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

A final presentation from the senior precious metals royalty and streaming companies is Royal Gold. And I'm pleased to have with me here from Royal Gold, President and CEO, Bill Heissenbuttel, Bill, welcome to Miami. Welcome to our panel. It's very nice to see you.

Nice to see you.

The podium is all yours.

Good morning, everyone. Thanks very much to Bank of America for the opportunity to participate in the conference. I will be making forward-looking statements, both here and during the Q&A session. They are subject to risks and uncertainties. Actual results may differ materially, and these risks are in our 10-K filings with the SEC. . I just -- I wanted to take a few minutes and just talk -- cover some introductory topics that's been a discussion of our portfolio, our approach to financing and our capital allocation process. I think firstly, with respect to the portfolio, I think it's underappreciated in the market. And I'll give you a few thoughts on the successes we've seen in our portfolio. I'm going to use some percentages. Those come from our 2023 numbers. Almost 60% of our revenue comes from the U.S., Canada and Australia. If you're interested in political risk, that's a very good percentage. 41% of our revenue generated by top-tier operators, Barrick, Newmont and Teck. It's actually one of the more diversified portfolios in our sector and that diversification has been improving. One of the things people talk about, our mine lives are longer than I think some people really expect with our -- with the Milligan cost support agreement that we just did. We could see our largest asset extend its life into the 2040s, depending on the study that's completed next year. You take Pueblo Viejo, Cortez, Khoemacau, Cote, Red Chris, all expected to have mine lives of at least 2 decades, and Andacollo, Penasquito, Rainy River, Bellevue, King of the Hills have mine lives into the 2030s. And our portfolio also has a very long history of reserve replacement. So I did the valuations on a number of the assets in our portfolio. And I had -- I have Wharf, [indiscernible], Williams having mine lives ending in 2012, '13 and '14. They all paid revenue last year. Beginning of '23, we thought Robinson was going to have 3 more years of mine life, now has a mine life to 2036. When we originally did Wassa, we had Wassa mined out in 2023 that has a mine life until 2037. And a few of these assets that I've mentioned are actually underground mines. They have 5 to 7 years of mine life at any one time, but they go on for decades. Another thing to note with the exception of Andacollo, I think all of our key producing assets are important in the context of the portfolio of the operators. Milligan is important to Centerra, Pueblo Viejo, Cortez to Barrick and Newmont, Penasquito to Newmont and now Khoemacau to MMG. We've invested $2.6 billion in aggregate at the newer side of our business, the Streaming business, and we've received $2.4 billion back. Milligan and Wassa are now in the return phase. And PV, Rainy River and Andacollo are about 85% of our investment has been returned. And our royalty returns in that portfolio are even more impressive. Turning from the portfolio to financing. I just want to draw your attention to our use of debt and cash from operations and not equity. If you read our press release last week, we've taken our debt position from $575 million to $75 million in the last 18 months. And those large acquisitions that we did in 2022 at Cortez and Great Bear. They're almost fully repaid without 1 share of equity being issued to accomplish the transactions. I haven't done an equity issue since 2012 and our 66 million shares outstanding is by far the lowest in the GDX. So we think our model is well suited to debt finance. We have high margins. We have no sustaining capital. And we believe -- really is the best way to finance our business. And then finally, on capital allocation. We believe that the best use of our cash is through the acquisition of new investments. Cash trades at 1x NAV. The new investments tend to trade at a premium today. We next look to reduce and repay debt outstanding. And finally, we look to increase capital returns to our shareholders. I think you may know, we've paid an annually increasing dividend probably longer than almost all of our competitors have been around, and we are the only precious metals company in the S&P High Yield Dividend Aristocrats Index. So thanks for listening to my opening comments and looking forward to the Q&A session.

That was actually a resounding endorsement, I think, for the entire royalty streaming model. You highlighted a lot of really strong points there. And what I wanted to do is just ask you to dig down a little bit more on the differentiators of Royal Gold versus your peers. I mean, obviously, your senior peers but also thinking about some of the smaller peers as well. And it would be helpful if maybe you could address the model versus equity or ETFs and other sort of gold investments, but in particular, versus peers, from a more strategic point of view and a deal-making point of view as well.

