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

This is our final presentation of the day or final presentation of the large-cap royalty streaming companies. And to finish this off, I have with me today, Bill Heissenbuttel from Royal Gold, President and CEO. Bill, it's really, really nice to have you. Welcome to Miami.

Thanks for having us.

Maybe where I'd start off is on ESG. So it's a theme of the conference. It's also been an intriguing theme for the royalty streaming companies insofar as you are in a unique position. I'd love to hear your points of view in terms of how you think about that, particularly the Scope 3 emissions.

Yes, if you go back -- and if I'm talking too loud, someone raise your hand. But if you were to go back, we -- ESG was always an important part of the Royal Gold culture. It was always part of the due diligence. And I would say we were never good at talking about it, letting people know how important it was to us. And we did not have an ESG report out for a long time. And over the last couple of years, we started to sort of formulate what's that going to look like. And the first place we went to, we're part of the World Gold Council, you go to the Responsible Gold Mining Principles, the ICMM 10 Principles, we'd endorsed those. But when you think about it, it's like what does endorsing really mean? The operating companies implement. And when you get sort of the RGMPs, you get down towards the bottom, and you say, "Is any of this really applicable to what we do?" I mean, artisanal mining, we're not involved in mercury. We're not involved -- we don't manage tailings facilities. So what really works for us and as we got further and further along, it became clear to me that we are a finance and asset management company. And so where should we be looking for principles, if there are? And the first one really came to the principles for responsible investment that a lot of the folks here on the investment side have signed up to. And we spend a lot of time looking at it. Is it appropriate? There are some things in PRI that really don't apply to us. You start getting into proxy voting. You start getting into shareholder resolutions. And we're fundamentally different. An institutional investor's going to make a decision based on public information. They can buy, they could sell. It's still a little bit of a different business. So really, the tack we took was, let's look at PRI, let's look at the principles for responsible banking, let's put them all together and see what comes out and come up with what we now have as sort of our 4 pillars for ESG. And it goes from governance and culture to due diligence to stewardship with respect to our portfolio. And then it's transparency. And so we put this out about 5, 6 weeks ago and, really, we're looking for our investors to provide us feedback on it. Are we on the right track with respect to it? Because we think the pillars make a lot of sense for the business. And we think we're providing what they want to hear from us, especially on the transparency side because we tried to provide a lot of data on our portfolio in terms of emissions, broader risk and we expect to increase that disclosure over time. Scope 3 is really -- you talk to the operating companies that are like Scope 1, Scope 2 and Scope 3 is over there. And for us, Scope 1, there's nothing. Scope 2, it's really small. We've already bought offsets so that's not the issue. But how do you deal with Scope 3? How do we influence Scope 3? I think that's the thing that we will continue to struggle with. And now you've got this overlay of the SEC disclosure, and are we going to be held responsible for the disclosure we make because we're not measuring emissions? We're not -- we don't have the data on site to do a lot of the work. So we can only take it so far. So we always say it's a bit of a journey. We're early in the journey. But again, I think we did try to take a little more of a what would have -- how would a finance company, how would an asset management company think about these issues? It just seems most appropriate for us.

And you bring up a really interesting point there. I've not surveyed the asset management finance industry. I imagine you have. What do you see as best practices when you look across that industry?

Well, I wouldn't say -- we did through the process, we went to a number of our institutional investors. And it wasn't so much best practices. It was very interesting. Sometimes they talk to our portfolio managers. Sometimes they talk to the ESG people. And one of the things we got back is we don't know what kind of company you are. So it wasn't even -- I'm not even to the point of best practices as an institutional investor. I'm trying to make sure that the market understands how we see our company and where we fit on the ESG side when it comes to being an investor.

Yes. Where I was coming from, just a comment, is that like some banks will no longer deal with coal companies or oil and gas companies as a result of this sort of thing. So it'd be interesting to see how this unfolds.

