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

Welcome to Colorado.

Maybe if we can kick it off, Bill, could you give us a quick update on the ACG Acquisition Company transaction?

Yes, Cosmos, I really wish I could. I wish I had more to say. We really don't have much to add past our August 21 press release. At that point, the parties were still in discussions. The parties are still in discussions, but no agreement has been able to materialize through those meetings, through those talks. The only thing I'd just like to add has nothing to do with the assets. The assets are quite good. We really -- we like the assets. If the transaction were to not proceed, it doesn't affect the guidance that we've given. We never really put any of that into our annual guidance. And with the passing of the August 18th date, there's actually no commitment at this point on our part.

Great. Thank you, Bill. And I want to ask this next question upfront because I think it's important. I think it's also very important to you as well, ESG. How do you think about ESG and your approach to ESG given your role as a passive investor in the mining space?

Yes. We spent a lot of time thinking about ESG. And the thing I'm always struck by is, ESG is an acronym that covers a certain number of risks. And if someone wants to sit down and talk about those particular risks, I'm more than happy to do it. But I go a little bit further, and I think about our enterprise risk management program. And I would say, the risks covered by ESG sort of filtered through about 3 of the 7 categories that we look at. And it's always interesting, people ask me about ESG. ESG, it doesn't sit off in a silo. It is part of the total risk management program, and I always encourage investors if you want to talk about ESG, fine, but we should talk about all the other risks because I think if we get geology wrong, you may end up losing money a lot faster if you don't do that. As a passive investor, what can we do? It's really about helping the operators. And I think Sean just said it very well. They may have community support goals. They may have emissions target goals. And we want to sit down and say, how do we help you achieve your goals? So that's really the relationship we try to establish with the operators. And the other thing we try to do is, we're in 4 different communities with our offices, and we try to be a contributing member of those communities.

Thank you, Bill. That's a great answer here. And I think that leads well into my next question. Broader scale, what's your vision or mission statement for Royal Gold?

Yes. So, our vision statement is actually very, very simple, and that is to be the gold standard in everything we do. And by that, I mean, as an investment for our shareholders for -- as an employer for our employees, as a business partner and as a member of our community. And it's really about being -- going to work every day and being the best. And when you think of the gold standard, I think that's what comes to mind. In terms of the mission statement, we very specifically wanted to point out that we're not a mining company. And so, our mission statement is all about providing capital in a creative in an innovative way, and if we can establish mutually beneficial relationships with the operators and listen to them. What do they want to accomplish? What are their issues? What are their problems? How do we solve those problems for them? Then I think we would have succeeded in pursuing that mission.

Great. Throughout the presentations today, we've talked about M&A. And we've seen mergers and more so acquisitions in the royalty space. How do you see Royal Gold positioned in terms of M&A? And in your opinion, is more consolidation needed?

Yes. Actually, I really like the position we're in. We are not at all reliant on doing M&A for the future growth of the company. And I think somebody else once said it. We're sort of in the Goldilocks position in the sense that we're small enough that the transactions that you will normally see in this industry will show up in our growth profile. It's not that hard to move the needle. At the same time, we have sufficient liquidity to compete with some of our bigger competitors. So, again, we don't feel like we need to do it. M&A requires 2 parties to be interested. And there are times when we look at our valuation, and we look at others and we say, hey, it might be a transaction to do here. It's going to be accretive for both of us. It takes 2 parties to be willing to do that. And what we tend to find is people say, "I don't like where I'm trading. Come talk to me when I'm trading at your multiple." And then it becomes much more difficult to get things done. Does M&A have to happen in our sector? Not really. I think it should happen at the lower end of the sector. But just going back history-wise, go back 15 years, you had International Royalty, you had Silverstone, you had Gold Wheaton. And what did the big 3 do? We bought them up. And so, what that did is I think that caused people to say, "Oh, let's get into the business, create a portfolio." Those companies did very well. And I think at the time we bought IRC, scale was important to us. I don't think scale is that important to any of the 3 bigger companies. So it's a very different dynamic. And I think it's a little bit harder for the 3 of us to look at some of the others and say, "Okay, that makes a lot of sense at a big premium."

I would agree, Bill. Maybe pause here for a moment. Any questions coming from the audience? If not, I'll continue. When I look at my research, my NAV for the company, the largest components include Mount Milligan, Cortez, Pablo Viejo, Andacollo and Khoemacau. Are there any noteworthy updates that we should be aware of? Maybe start off with Mount Milligan, just given the update yesterday that we received from Centerra?

