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

Hello, and good afternoon, ladies and gentlemen. Welcome to today's Virtual Non-Deal Roadshow. My name is Julia Perron, a virtual event moderator here at Renmark Financial Communications. On behalf of our team, we'd like to thank everyone in New York and surrounding areas for joining us today for the presentation of Royal Gold, Inc., trading on the NASDAQ under the ticker symbol RGLD. Presenting today is Alistair Baker, Vice President, Investor Relations and Business Development. The presentation will last approximately 20 to 25 minutes and will be followed by a formal question-and-answer session for which you can participate in using the chat box on the top right-hand corner of your screen. And with that, I will hand it over to Alistair.

Thank you, Julia, and thanks for the opportunity to present to you today. It's certainly a very interesting time for golds and with a strong backdrop to us as an interesting time for me to tell you about Royal Gold. So I will be making forward-looking statements through the course of this presentation. There are risks and uncertainties that could cause actual results to differ materially from these statements. All of these risks and uncertainties are discussed in our most recent Form 10-K filed with the SEC. So during the course of this presentation, I'll give you 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 the presentation will focus on how we provide this. So I'll explain during the presentation, our low-risk leverage to gold, our long history of executing a very simple and clear business strategy, our unique business model, organic growth within the portfolio and the potential to provide more from a diversified portfolio. And then lastly, I'll end up with some comments on valuation, which I think is pretty attractive relative to where we have traded in the recent years. So this slide here, Slide 4 shows Royal Gold at a high level. We are a high-margin business that generates consistent cash flows from precious metals. We've been in the business since mid-1980's. And we've been on the NASDAQ for over 41 years, so a very long track record. In 2023, our stream segment contributed about 69% of our revenue, our royalty segment about 31%. Royalties tend to be a little higher margin than stream, but both provide the same thing to our investors, which is an exposure to the top line production for mining assets. In 2023, we repaid about $325 million of debt, and we increased our dividend during the year to -- by about 7% over the previous year's level, which is our 23rd consecutive increase to the dividend. We released our Q1 results in early May, just a few weeks ago. We had very solid financials. We had $138 million of cash flow, $47 million of earnings, and we maintained our very high EBITDA margin of about 79%. 75% of our revenue came from gold in the quarter and over half, about 53% came from Australia, Canada and the U.S. So very attractive and safe jurisdictions. Slide 5 shows how we compare to our peers in the sector. And we sit in a very interesting position. We're big enough to compete for the largest transactions, but we have a significant cash flow, and we have access to low-cost capital. But we also have a size position that makes it very easy or easier for us to show growth. In a small transaction for Royal Gold can actually meaningfully add value or a small transaction to our largest competitors is much harder for that position -- actually show them results of that transaction. So I want you to keep that in mind as we talk about our portfolio today and some of the growth opportunities we see ahead of ourselves. Now during this section, I'm going to talk about our low risk leverage to gold. And this slide shows how we're positioned relative to other investments that you can make in the gold sector. Our model provides exposure to precious metals without many of the risks that come with investing in operating companies, and we provide exposure to gold and optionality while reducing our downside risk through holding universe portfolio that does not have direct exposure to operating accountable costs. That's very important when you consider inflation and what that does to margin erosion. There are other ways you can invest in gold, and you can be conservative, and you can own the physical metal, but an ounce will always be an ounce, and you'll never get a dividend from that ounce. You can be more aggressive and you can invest in mining companies or exploration companies, but with those investments, you're also getting direct exposure to operating costs, capital costs, which kind of increase quickly over time as we've seen. Slide 8 shows our historical performance going back several years and why we think we're a good alternative for those investors who want conservative exposure to precious metals. On the left-hand side, you can see our beta to gold of about 1.9%, which is very strong. On the right-hand side, you can see our share price performance over the long term. And over the long term, we have beaten the gold price, beaten the GDX index, and moving around since the index is formed in 2006. So long record of performance. We've also performed very well against general market [ indices ] over those periods -- over that period. Now I'll talk a bit about our history of execution. And as I said, we have a long and consistent record of disciplined performance. And this slide shows our 20-year history of capital allocation and growth, which is really driven by providing accretive growth through our shareholders. Since 2000, you can see that we've had significant revenue and cash flow growth. There are 3 aspects of this growth that are really important to note. The first is our business is high margin and it's scalable. So revenue growth far exceeds the increase in G&A expense. The second is our revenue growth is not solely dependent on metal prices. We've added volume to our portfolio, which also allows us to increase our revenue. So we're not just relying on metal prices to [indiscernible] on site. And then thirdly, we have financed our growth internally, and that's without a significant increase in our share count. We are an original member of the GDX Index, and we have the lowest share count in that index. We want to avoid shareholder dilution if we can. And if we can fund our business with internal resources that results from per share growth to our shareholders. Slide 11 shows a snapshot of our liquidity. We have to be patient in our business, and we need to maintain a strong balance sheet and good access to liquidity to be able to easily finance opportunities as they come to us. And our approach to funding growth is to use cash on hand, operating cash flow and our revolving credit facility first, and we look to equity as a least favored or least preferred way to fund our growth. The waterfall on the left-hand side of the page shows you how we allocate our cash flow in 2023. We use our operating cash flow to repay debt, and we also paid our dividend. We ended last quarter with total liquidity of about $966 million when you include our working capital. So we have lots of liquidity for the business environment -- in the business development environment we find ourselves in today. Slide 12 shows how we use our credit facility. And we have a $1 billion revolving credit facility that provides cheap and flexible financing to us. We have 8 very top-tier banks in the resource sector provide our facility to us. And we use our credit facility like a credit card. We draw on the facility when we need to raise money for a transaction, and then we'll pay that balance back from cash flow afterwards. 