And that's really hard. I think one of the harder thing is if you're an institutional investor or you're a bank, you often have the time to make investments in a number of different sectors that may offset something that isn't so good. We're focused on gold. We're in precious metals. For us to sit there and say, "Well, we'll go off and start our renewables portfolio", it does not make sense. So there are a lot of restrictions that we have that we're just going to have to work through as we go forward.

Yes. No, it would be interesting to see that space evolve. A question I asked all your peers, the pipeline, how are you seeing it? So size, type of deals, deployment of proceeds.

Yes, it was a slow start to the year, at least for us, in terms of new opportunities. I think it has picked up. I'm actually very happy with the pipeline where it is. The size is where it's been for a long time, $100 million to $300 million. And I would actually say that's probably the market. If you were to go back and there are only so many Vale transactions or Cobre Panama transactions or Pueblo Viejo transactions. Those are actually a few and far between. The core market is the smaller size because those bigger investment opportunities are with the bigger companies. Well, the bigger companies don't really need us right now. They've got healthy balance sheets. Our target market is always going to be sort of the middle tier. So again, I just don't think you're going to see a lot of $700 million, $800 million transactions unless and until bigger companies need our help.

And you did say it was on the gold?

Different commodities and also different stages. We're seeing some things in production. We're seeing some things in -- on the development side, which is nice to see.

The geography is pretty consistent with your existing portfolio?

Yes. I always find streaming is very Americas-focused. And I think that's just because it's been accepted more by North American sponsors where they tend to have more assets. Australia has always been a difficult place because they just don't -- I don't think they like the product all that much. And you do where you've got a North American sponsor but you've got a mine in Africa that you'll still see that. But I still think it's always going to be an Americas-focused product.

I wanted to ask about the exposure to the GMT. Do you guys have a sense or how are you thinking about that?

I don't spend much time on the GMT at all really because we already have one. So we -- our business is 2 segments, one is royalties. Royalties, that's passive income in the eyes of the IRS. Passive income is taxed at the U.S. corporate tax rate no matter where you earn it and no matter where you leave it. So you don't bring the idea of I can avoid it by leaving it offshore, does not exist on the royalty side, the streaming side. In 2017, the U.S. tax law came in that basically established GILTI, which is a minimum tax. The effective tax rate right now is 13.125%. It actually goes to 16% in a few years. So difference between 13.125% and 15% to me is nominal. And I think I don't know what the -- I heard Randy's comments about Canada, but I don't know what the U.S. does with the election coming up, with the Republicans potentially taking 1 house. I think they could put the point to the GILTI at 16%. So we're already there.

Yes. That's great perspective. Now precious metals mix. You guys are heavy, heavy precious metals. So does that mean that you think about your portfolio as having room for other metals?

I don't always think of it as room as though we have a floor in precious metals that we're driving to. We are committed to precious metals, gold in particular. If you were to ask me how much gold or silver would we want to have, I would say more. But that does not mean that we're not going to look at things outside of precious metals. If we see something, good operator, good asset, good jurisdiction, good returns, some combination of those things, we'll absolutely take a look at it. Where I kind of draw the line is where we don't understand a market. I can get my head around base metals. I can get my head around iron ore. But some of the other things, especially if there are offtake contracts involved and you have to understand how you market these things, that really gives me quite a bit of pause. We want to invest in things we know, where we know the market.

I'd like to get your thoughts also on industry consolidation. Royal Gold famously bought IRC and that's been an excellent acquisition for you guys. So how do you see the industry? Do you see opportunities? Do you see a need for consolidation?

I do. I think the Sandstorm transaction could be one of many. I think that end of the market does need some consolidation. But at the same time, you heard say, well, there are too many of these companies. I say, go back 12 years where you had International Royalty, you had Silverstone, you had Gold Wheaton and now we have a Osisko Gold Royalties and we have Maverix. We do have a few more but the dynamic was kind of the same way it was many years ago. I will say it's interesting that you mentioned IRC as a positive transaction. I would say that has proved to be very challenging. The 2 biggest assets, we spent years of litigation at Voisey's and Pascua is no closer to production. So you look at that and like do I want to do that again? I was glad to hear Randy like buying Silverstone. But there are challenges in those types of mergers. I'd much rather -- I don't need a bigger portfolio. I'd much rather go asset by asset, where I'm not paying 1.5x, 1.6x, 1.8x NAV just to consolidate the industry.