Yes. So I touched on the dividends. I touched on the share count. I think those are huge differentiators. It speaks to, I think, a level of consistency both in terms of payout ratio, but also we're really stingy with our shares. We just don't like issuing equity. I think the second thing to know, we are a U.S. company. We're the only really U.S.-based royalty company. And what that means is, when the U.S. generalist, which is a huge market, find an interest in gold and you're measured against U.S. equity indices, we're in over 200 equity indices in the U.S. You're measured against those, you kind of have 2 choices, it's Newmont and it's us. And I think that's a real advantage. And then finally, I think the other thing is, we're kind of alone in the middle. We've got 2 much bigger peers, and we have a series of smaller peers. But what we like about where we sit in the middle is, we're small enough that the normal sized transaction in the streaming market, you're going to see in our results. If we do a $200 billion transaction, we can look out 2 or 3 years and say, okay, that's going to -- that is going to represent a meaningful percentage, something you're going to see in our results. But at the same time, we have enough liquidity to compete with the bigger companies. So I kind of like the position. I think our bigger competitors, I think they have a really tough job. How do you grow those vehicles because they've been so successful. And then I look at the smaller companies, and I see a lot of competition -- and it's almost the same thing, how do you grow, you don't have the same cost of capital that we do. So it kind of like we're kind of on an island in the middle and we kind of like to be in there.

I wanted to also ask about geopolitical or geographic exposure as well. Because I mean, one thing that's remarkable or notable about your portfolio versus [ Viago ] and Franco, is you have invested a larger amount into Africa. What is it that allows you to get comfortable with African exposure? Is it deal structure? Is it sizing? Is it the quality of the asset or all the above and something else?

Well, deal structure is not going to save you from political risk. I don't believe. And if you think about it, we're not that invested in Africa. So we're in Ghana, and we're in Botswana, really. Two countries that do have a mining culture or mining history, which is something when we're looking at jurisdictional risk, those are things we really pay attention to. And in both of those countries, you have other people who've had exposure. So before we go into Ghana, we talk to people who have operated there, people who have invested there, what do we look for. In the exact same way in Botswana, we talked to the fellow who ran Debswana. What do we need to be aware of? So it's not a comfort level with the continent as a whole, it is selective comfort in certain countries. .

Yes. That makes perfect sense. So I ask both of your peers this question, and I'm going to ask you. View on the gold price, view on the silver price, thoughts on how we got to where we are at all-time highs in a very short period of time.

Yes, I'll probably focus on gold more than silver here. I am so surprised by the gold price. I think when we started the year, the number -- the consensus number of Fed rate cuts was 6. And if you had told me we were 5 months into this, and we hadn't seen 1, and inflation was still an issue. I would have been bearish on gold. At the same time, if you had told me while that's going on, the ETFs are going to be having outflows, consistent outflows, I would have been even more bearish about gold. Now central bank buying and retail buying in China, in the U.S., I don't know there was an article in the economist, one of the things I noted about demand was Costco. And you think this is a joke. I mean I can't be driving the gold price. But Costco is buying healthy amount of gold that the Chinese central bank is buying. So it does impact. And I think the other thing to just notice the central banks that are buying are also the ones that are more likely to get offside with the U.S. government. And they look at what is happening -- potentially happening to the Russian reserves and they're saying, "I don't want to put up with that. Where am I going to put money if we don't want our reserves confiscated potentially. And I think that's one of the reasons a lot of these central banks have been going into gold. And I think longer term, the bigger issue is the U.S. fiscal situation. There is absolutely no political will to solve any of the problems that we have, and that will eventually result in the crisis. I don't know what that crisis looks like, but I think that's good for gold.

I wanted to ask your thoughts on concentration by asset, particularly in light of what happened with Cobre Panama. What are your thoughts, particularly in light of 1 asset you have in your portfolio that's a fairly significant piece overall?

Yes. If you look, Milligan was probably 30-plus percent of our NAV a few years ago, and I don't know what the consensus is, but I think some people have it less than 10. So we have done a very good job of bringing that down. Now I think it's extremely important. Actually, if I were to put up our strategic business plan on the on the wall here, the first thing you'd see is diversification. And it's not just getting that 1 asset down, I think our top 5 assets are 70% of our revenue. I would just every day come in, try to find a way to diversify that portfolio because Franco have seen it, we've seen it when your biggest asset has an issue, it's time consuming within the company, and it obviously shows up in your share price. .

Like we've discussed this before, but it keeps coming up with investors, so I want to revisit it, which is just the idea of long-term guidance. And I definitely appreciate that not being the operator of any of your portfolio assets. It is very challenging to provide convincing sort of 5-year guidance. But both your peers do and investors use it to hang their hat on in terms of valuation. Is it something -- at least from that point of view that it might actually help your valuation that you consider?

