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

Hello, everyone and welcome to today's Virtual Non-Deal Roadshow. My name is Karina Tatarinova [indiscernible] especially those of you in Chicago and surrounding areas for the presentation of Royal Gold, trading on the NASDAQ under ticker symbol, RGLD. The presentation will last approximately 20 minutes, which will then be followed by a formal Q&A that you can participate in by clicking on the chat box at the top right corner of your screen and sending in questions. And now with that, I present to you Alistair Baker, Vice President of Investor Relations and Business Development. Alistair, the floor is yours.

Great. Thank you, Karina, and thanks very much to Renmark for the invitation to present today. I will be making forward-looking statements during this presentation, so these risks -- sorry, these statements are subject to risks and uncertainties that could cause actual results to differ materially. All of these risks and uncertainties are discussed in our most recent 10-K filings filed with the SEC. So please make yourselves familiar with the language on this page. So with that, I will jump into the formal part of the presentation. And really what I'm hoping to do today is give you an overview of the investment thesis for Royal Gold and what we provide to investors, which is precious metals exposure with consistent financial performance and a focus on per share metrics. And in this presentation what I'm trying to do is -- what I'll walk you through to achieve this objective is, I'll talk about our low risk leverage to gold. I'll talk about our long history of successful execution. I'll talk about our business model and its unique nature. I'll talk about the portfolio, which is broad and deep. And I'll talk about our valuation, which I think is a pretty attractive levels compared to where it has been over the past several years. So this slide really explains Royal Gold at a high level. We're a high-margin business that generates consistent cash flows from precious metals. We've been in the business since the mid-1980s, and we've been on the NASDAQ exchange for over 41 years now. We have 2 operating segments to our business. We have streams that provide 70% of our revenue, and royalties that provide about 30% of our revenue, and both really give us exposure to topline production from mining assets. We have a diverse portfolio of about 200 properties, 40 of which are in production today, and about 85% of our revenue comes from precious metals. Our market cap today is just over $8 billion. We have 31 employees. So it's a very efficient business model. I'm going to talk a bit about our low-risk leverage to gold, and this slide here shows other gold investments and how Royal Gold is positioned relative to those investments. Our model provides exposure to precious metals without many of the risks that come with investing in operating companies, and we provide upside exposure to gold optionality in the gold price, while reducing downside risk, and that's through holding a diverse portfolio that has no direct exposure to operating capital costs. There are other ways you could hold gold in a portfolio, you can be very conservative and you can hold physical metal, but an ounce will always be an ounce. Physical gold will not give you upside to mining projects, and it won't pay you a dividend. On the other hand, you could be more aggressive and you can acquire shares in operating companies or junior development companies. But when you do that, you're also exposing yourself directly to operating and capital cost risks. Now Slide 7 here shows our historic performance and why we think we're a good alternative for a conservative exposure to gold. On the left-hand side, you can see our betas. A beta of 1.9 approximately to gold is very strong leverage. On the right-hand side, you can see our share price performance over time, and I've gone back to 2006 to the beginning of the GDX Index to show the share price performance. And over that long time period, you can see that Royal Gold shares have outperformed the gold price, they've outperformed the GDX index and they've also outperformed general market indices. So this is performance that we think is very much indicative of the way that we've been running our business. I'll talk a bit about the history of our execution and really a long and consistent record that we've got in terms of consistent and disciplined performance. Now we have a 20-plus year history that I've shown on this slide here of capital allocation and growth, which is really driven around providing accretive growth to our shareholders. And since 2000, you can see that we've had significant revenue and cash flow growth, but there are 3 aspects of this growth that are really important to understand. The first is that the revenue growth exceeds the increase in our G&A expense. So that demonstrates we're a high-margin and very scalable business. If we add new revenue sources to the business, we don't need to grow our employee count or our cost base to absorb that revenue growth. The second is, our revenue growth is not dependent only on metal prices. We have added volume during this period, and that's by acquiring good assets that provide revenue to us. We're not waiting or dependent upon the gold price to make our business perform well. And then thirdly, we've financed our growth mostly from internal sources and that's without a significant rise in our share count. We're one of the founding members of the GDX Index, and we have the lowest share count in the index. We want to avoid shareholder dilution, if we can. If we can fund our business using internal sources and internal resources, that provides per share growth to our shareholders, which is really one of our key strategic objectives. Slide 10 here shows a snapshot of our current liquidity. We have to be patient in our business. We have to make sure that we have liquidity on hands and a strong balance sheet because sometimes opportunities come up out of nowhere, and they are not things that we can necessarily anticipate. At the end of September last year, the last time we -- without