Yes. I mean, one of the great things about Mount Milligan is probably the most important asset to Centerra. And one of the things we always like to be is have an interest in a mine that's important to the operator. So, talking about maximizing the Milligan resources is great. That's music to our ears. I think we've been pretty consistent in following Centerra's guidance for this year. It was going to be a slower first part of the year due to mine sequencing with a stronger second half of this year. As we try to do almost every quarter, say, just remember the way our contract works with Milligan, the gold is delivered and is sold upon final settlement of concentrate shipments, which is typically 6 months after the concentrate is shipped. So, if Centerra comes out and said, "Hey, we had a great fourth quarter." You may see that in our numbers about 6 months later in terms of deliveries and sales. Cortez, I want -- I certainly want to talk about, I don't know if you saw the press release and presentation last week, it seemed to be designed to focus on Barrick's copper exposure, but what project did they start with? Fourmile. And when I start looking at the highest grade undeveloped asset in the Americas, the potential for multiple [ Mikles ], potential to triple the resource, those are -- that, again, is music to our ears. And for those of you who followed the acquisition that we did last year, people said it was an aggressive valuation. And I agree, but that's the kind of exploration potential that our geologists saw, and it's always really nice to see that come forward in a very short period of time after we made any acquisition. Pueblo Viejo, at the same time, I think Mark has been very upfront about the teething issues that have gone on at the PV expansion. We're awaiting further updates. We did have a team there in June. I think the team came away positive with respect to the ultimate success of that expansion. But again, the way we look at it, okay, if it takes another quarter or another quarter or 2 to figure it out, it's a 20-year asset. So, what's a quarter here or a quarter there, still an important asset to us. Andacollo, not really much to say. Andacollo kind of chugs along in the background. They were affected by some unusual rainfall last year that affected deliveries. Again, that's another 6 months later transaction for us. And then, Khoemacau, the question we always get is, there is a sales process. We're not involved in the sales process. We knew it was being developed by private equity. We knew they were going to want to sell. Our contract certainly permits it, but there are certain standards of technical and financial and operating capability that really has to be met in any transaction like that. So, we'll be -- I think we'll be comfortable with whoever comes in and buys it.

Thanks, Bill. As you noticed, I did not mention Penasquito. Interesting fact, and some investors might not be aware, Penasquito is actually not 1 of your largest streams or royalties. But given the ongoing situation, can you give us an update?

Yes. I wouldn't want to discount Penasquito too much. I mean, we still highlight it as a principal property in our SEC filings and on our website. It's 7% of our revenue. I think 2 years ago, it did a little north of $50 million in revenue. Penasquito is a royalty contract. It is a royalty contract that we bought from a third party. It contains the typical information rights for a royalty contract, and that's very limited. We typically find out what happens at Penasquito when you do, when the press release comes out and announces it. So I don't have any update. I do look at what Newmont says about the asset. And you just think, okay, this is a mine that employs 5,000 people. And according to Newmont, invests or allocates $600 million in pays and wages, benefits, royalties, taxes, infrastructure, investments. And it's so important to stay to Zacatecas. I just find it hard to believe that this could go on that long.

Thanks, Bill. And then beyond the assets that we've already mentioned, any other ones that we should touch on? Any other ones that investors should be aware of?

I'd like to just notice what Ero Copper has done at Xavantina. That's a really good management team. It's a smaller company. That was a little like the Cortez transaction. That was a geology leads transaction for us. And our geologists went in there, we're really excited. And I think when we came out with the initial investment, people questioned the returns and immediately within, I'd say, 6 months or so, [Technical Difficulty] you see, and it was all about the underground and the block cave opportunity. And they came out with a pre-feasibility study about 2 months after we made the investment, and our valuation matched up very nicely with the PFS cash flow. So we felt very good about that. And now you have East Ridge, and now you have Far East Ridge. And they're running out of names for things. Far East Ridge, they think might be the fifth copper porphyry on the property. And again, that goes back to -- that's what our geologists thought was there when we did that. So we're really excited, especially in the hands of Newmont to see where that goes.

Great. And as we talk about growth, I know some of your peers presenting today, a lot of the other companies give out 5- to 10-year projections in terms of growth, Royal Gold doesn't. But through our discussion, I understand there's a lot of growth coming through. So, maybe to help us summarize or even help us with some kind of mosaic theory, could you maybe talk to us about some of the key growth drivers coming up that we can look forward to?