2022 was a very big year for us with acquisitions. We borrowed that year to acquire long-life assets at Cortez and Great Bear. These are royalties that we expect will produce for decades. And we repaid debt very quickly. Since the end of 2022, we've paid $500 million down, that's in 5 quarters. At the end of May, we had $75 million outstanding on our revolving credit facility, which we expect to repay by early in the third quarter, assuming current metal prices and new other business development opportunities arise before then. That rapid paydown really shows you the cash generation potential of our portfolio. And while there is an interest cost in us drawing on this credit facility, we think that a short-term payment of interest over several quarters is well worth it if you could add multi-decade assets to the portfolio. Return of capital is also a key strategic objective for us. And it's one of the attributes that makes us unique amongst other gold investments, especially gold and equity so you can invest in today. We paid a growing and sustainable dividend since 2000. We've increased the dividend every year despite volatility in the gold price. We paid out over $900 million of dividends since we first started paying a dividend and we're the only company in the GDX Index 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 that sets us apart from every other company in the gold equity space. Due diligence for us is a core competency and something that we were very proud of our core competency in this area. Good due diligence is very important to make sure that we add the right assets to our portfolio, and we avoid the assets that won't make it. We're always looking at opportunities. We're always very busy. Not all opportunities make it through our due diligence process through completion. Our process is very extensive and we're very disciplined in the way that we deploy our capital. So if we see risks that we don't like and we don't think the counterparties and the operators can address those risks in a satisfactory way, we will walk away from transactions. We've done that many times. We don't feel the pressure to do transactions. We're not compensated to do transactions. And if we can't find the right opportunities, we're happy to collect our revenue, build our balance sheet and wait for the right opportunity. History has shown that opportunities will always present themselves. 2023 is a good case in point -- on this point. We were very busy in 2022. We added a lot. But 2023 we didn't quite see the right opportunities for us. So we used the time to pay down our debt and rebuild our liquidity because we know that opportunities will come. I'll talk for a moment on ESG, and our business model does not allow us to provide where we don't have direct operating control of the interest that we invest in. But ESG has always been a part of our business. It's very important. We invest for the long term. So ensuring the sustainability of those investments, is very important in our due diligence of those investments. We will often build language or we always try to build language into our transactions to ensure that operations are managed to the highest possible standards and where it makes sense. We're always looking for opportunities to help our counterparties with any programs that they may have in place around the interest or investments that we make. On this slide, I've shown MSCI and Sustainalytics ratings. And these are two influential ratings providers in our sector. We are top rated by Sustainalytics, and we're AA rated by MSCI. And we've worked a lot over the past several years to improve our transparency when it comes to ESG and sustainability and our practices and processes. And we're very pleased to see that we've seen material improvements in our ratings over the last several years. I'm going to talk a bit in the next section about our business model, which is pretty unique. And the key to our business model is optionality, and that's optionality to reserve and resource growth at the assets where we invest in without having to pay for that, without having to invest any further and get exposure to that growth. There are 2 examples that I've got shown on this slide. PV and Wassa were both investments we made in 2015. And in both cases, total investment -- or sorry, total reserves or resources today are higher than at the time that we made those investments. And that's in addition to the production that's provided cash flow to us that's allowed us to recover over 85% of our investment in PV and over 140% of our investment at Wassa. And there are growth projects underway at both assets. The PV that recently completed an expansion of the plant to allow sustained gold production levels of 800,000 ounces a year, but they're also working on extending the mine life to the mid-2040s by adding a new tailings facility. At Wassa, there's a resource that's been outlined that could add an additional 11 years of mine life to the existing reserve life. And neither of these cases do we have to pay for this upside. We don't have to fund any capital. We don't have to invest any further. That exposure is what we get this growth that we don't have to pay for. And that exploration and upside is very important when we look at new opportunities. And it's probably the most important feature of our business model. Now another feature of our business model is its efficiency. And we have 30 employees in the company. Last year, we produced over $600 million of revenue. And today, our market cap is over $8 billion. So on a per employee basis, we compare very well to any other company anywhere. And our low employee count means that we have a low fixed cash G&A, which further contributes to efficiency. Our EBITDA margin in 2023 was about 79%, and our cash G&A was about 5% of revenue. Our G&A is low and is mostly made up of fixed cost. So inflation should not be a significant risk to our margins. You can see this clearly on Slide 20, where I've got our cost structure versus the cost structure of the average industry producer. And we are insulated from cost inflation relative the average gold producer. Producers are exposed to inflation and input costs. So the costs that they have to incur to produce. So things like labor, energy, consumables and other site costs often increase when commodity prices increase. Whereas our G&A costs are mostly steady. But things like salaries, services, office rents, they're not typically subject to short-term increases. So our margins are much less exposed to inflation pressures simply because we're not directly exposed to operating and capital costs. I'm going to talk in the next section about our portfolio, which is broad and deep and has lots of organic growth potential. This map shows our global portfolio. And you can see based on where we are, it's weighted -- our assets are weighted towards lower risk and more mining-friendly jurisdictions. Our principal properties are called out on the right-hand side, and