any financials, we have a deposition of $450 million, which is about 0.7x our trailing 12-month EBITDA. And we had at the time of about $670 million available between our working capital and our undrawn revolver -- revolving credit facility for new business opportunities. Now we have drawn further on the revolver. In July, we drew on it, and we drew again in December. And that was to fund a couple of acquisitions that I'll talk about in a few more minutes. So currently, we have about $575 million outstanding on our revolving credit facility, and we aim to pay this back by the second half of 2024 just using cash flow. And that's assuming the metal prices stay where they are today. We are very focused on maintaining our balance sheet and a strong balance sheet. We will prioritize our use of cash towards debt repayment and dividends followed by new business, and you can see that on the right-hand side of this page. Now return of capital is a very important objective for us as a management team, and it's one of the attributes think that makes us unique amongst precious metals investments. We paid a growing and sustainable dividend since 2000, and we've increased the dividend every year despite volatility in the gold price. In November last year, a couple of months ago, we raised our dividend again for the 22nd consecutive annual increase. We raised it 7% over the prior year. We paid out about $770 million in dividends to our shareholders since we started paying dividends, and we're the only company in the GDX that has paid an increasing dividend every year since the Index was formed in 2006. And we're the only precious metals company in the S&P High Yield Dividend Aristocrats Index. So we stand apart from our peers and the gold sector generally when you think about our dividend and when we think about paying back our dividend to shareholders. Now due diligence is a core competency for Royal Gold. As you can see on Slide 12 here, we have a long and pretty exhaustive due diligence process and a lot of things that we look at. It's very important to get due diligence right to make sure that we add the right assets to our portfolio. And while we're always busy looking at new opportunities, not all opportunities make it through to completion. Our extensive due diligence process really means that we are very disciplined in the way that we deploy our capital. If we see any risks that we don't like, if they're technical or legal or social or environmental or you name it, if there is a risk that we don't like that we think will impact the viability of an investment, then we're happy to walk away from potential transactions. We don't feel pressure to do transactions. We're not compensated based on achieving a certain number of transactions in this given period of time. And if we can't find the right opportunities, we're happy to collect our revenue, build our balance sheet and wait because history has shown us that if we wait and we're patient, the right opportunities will come to us. Now our business model does not provide us the opportunity for direct to operating control, but ESG is very important to our businesses. It's been core to the way we approach our business for many, many years. We invest for the long term and ensuring the sustainability of the investments that we make is very important, and we get to see that when we do our due diligence on new transactions. We also tried to build language into our transaction documentation to ensure that operations are managed to the highest possible standards. And where it makes sense, we always look for opportunities to help operators with any kind of initiatives they have around the operations where we're invested. If they have any ESG initiatives that they're trying to execute, we'll be happy to help support. We've done a lot over the past few years on improving our transparency when it comes to ESG and our processes, and we're very pleased to see that we've had very good improvements -- material improvements in the way that we're perceived in the marketplace. And as shown on this slide here, 2 ratings providers, who are very influential in our sector, MSCI and Sustainalytics. We're top rated by Sustainalytics, and we're AA ranked by MSCI. Now I'll spend a couple of minutes talking about our business model and the unique nature of that model. And this slide, Slide #15, really shows the key to our model, which is optionality to reserve and resource growth without having to pay for that optionality as it comes. And I've got 2 examples shown on here. We've got PV, and we've got Wassa. These are both stream investments we made in 2015, and in both cases, reserves and resources today are higher than at the time of the original acquisition of these [ entrants ]. And that's in addition to production that's allowed us to recover about 74% of our initial investment of PV and over 100% of our initial investment of Wassa. And there are growth projects underway in both assets today as we speak. At PV, the operator, Barrick is looking -- those are completing an expansion to maintain gold production levels and potentially increase the mine life to the mid-2040s. At Wassa, a new resource has been discovered and work is underway to potentially add that to the mine life, and that could potentially add 11 years of additional mining to the existing reserve life. What's important is that in both of these 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 when we look at new business opportunities, exploration and production upside is very important, and that optionality is probably the most important part of our business model and what we're trying to provide to our shareholders. As we talk about efficiency, as you can see on this slide here, we have 31 employees. In 2021, we produced about $650 million of revenue, and our market cap today is over $8 billion. So on a per employee basis, we compare very well to any company in any sector, and it's a very efficient business. And that low employee share count or low employee count really means we have a low fixed to cash G&A, which further contributes to our efficiency. In 2021, our EBITDA margin was about 80%, and our