Yes. I mean, I think this time last year, we would have been really focused on Khoemacau and the ramp-up, and that was going to be the big piece of our growth. But at the same time, we were highlighting a number of smaller royalty assets that -- some of which have been sort of cooking away in the portfolio for quite some time. And I would say, over the next 2 to 3 years, they are going -- I think there will be multiple sources of growth from assets that if I talk to you about them individually, you kind of look at me and say, why are you telling me about this? But Manh Choh, which is the satellite to Fort Knox. You've got Mara Rosa, you've got Bellevue. King of the Hills is in ramp-up. Cote is closer to production and in a better financial position. Back River is in the hands of a bigger gold company right now. And even transactions like Genesis buying the Leonora assets, so we have a royalty on Gwalia, and we have a royalty on Ulysses. With the acquisition, you marry the 2 and now Ulysses may come into development a bit faster than it would have. So, you add up all these, which might be 3,000 GEOs and 4,000 GEOs, that's not that exciting. But when they aggregate to 20,000 to 25,000 GEOs and look backwards, that's 5% to 10% growth from small assets in our portfolio.

Thanks, Bill. It sounds like you're ready to give us a 5-year or 10-year projection. Is that what it sounds like? I'm kidding. So, maybe taking a step back here, as CEO, how do you balance between acquisitions, dividends and share buybacks?

Yes, capital allocation. I always get the question, but there's one thing you left out of there, and it's really important, that's debt repayment. And the way we like to finance ourselves is using that revolving credit facility, okay? We see an acquisition. Do we have enough cash on hand? No. Go to the revolving credit. At the end of June, we had $400 million outstanding under the revolving credit. And in the absence of good investment opportunities, we're just going to keep paying that down. What's the excess cash? We'll pay it down, pay it down. In the first 6 months, we paid down $175 million. And if you remember, we borrowed $200 million to do the second Cortez transaction. So, in the space of 6 months, we've almost fully repaid that advance. Sorry, go ahead.

Go for it.

No.

Great. That was going to be my next question to talk about your balance sheet, but I think we've checked that off. So maybe we can move on to next question here.

Let me come back to the capital. I thought you were going to go to the balance sheet question right away. So, capital allocation, beyond that, acquisitions is the best use of our cash. Cash sits on the balance sheet at 1x if we can find really good investments and they trade at the premium of 1.6, 1.7, whatever we're trading, that's the best use of capital. Dividends, we have been very consistent for 20-plus years in terms of increasing it on an annual basis. It's sort of core to who we are. And then your final point was buybacks. Buybacks are really hard to consider when you trade at a premium. And so, I think we've never -- I've been with the company for 17 years. I don't ever think we've ever sat there with a lazy balance sheet where we couldn't find the investments that we wanted to make. So, we've never really gotten very close to anything like special dividends or share buybacks.

And I think, Bill, I think that leads well to my next question here. And I often get this question, and I'm sure you get this as well. Some investors, a lot of investors push back on valuation multiples of royalties and streaming companies. As you mentioned, you do trade at a premium. What is your response?

Yes. I always say, the unsatisfying answer is that's the way it's been for decades. Go back to when Franco and Euro-Nevada were separate companies. I mean, we've always traded at very, very high multiples. Then you come down to the -- you have to go to the business. And what we try to say is, look, cost-free resource reserve upside, we earn most of our revenue from the top line of our operators. We're not exposed -- we're not directly exposed to operating expenses and capital expenses, and we don't have the liability of the operators. And I think that -- and you have a high-margin business. I think that all certainly defends the premium a little bit. I do think there's also an issue when you're talking about a NAV premium. I'm always interested in how it's calculated, and it's a little bit different than the way we think about our business, in the sense that you take on discount. It's like, what's PV5? You take the cash flows and it might just be the reserve ounces, maybe a little bit of the resource ounces and you do a discounted cash flow valuation. And what that valuation leaves out is the cost-free upside, the optionality in price, the optionality in the resources and reserves. So, maybe the issue isn't the premium itself, it's the calculation as well that might be behind it.

Yes. I guess, as analysts, we can do a better job. That wasn't my point. But I guess that leads into my last question here, Bill. How can we attract generalist investors into the sector or can we? Or are they needed?

That's the pot of gold. It really is. And when you say this sector, I assume you mean the royalty and the streaming.

Even broader as well.

Even broader. I mean, we spend almost all of our time marketing to U.S. generalists and introducing ourselves. And we're probably a couple of years into this program, and you really have to meet with people 2x, 3x, 4x, 5x, and they get the business, they understand it. You're always going to have the generalist to say, the ETF is enough for me. I don't need anything more esoteric than that. But the people who really dig into it and say, "Hey, that's a high-margin business. It's precious metal exposure. It pays a dividend." And the thing that we found is that when the sentiment in the U.S. turns positive to gold, you see it in our share price. And so, we just got, we always have to be in front of them, be top of mind. So when the sentiment shifts, they know where to go.

Great. Thanks, Bill. I think that's all the time we have today. Thanks, Bill, once again, for joining us.