those are the larger portfolio assets that provide the bulk of our revenue. Slide 23 here shows our exposure to established mining caps around the world. And about 50% of our revenue last year came from assets in Nevada, British Columbia and Western Australia. These are all historically -- their historic mining areas with excellent prospectivity and supportive regulatory environments. We have significant exposure to these and other areas around the world where you have these clusters. And we're very pleased to see much of earlier-stage assets in these regions that potentially could grow as the years go by. Now our portfolio is well diversified, as I've mentioned before, and that provides stability to us. If you look at our counterparties, our operators, they are generally best-in-class with large, well-capitalized and experienced companies. If you look at the assets where we receive our revenue, we have 37 assets producing today. That portfolio breadth compares very well to any other mining company in the business. Our underlying assets are about 50% gold assets and then about 50% come from gold copper or base metal assets. So good diversity of revenue there. And then our largest country exposures are to Canada on a revenue basis or to Canada, the U.S.A., the Dominican Republic and Chile. So all of those are mining-friendly jurisdictions. So this revenue diversification, it does reduce our exposure to single asset or operator or jurisdictional risks. Now our portfolio spans the various stages of mining project development. We have 141 assets today that are not producing in various stages of either exploration, evaluation or development. We would expect there to be some organic growth from within the portfolio as assets advance through that pipeline to production. Recent examples of where we've seen this have been the King of the Hills and Bellevue, which are 2 relatively new assets in Australia. We've had royalties on these projects for well over a decade, and it just started to contribute revenue after new management teams have come in and read new life into these projects. Now to continue on the theme of organic growth. The slide shows some of the catalysts that we see in the portfolio today from various assets. In the blue, the light blue arrow, as you can see, there's a potential for mine life extensions and production increases at several assets that are producing today. We also have some other newer assets, which we have either received very recently production revenue or we'll expect to see some of those are shown in the gold arrows. We've already seen new revenue. Our first gold has been produced at Mara Rosa in Brazil and the Cote project in Canada. The Goldrush mine in Nevada is just officially opened. Barrick is expecting 130,000 ounces this year from Goldrush, jumping up to about 400,000 ounces in 2028. We're expecting to see the first gold from Mancha in Alaska in the third quarter of this year. And then if you look a little further afield, Back River, we're expecting that to be in production next year and then the Great Bear project towards the end of this decade. All of the gold shown on this page is free. It's free optionality to our shareholders. It is all funded -- it's all fully funded, and we don't need to pay any further for this growth. Now as we think about growth, we're not just relying on organic growth to grow the portfolio. We're always looking to add new assets to the portfolio. And this slide summarizes what we've done over the past 3 years. We deployed about $1.2 billion in acquisitions of 6 transactions on 5 assets. And all of these provide gold exposure to assets with good upside, good geological upside in safe jurisdictions. We funded all of these transactions using cash on hand and our revolving credit facility. And we haven't diluted our shareholders by issuing any equity to get exposure to these assets. And this slide just shows a summary of what we've done and what we acquired. At Cortez and Nevada, we've always owned royalty interest at Cortez. It was the birthplace of Royal Gold, but we expanded our royalty position significantly in 2022 to give us exposure to the entire Cortez complex. This is a world-class gold complex in a mining-friendly jurisdiction, is operated by Barrick and Newmont, 2 of the biggest producers in the sector. And with the new Goldrush mine operating that -- it just shows the potential with additional potential to come from the formal project and the Robertson project as well, which Nevada Gold Mines and Barrick are both advancing. At the Red Chris mine in British Columbia, Newmont is continuing to advance the transition of this mine from an open pit to a large bulk tonnage operation. Current expected mine life is over 36 years, but that does not include additional resources that have been found more recently as a result of exploration success. The Xavantina mine in Brazil, Ero Copper has outlined plans to sustain gold production at around 60,000 ounces a year. So tremendous growth at that asset. At the Cote project in Ontario, they poured their first gold in March. They're expecting to get commercial production, reach that milestone in the third quarter of this year. And then finally, the Great Bear project in Ontario, Kinross continues to do exploration. They've added -- now it stands at about 6 million ounces of resources. We expect to add to that as they continue doing deeper exploration and they're targeting first production towards the end of this decade, as I said. Now there's one theme that's consistent with all of these assets and these transactions. All our precious metals and all provide further exposure to production and exploration upside. So we're very pleased to have added these to the portfolio. And again, without adding any shares to dilute shareholder interests. Now I'm going to talk finally about valuation and where we stand today. And I think if you look back over the long term relative to our peers, we are trading at pretty historically attractive multiples. Our business is performing very well. We've got very strong cash flow, very disciplined in the way that we allocate our capital, and we have good organic growth within the portfolio. But I think if you look at multiples, especially on the cash flow multiple, we seem to be lagging. And we are trading at the bottom half of our peer group. I personally don't believe the market recognizes the cash flow and the quality of the cash flow that we're sourcing from this diversified set of high-quality assets that I just walked through. It feels to me like the value of the long life assets and the optionality is not being recognized by the market, right? There's something else at play as well. And I think in the current market, gold equities generally are not reflecting a stronger gold price outlook. And so I don't think the market is pricing in or at least incorporating in our valuation the current gold price. So with that, I guess I'll come to the end of the formal part of the presentation. Hopefully, I've given you a sense of our record, how our business is performing, the assets in the portfolio, the organic growth we see, our valuation. And finally, where we're positioned with our strong balance sheet and liquidity. So with that, Julia, I'd be happy to turn it back to you and take any questions that may come through.