We have considered it. And in fact, it's not just our bigger peers. I think we're probably the only one in the sector that doesn't give the longer-term guidance. And as you said, my position has always been we don't control these properties. We get mine plans from year-to-year and the difference in production from year-to-year that these operators probably saw 6 months ago, suddenly shows up. I can go back in our strategic business planning, look at life of mine models, and you see these vast differences. And I just look at it and say, why would anybody in the market look to us to tell them what Penasquito, Pueblo Viejo are going to do in 3 to 5 years. We just -- we don't know, we don't operate it. We don't have all the inside data to do that. And I would just -- I just go back -- it's kind of funny you, go back and look at some of the longer-term guidance that some companies have given. Go back to 2018, '19 and look at the period at the end of 2023. How many people came close to what they said was going to happen? And what you're going to find? I think, is a very large discrepancy between what was projected and valid reasons for the projection, but it didn't happen. And I have people say, well, just give it, no one is going to hold you to it. Why do that? I want it to be a legitimate forecast. And since we can't really do that, I really hesitate. Final point, we've had some very large shareholders come to us and say, we pay no attention to long-term guidance, and they don't say, I wouldn't do it if I were you, they say, "Don't do it. And that -- these are our largest shareholders who've been with us for years. And I say, "Okay, we'll just keep doing what we're doing.

Yes. That is totally fair. In the end, you're ultimately working for your shareholders. So that's a good perspective, and I appreciate you sharing it as always. Do we maybe touch on the deal pipeline. I wanted to get a sense of what you're seeing in terms of deal size, the use of proceeds. Meaning, is the idea to put it towards balance sheet repair or project financing or otherwise and then sort of geographic exposure? So traditional sort of angle of [ accent ] in countries versus LatAm or Africa.

Yes. So size wise, we've been very consistent. It's a $100 million to $300 million market. There are transactions that are lower than 100%. And I think at our Investor Day last month, we said the average transaction since the beginning of streaming is about $100 million. So when people look back to 2015, and they say, well, you're not seeing the very large transactions, you're not seeing -- well, that's not the market, that's the anomaly. And that's when I come back to our size and how it's good to be the size that we are because most of the transactions are in a range that you'll see in our financial results. That being said, I did catch some of Randy's comments, and we are seeing a couple of larger transactions, which is really great to see. Those are really good things to look at. Use of proceeds, anything that needs capital, stream can finance. Now traditionally, it's project development. It's always going to be project development, first and foremost. Balance sheet restructurings, you do see those tend to be cyclical. And then there's M&A, which I think is the great untapped market. We always talk about it, but we really see it, where streams are used to do M&A, but we're seeing opportunities across all of those different areas. And then geography, I think streaming will always be sort of an Americas-focused product. And when I say America focused, I mean, we're the operator space, not necessarily where the project is based. I just think mining companies in North America have gotten their minds around streaming as a source of capital better than other areas of the world. I talked to Australian mining companies all the time, they just don't like what we do. And they have a source of capital in the bank market and the equity markets that have supported them for years. So I understand it. So I think most opportunities will be in the Americas mainly because that's where the operators are based.

And then on commodity exposure like within your current portfolio versus where you might see it going forward. You guys came close to diversifying a bit more into nickel and copper with the transaction last year. Perhaps that transaction may come back. But I mean, for now, it seemed to indicate a desire at least an interest in getting more exposure to battery metals. Is that something that's a strategic decision for Royal Gold? Or is it just you're metal-agnostic and it's about the quality of the asset?

We're not metal agnostic. We are focused on precious metals, gold, in particular. The part of the Serrote and Santa Rita transaction that was based on base metals was done for one single reason. We were -- they needed more money and we were running out of precious metals. So it was something we had to do to get the investment to where the acquirer really wanted it to be. So I get the question all the time. It's not that we're against base metals or other markets that we can understand. It's just that what we're offering shareholders is precious metals based exposure. And I don't think anybody would want to buy us to have a diversified do I go after copper or lead or zinc or it's just -- they can do that elsewhere. They can find other sources of exposure. We're about precious metals. We will look at base metals, but it's not -- it's -- when it comes in the door, and we really like the opportunity, then we might do it on a one-off basis, but it's not part of the strategy.