cash G&A was about 4% of revenue. And if you look at our G&A, it's made up of mostly fixed costs is low and their fixed costs. So inflation should not be a significant risk to our margins. And in the third quarter of last year, we had a 77% EBITDA margin, before that, 78%. So it was a pretty consistent margin over time. And if you think about how we are insulated from cost inflation compared to the average gold producer on this slide here, on the left-hand side, you can see cost structure of Royal Gold versus the average gold producer. And if you look at the average gold producer, their costs are -- they're exposed to inflation through their cost structure and the input cost. So input costs like labor, energy, consumables and other things that they spend to keep their sites running are often -- those costs often increase when commodity prices increase. Whereas our G&A costs are mostly steady. So things like salaries, services, office rents typically don't move in the short term in a big way. So our margins are much less exposed to inflation pressures because -- simply because we're not directly exposed to the operating and capital costs of the assets where we invest. Now I'll talk a bit about our portfolio and the breadth and the depth and the organic potential -- organic growth potential within the portfolio. And Slide 20 here just shows a map of our portfolio on a global basis. You can see that we're weighted more towards lower risk and more mining-friendly jurisdictions. On the right-hand side of this map, our principal properties. They are the key assets in our portfolio that they provide the bulk of our revenue. But if you look across the portfolio and diversification, you can see that we do have a very well-diversified portfolio, which provides stability to the performance of the company. Our largest country exposures are to Canada, the Dominican Republic and the U.S.A. So all of those are pretty mining-friendly jurisdictions. And our revenue contribution, as I said at the outset, comes from 40 different producing assets. So this portfolio breadth compares very well to any mining company in the business, and that revenue diversification really reduces our exposure to single asset underperformance. And then finally, most of the underlying assets in our portfolio are predominantly precious metals in terms of the metals that they produce. So while it may not be that important today, thinking about time is where base metals fundamentals are weak, we don't have to worry about that so much because our portfolio is more driven towards or driven by precious metals assets. So our portfolio, it's like a mining companies in that it spans various stages of mining project development. We have 146 assets within the portfolio that are at various stages of either exploration, evaluation or development. And we would expect organic growth from within the portfolio as assets move from the left-hand side to the right-hand side of this slide from the earliest exploration through to revenue [indiscernible] the assets or production. A couple of good examples of this that are coming into production very shortly are King of the Hills and Bellevue Gold. Those are organic growth assets within our portfolio that have over the past several years moved from left to right, and we're expecting to see revenue growth from these assets in the very near term. And these are assets that are -- that have been in the portfolio for well over a decade, very little book value associated with them. So there will be very high-margin assets when they start producing for us. And to continue on this theme of organic growth, this slide shows some of the key catalysts that we see today from various assets within the portfolio. The assets in blue show where we have the potential for mine life extensions and production increases assets that are producing revenue for us today. So some of these are the largest assets in the portfolio. If you look at a little bit further down on the page and the gold, there's potential new revenue from brand new sources of revenue within the portfolio. I've already mentioned King of the Hills. They reported their first gold in June last year. We're expecting to see the first royalty payment to us in the December quarter of 2022. And then we expect Bellevue to come -- start producing revenue to us mid this year, followed by Cote, Manh Choh and then further along Mara Rosa and Back River, all of which are in various stages of construction today. It's really important to note that this growth is free to our shareholders. This is a free optionality. All of these are fully funded. We've made our investments, and we do not need to pay any more for exposure to these assets [indiscernible] while organic growth is very important, we're also always looking to add new assets to the portfolio through M&A or acquisitions. On this slide [indiscernible], we've deployed $1.2 billion in 6 transactions on 5 assets, all of which are designed to provide gold exposure on assets with upside potential in safe jurisdictions. We funded these assets or transactions using cash on hand and our revolving credit facility, and we haven't diluted our shareholders by issuing any equity to raise money to acquire these assets. I'll spend a couple of minutes on the newest of these, Cortez and Great Bear, and just to give you a sense of how they fit our strategy of strengthening and diversifying the portfolio. So on Slide 25 here, and this is a bit of an ugly slide -- apologies for the detail here, but we have done -- the 2 largest transactions that we've done are on the Cortez complex in Nevada. We acquired additional royalty interest, and we acquired those in early August last year, and we announced the second piece in -- sorry, in January, so just last week. And when we think about transactions generally and our strategy and criteria for adding things to the portfolio, I always think about the 3Ps. So people, place and project. And Cortez is one of those assets that checks all of those boxes very well. In terms of the project is a world-class gold producing complex. In terms of the place, it's in Nevada, U.S.A. It's very [indiscernible].