Excellent. Thank you, Alistair, for the presentation. As mentioned, we will now start the Q&A for today's presentation. Your first question for today, the viewer is asking, what are the key differentiators between the principle and producing mines in your portfolio?

It's really size. When we look at our portfolio, we look at the largest assets with the longest duration and the highest value, and we tend to call those our principal assets are the ones that we provide more frequent and more detailed disclosure on. As I said, we do have a lot of assets to intrigue revenue, but there's a small handful that provide an overweight proportion of revenue. And those are the principal properties. It doesn't mean that the smaller assets in the portfolio are less important. It just means that the revenue contribution is lower. And so we don't give as much disclosure on those assets.

Excellent. Thank you for clarifying. Your next question, a viewer is asking, would the gold price trajectory continuing, does management see an increase to more competition for deals coming near term?

We always see competition. We see competition regardless of the gold price. I think what the higher gold price does is it brings more projects forward. Projects that aren't economic at lower prices suddenly look very, very good at higher prices. And so what it actually does is it means that there's more for us to look at because there are more -- simply more projects available. So that's a good thing. Competition though is something that's been a feature of our business since the very beginning. I don't think it necessarily changes that. We don't see a lot of new entrants of scale in our sector, and we've really -- we've competed against the same large companies for quite a long time. So that hasn't really changed as a result of metal prices. Not to say that there aren't going to be new entrants that come in to our sector. But I think those new entrants, they generally struggled. They struggle with being able to compete against those of us who have been doing this for a long time. So I don't think the higher gold price will necessarily result in higher competition.