Right. No, that's a fair point on Pascua. I wasn't going to bring that up.

Yes, I thought I would.

You got Peñasquito, though.

Not in that one.

I also wanted to ask about kind of how you approach deals and transactions. So how do you consider a counter-party's requirements within the context of what you're offering in terms of capital?

Yes. I'd tell you, our business development team has to be absolutely tired of listening to me go on and on and on about partnerships. And if you are approaching this business transactionally, you're making a big mistake. These are life-of-mine contracts. And I would say the same thing to the operators when they're looking at choosing someone. This isn't a loan you're going to pay back in 5 or 7 years. And the people you're dealing with now probably aren't the people you're going to be dealing with 10 years and 15 years. So you're almost -- it's almost a culture. And I want our team to make people feel like we're on the opposite side of the negotiating table. I said pick yourself up, put yourself on the other side, on their side and think about it from their perspective. And if we can tweak the structure in a way that makes their life easier living with a life-of-mine contract and we can live with it, let's consider it, and in many cases, let's do it. So we were one of the first ones to do the drop-down in the stream rate because we wanted to incentivize. We want to incentivize operators to keep exploring. And so you say, "Look, you get to a certain point. You're going to have a bigger interest in these metals along the way." And at the same time, the NX Gold transaction we did, we put in a couple of extra advanced payments to incentivize exploration and finding new resources, and we also had a community support part of that transaction. Again, trying to say we're not partners in the sense that we're running the thing but we're right behind you, helping you achieve your goals. And I'm always all over my team about thinking that way.

That's great. I also wanted to ask you about growth in the portfolio, particularly through exploration upside. Which assets do you see the most potential from?

Yes. I mean starting with growth potential that we see. Obviously, Khoemacau's our big one. It's going to be ramping up this year. In calendar 2021, we did, I think, 360,000 GEOs and that alone is, we think it's a silver stream. But if you bring it back to gold, it's somewhere between 25,000 and 30,000 ounces. So that's probably the most important one. And then we have a series of things that are just coming out of the portfolio that no one's really focused on, King of the Hills, Bellevue. I think we got those in the IRC transaction. So we've got a couple of positives there. Mara Rosa is another one. Manh Choh, which is our old peak gold in Alaska that Kinross is bringing forward. And ultimately, you're going to get to Back River and then hopefully, Red Chris block cave. So all of these things, you pull these little ones together and excluding the block cave, you're probably talking about another 20,000 or 25,000 GEOs. So altogether, King of the Hills, 2,000 GEOs don't sound all that exciting, but in a portfolio with a number of different assets moving into production, I think it is very exciting.

You mentioned Khoemacau. What do you see as the upside potential of that in terms of your GEOs?

Well, the area of interest has been designed so that we capture any extensions of Zone 5. And they have spent some time on an expansion study. The logical place to try to find those, in their case, the tonnes of copper is a long strike. There are other areas where I think we have some of the deposit but not all of it. But I think the upside, especially the expansion potential there, is quite good.

And finally, in terms of sort of hidden assets in the portfolio, I've actually had a couple of questions recently about KSM.

Okay.

How do you guys think about that asset? I mean it's kind of all upside for you.

It is all upside. I'm trying to think. I think we did that in 2011. And we hold an option. So we bought some shares at a premium, and we've got an option that is heavily in the money at these metal prices. I think Seabridge is the first one to tell you, they're not going to build it. So there's a lot to happen between here and production. I kind of look at KSM and Pascua as these big things sitting in the portfolio, but it's going to be years, I think, before we really see it.

Very interesting. Well, this has been a fantastic conversation. Thank you very much for being here in Miami, and thank you all for listening. And I guess you're all dismissed.