It looks like we're experiencing a few technical difficulties on Alistair's end. We will come back to you shortly with the rest of the presentation and the Q&A. In the meantime, please stay tuned. Thank you, everyone.

[indiscernible] Barrick expects that Cortez will produce about 1 million ounces in 2023, and that will rise to about 1.35 million ounces in 2027. So with these production levels and royalty rates, we expect Cortez to become 1 of the top 3 revenue producers in our portfolio. And with the production growth and reserve replacement history that Cortez has demonstrated over the past couple of decades, we think this is one of the most prospective gold mining areas anywhere in the world, and we expect these royalties to be big producers to our portfolio for a long time. Now on Slide 26, I'll just talk about Great Bear, which is the other recent transaction that we did. We have a 2% net smelter return royalty on this emerging project in Northern Ontario. And like Cortez, it fits to 3Ps. So it's operated by Kinross, who's a well-capitalized and experienced senior company. It's located near Red Lake, Ontario, Canada, a very mining-friendly jurisdiction. And it's also one of the most interesting gold projects has been discovered globally in the past several years. Kinross is expecting this asset to produce over 500,000 ounces a year for a couple of decades. Our royalty covers the entire 91 square kilometer land package, and its life of mine without step downs or caps. Now there's a unique feature in this royalty transaction that I just want to touch on. We did provide Kinross the option to acquire 25% the royalty at our cost. And this is really compensation for a unique arrangement that we have with Kinross. Normally, when you acquire a royalty from a third party, so that's a party other than the operator of the project, you don't normally have good access to the operator's information and technical information. But in this case, we did have an agreement with Kinross to review their nonpublic technical data, and that allowed us to validate some of their assumptions and really understand how they think about this project, which derisks this transaction for us. Kinross is working very hard to advance this project, and this royalty will add in long-term growth scale and optionality to our portfolio. I'll touch on in Slide 7 -- 27, sorry, 4 other additions to our portfolio, recent additions that should add some near-term revenue growth. Starting from the left, Khoemacau in Botswana. The project is delivering silver to us, and it's ramping up to full production as we speak. At the Red Chris mine in Northern British Columbia, Newcrest, is advancing studies to transition the mine from a small open pit to a large bulk tonnage underground operation by 2026 or so. At the NX Gold mine in Brazil, Ero Copper is continuing to do exploration work to fill the mill and achieve a sustained gold production level of 60,000 ounces a year. And the Cote project in Ontario, construction continues. And as of last report, it was about 64% complete, and targeted production -- commercial production is early in 2024. There's a common theme here with all of these transactions that I've just discussed. They're all precious metals to our account. 3 of the 4 on this slide are providing revenue to us today, and all of these provide exposure to production and exploration upside in the future. I'm going to spend a minute just talking about valuation. And on this slide here, Slide 29, you can see our P to NAV and P to cash flow multiples [ and how ] we're trading relative to history, which I think is pretty attractive. Royal Gold performed very well. Our stock price performed very well in 2022, and we outperformed all of our large cap peers in the gold sector, and that reflects strong company performance, I believe. However, I don't think the multiples necessarily are reflective of that performance. If you look at our cash flow multiple, we're trading at the bottom half of the peer group range. And I don't think that really reflects the quality of the cash flow that we have from this diverse base of high-quality assets. And I don't believe the market has yet given us credit for some of the recent transactions that we've done. The value of the long life assets and the optionality of those assets has not yet been recognized or reflected in the multiples. So with that, I've come to the end of the formal part of the presentation. I hopefully have demonstrated or been able to show our record is strong. Our business is performing very well. We guided high-quality assets to the portfolio. We do see some good organic growth potential from within the portfolio. Our valuation is attractive, and we have ample liquidity to continue growing the business. So we believe that Royal Gold is very well positioned today. And with that, I've come to the end of the formal part of the presentation. Karina, I'd be happy to turn it back to you for any questions.