Great. Thank you for your insight. Moving on to your next question. Our equity and debt financing becoming more competitive to royalty deals as metal prices rise?

I think so. I think -- well, I think certainly, equity is becoming more competitive. It's -- debt is expensive. Now with higher interest rates, that is more expensive. I don't think people are looking to fund projects with debt as much as perhaps they were in the past simply because it is more expensive. Equity though, until very recently, we haven't seen a lot of equity coming into the marketplace. And so that has not been a competitor for us. In the last couple of weeks, we've seen the equity markets start to reopen. And so that does create a little bit of competition. But as we have looked over the past several years, at opportunities, we haven't seen too much competition from equity or debt. So the problem is that we're often asked to be whole -- provide all of those parts of the capital structure for transactions. So if we look at doing a stream, for example, sometimes companies will say, "Well, that's great, but we'd like some equity and would like some debt. Can you provide everything?" And while we're always okay. We're flexible and thinking about providing other sources of capital, it's not our core business to be offering equity and debt, we would always prefer to be offering the bulk of our -- whatever the transaction is the bulk of the value in streams or royalties. So to see equity and debt alongside us from other sources is a good development. We do like to see that because we don't want to be the sole source provider of capital to the sector.

Great. Thank you, Alistair. Your next question, a viewer is asking, when could our gold be completely debt-free?

Well, we expect that we'll repay our revolving credit facility balance by sometime early in the third quarter, so in the next several months. And of course, the caveat there is metal prices of the states, it's roughly where they are. And we're not extend -- we don't spend a lot of money on a big business development transactions. So all else equal, we would expect to have that paid down fairly quickly.

Excellent. Thank you for your answer. Your next question, a viewer commented, how do you balance your lower leverage and hence increased firepower to invest in new deals versus ideally wanting to invest countercyclically when the euphoria around the gold price is not as exuberant as it is right now?

So we have to invest when opportunities or initiatives we have to invest it. We have to look at things when they're available. So things become available to us at high points of the cycle and low points in the cycle. And if they're available, we have to look at them. Now when we look at acquiring or when we do enter into commercial discussions with counterparties, we will often be conservative when it comes to looking at metal prices. So we don't want to be investing at the very top of the market. We will look at -- we'll do a lot of stress testing and valuations at lower metal prices, if there's been a real run up, a real quick run-up in metal prices. So we can't really control what opportunities come to us. That is a feature of the marketplace. The opportunities come when people need capital and they decide when they need capital and they come to us. That could be at any point in the cycle. We tend to be very wary about cash cost positions for assets. So if somebody comes to us today and they offer something that's got a very high cost, it may be an asset that works well at $2,300 gold price. But if the all-in sustaining cost is $2,000 to pick a number, we're going to be a lot more careful about that opportunity than we would if the opportunity had a much lower cash cost position. Simply because if the gold prices run up very quickly, you can also go the other way quickly. We don't want to be caught where we're investing in assets that could end up being threatened by a lower gold price environment. So all that to say, we can't choose what comes to us, the timing of why it comes, but we can be careful how we look at opportunities and invest according to what we think are conservative and sustainable metrics.

Excellent. Thank you for elaborating on that. Your next question, are you focused on growth or value?

I would say we're more focused on value, but a part of value is also growth. We get higher multiples in the marketplace and we show that you do have growth. So that goes to value. I would say, though, that we don't have ambitions to be the first streaming company that produces 1 million ounces, that is of no interest to us. We want to be the highest value company. So we're very focused on value. And as I said in our -- in the presentation, certainly around per share metrics. So if we can show growth on a per share basis, we can show value on a per share basis, that's more what we're interested in. We're not interested in being the largest company in our sector in terms of production. That makes no sense. We'd rather invest in high-quality assets that provide a return to our shareholders. And if we stay at the size, that's fine. I mean as I said at the beginning, we're in a very interesting position where we can add smaller assets to the portfolio. If those are small and high margin, they're small and high return, like Xavantina, for example, those are great transactions for us to do. So we're very happy to do those kinds of transactions and just add value to our per share metrics.

Great. Thank you for shedding light on that. Your next question. What is the flow of opportunities presented at this time for available acquisitions? And where are the metrics heading to?