to 6 years. There's been a significant amount of work done exploration-wise, and they have really defined a world-class deposit here. Right now, it contains -- I'm sorry, 15 million ounces of gold and more than 4.3 million tonnes of copper. And there's ongoing drilling here as well. So we look forward to seeing the highlights of exploration ongoing as well. The other interesting thing about the investment here is it provides royalty revenue to us now while Newcrest defines the multi-decade potential over the coming years. Looking at NX Gold is the next one here. We have a 25% gold stream. This is owned by Ero Copper. It's in Brazil. And since we made the announcement in 2021, Ero has reported excellent exploration results near the mine, adjacent to the mine and in the larger land package as well, all within our area of interest. The mill currently is running at 60% capacity and the company has commenced a program to sustain longer-term gold production of about 60,000 ounces a year. And again, this provides -- this investment provides immediate goal to revenue from the asset with excellent exploration upside, as I mentioned. Finally, on Côté, we have a 1% NSR royalty. This is IAMGOLD's development project in Ontario. It's an open pit mine or will be an open pit mine. IAMGOLD estimates gold production of almost 500,000 ounces a year for the first 5 years and at least an 18-year mine life. The project is more than 40% complete, and they're targeting first production in the second half of next year. Our royalty covers about 70% of the current 7.3 million ounce reserve as well as larger property blocks to the east and northeast of the main deposit. And so we have nice exposure here with this asset and other assets, as I mentioned, over a longer period of time. And we look at this asset, Côté in particular as being in a Tier 1 jurisdiction as well. All of these assets, except for Côté, are generating revenue today and all provide exposure to production and exploration upside over the longer term. So we're very happy with these latest investments that we've made. I'm going to go through these next 2 slides fairly quickly, but I do want to touch on ESG. And although our business model is not involved directly in operating mines or having control, ESG is a core part of our business. We invest in the long term. And so we have to ensure that our investments are sustainable. It's a key part of our diligence as we look at new transactions as well as how we manage our ongoing business processes as well. This is not new. We have worked to improve our transparency around these processes. And as you can see on the right-hand side, we're pleased to see material improvements in the perception and recognition of our practices. Slide 16 here, again, on ESG, it just shows what we're doing in each of the ES&G areas. And it frames our focus on ESG at the local and corporate levels. We've always incorporated environmental and social impacts into our diligence. And importantly, we continue to support local charities where we live and work. We're also pleased to be partnered with companies with strong commitments to communities in which we operate and we're looking for ways to continually -- to finance and support local efforts of our operators. On the governance side, I'll just mention Royal Gold is a strong, highly experienced and independent Board, and they're committed to best practices. This slide shows our material investment activity since 2004. And I think the key word here is patience. Our investments, as you can see, they're lumpy. They don't really fit into a quarter-over-quarter or year-over-year type of analysis. We continue to be very busy on the business development side. Not all opportunities make it over the finish line. We're very selective. And our due diligence includes a review of people, of the project, all the technical and legal aspects and the place or the jurisdiction as well. And we integrate ESG analysis through the review process as well. There's no -- they'll pressure for us to do any transactions. If we can't find the right opportunity, we'll harvest cash, we'll build our balance sheet and we'll wait for those right opportunities to come and review at that time. We know mining is difficult. There are unique challenges, and we believe we've got the right team in place to assess the numerous risks as well. I've talked a bit about liquidity as well through this presentation, but I'll just come back and share with you where we're at right now. Part of being patience, as I mentioned on the last slide, is having liquidity to be able to act in finance opportunities as they arise. At the end of December last year, we had no debt. We had $1.2 billion available under our undrawn revolver and working capital, and we are well positioned for looking at opportunities today in the market in terms of the sizes that we're seeing now. We're focused on maintaining a strong balance sheet. We prioritize our use of cash towards debt repayment and dividends and then new business as well. This slide shows our 20-year history of capital allocation and growth. And I think there are 3 points I want to share with you here. The first is revenue growth has far exceeded the increase in our G&A expense, as you can see with the bar charts. And that's an indication of our high-margin, scalable business. Number two, the revenue growth has not been dependent on an increase in the metal prices, as you can see. And finally, we have largely financed our growth without a significant increase in our share count. So when operating cash flow increases by almost 100x and our shares outstanding grow by less than 4x, that really signals that we're able to deliver accretive growth to our shareholders in a very high-margin business. I want to end with a comment on our dividend. And I made the comment at the beginning. Here's a history of our dividend in terms of the payout. We consider return of capital to be a key strategic objective. And as mentioned, it's one of the attributes, I think, that makes us unique among other gold investments. We've paid a growing sustainable dividend since 2000. We've increased the dividend every year despite volatility in the gold price. The dividend has had a 17% compounded annual growth rate over the last 2 decades. Collectively, we've paid out almost $700 million of dividends over that time period. We're the only company in the GDX that's paid an increasing dividend since that index was formed in 2006, and I've already mentioned the inclusion in the Dividend Aristocrats Index that happened earlier this year. So we feel very good about this. We're focused on a sustainable, growing dividend over the long term to make sure that we can pay in any price environment. Jackie, with that, those are my prepared comments, but I'm happy to answer any questions.