Thank you, Alistair, for your presentation and also each of the viewers who stay tuned with us during the technical difficulties. And we'll now move on to the Q&A of this presentation. Your first question here -- if you were just wondering, are you making the slides available after this call?

This presentation is available on our website. It's available right now. So you're -- if you jump on to the landing page of the website, you'll see a little icon that says available presentation. So yes, you have access to these slides.

Thank you, Alistair. And with that, we'll move on to a few operations questions. Viewers wondering, with the recent additional royalty interests at Cortez, can you give us an overall picture of the exposure RGLD has there now.

Well, I hope I've done that with that slide that showed the different royalty rates and the different deposits from mines at Cortez complex. As I said, we expect Cortez to be 1 of the top 3 revenue contributors to our portfolio. So it will -- with these recent transactions, it certainly moves up the ranking and it becomes one of the most significant assets in our account. It's always been a principal property for us. It's where the company really got its start, but with these recent acquisitions, all we've done is really broaden our exposure to the Cortez complex. We just had -- initially, we had our exposure was focused on the pipeline crossroads open pits. And now we've acquired royalties that really cover the entire complex. So all of the optionality, all of the development projects, all of the exploration potential that Nevada Gold Mines has in the Cortez. We have some royalty exposure, too.

And the next question here is on the topic of your acquisition. Are you confident in your Great Bear acquisition considering a resource estimate hasn't been announced yet?

Yes, we are. We did a lot of due diligence by Great Bear. And as I mentioned during the presentation, one of the things that we were able to do, which is a very unusual and unique was, we got access to Kinross. We got access to their information on the project. So while there is no resource estimate in the public domain currently, we got comfort with the way they're thinking about the project and the work that has been done. And we're confident that we will see how -- it's going to take some time, but we're confident that we'll see our view validated in the marketplace. I believe Kinross will be coming out soon with their first resource estimate for the project. And I'll just caution you that it's likely not going to be a fulsome resource estimate for the entire project, it will likely be something that's got constraints that are relatively artificial, things like drill hole depths. And they'll be focusing on certain parts of the ore body. We believe that there is going to be pretty substantial potential across the entire land package. So while we may see in the short term a resource that doesn't necessarily satisfy everybody, we think, over time, Kinross will do a lot of work to expand that resource as they just need time to do that work, and that will come out over the next several years, we believe.

And the next question you have here is, can you comment on Royal Gold projects in Brazil? Has the recent civil unrest impacted any of the company's projects in the country?

We do not have -- so we really have 2 assets of significance in Brazil. We have the NX Gold stream, which is producing revenue today. We have the Mara Rosa development project, and we have a few other royalties and things like that, but they're earlier stage. We haven't seen anything yet that would cause us to be concerned about the continuing operation or progress being made on those projects. So it's not something that we've seen. And I can't comment on the current situation really and what a [ peaceful ] the country as a whole, but we have not experienced any issues yet.

And moving on to next question, are any of your partners developing a mine experiencing any significant delays?

No. I think one of the things that has been very good for our portfolio over the past couple of years really is that most of the assets in the portfolio have been performing very well, and we haven't seen any significant issues with respect to operating performance or development performance. So it's been a good period for us. Now within the portfolio of the size of ours, you always have certain assets that will outperform and others that will underperform. And mining is a risky business, and there's always something that seems to be technically challenging in certain assets at any point in time, but there's nothing that really sticks out as being something that we've had to worry about within our portfolio. So we're very pleased with that. And I think that helps explain why, in 2022, our share price performance was pretty good relative to peers.

Perfect. And one last operations question. Have your methods of due diligence and assessing projects changed at all over the past few years?

Broadly, no. But we are always -- we've always had a very fulsome due diligence approach, but we always try and learn from everything we look at will identify things and maybe learn things that we try and build into our next due diligence. So I'd say, our approach hasn't changed necessarily, but it's kind of a refinement of our best practices. So hopefully, our due diligence checklist goes longer. Hopefully, the issues that we highlight perhaps and something we're looking at today, we'll start looking at those in more detail on the next thing. So we try and just improve our practices over time. But I think broadly, we've always done a very good and fulsome job of due diligence.