Thanks very much, Dan. Maybe I'll just ask a question on that dividend policy. Congratulations on being nominated to the Dividend Aristocrats Index. That's terrific. And clearly, you have commitment to your dividend. Do you intentionally target a progressive dividend? And if you do, how does that policy impact your growth strategy and your thoughts around the composition of your portfolio?

That's a good question, Jackie. We don't target a specific, say, payout ratio or external-type targets. What we do is we want to make sure that it's sustainable that we can grow it, that we think about the volatility of our business. Right now, we see opportunities where we can deploy capital potentially. We want to make sure that we're liquid enough. And so we're always balancing those 2 aspects in terms of the use of our capital. And many of our shareholders like this approach because it really shows discipline and a certain way to approach capital allocation that they want to see in a business model like Royal Gold.

When you're looking at growth, do you have a preference to maintain a high exposure to gold? Or are you commodities agnostic? Are you looking just for the best opportunities?

Well, we are -- as I mentioned, we're very much focused on precious metals. As I said, we're 85% or so weighted towards precious metals, 75% towards gold. We have copper in the portfolio. We have a stream, as you know, on Mount Milligan, that's about 12% of our revenue. Those streams are pretty rare and pretty unique. And so we're happy to have that. It's a bit of a diversifier in our commodity mix, if you look at the portfolio. If we came across a very high-quality nonprecious opportunity that was in a good jurisdiction, that was in the hands of a strong operator, we would consider that opportunistically, but our focus has not changed. It's been precious metals and specifically gold, and that will remain the case going forward.

And maybe if I could sneak in one more question. We've seen you talk about your organic growth in your pipeline. I know one of the, I guess, opportunities for royalty and stream growth today would be in construction or financing of earlier stage projects. How do you feel about those? Is that sort of worth adding those to your portfolio? Do you think you get recognition for those in your share price today? Or is it something that you sort of feel like it's important to do for a longer-term growth pipeline? Like how is the view on early stage versus, I guess, cash flowing assets?

Well, we're certainly open to that, Jackie. And Khoemacau is an example of an investment we made in 2019. As I mentioned, that was 2.5 years before production happens. So we're comfortable. I think what has to happen is there has to be rigorous diligence, which we put in place. We also put things into our agreements that protect our shareholders. So for example, we wouldn't advance all of the capital upfront. We would do it in line with forecast spending. We'd have an independent engineer to verify that with these drawdowns. So we're open to it. It's obviously part of building out the pipeline longer term. We're very careful and measured when we make these investments, but we're certainly open to considering them. And we're seeing a lot of those right now. I think as the market sort of responds to the commodity prices right now, projects are moving forward. Capital is needed. I don't think the equity markets, at least until now have been very open for large financings. And so our product has been very relevant to help projects move forward.

Absolutely. Unfortunately, we're out of time. Dan Breeze, Vice President, Corporate Development at Royal Gold. Thank you very much for your presentation.

Jackie, thank you very much. All the best.

Thank you.