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

Presenting is Royal Gold, which is one of the first gold royalty companies. And in fact, it's been in business for over 40 years. As many of you know, we continue to believe that a great way to get exposure to precious metals is through the royalty streaming companies as they give you exposure to precious metals, but they mitigate some of the risks of the alternative investments. Today from the company, we're very pleased to have Bill Heissenbuttel, who is President and CEO. I'm going to turn it over to Bill to give a quick presentation on how the royalty model works, why it's such a good business, and then we'll have a fireside chat. Bill?

Great. Good afternoon, everybody. Thanks for your interest in Royal Gold, and thanks to Raymond James and Brian for the invitation today. I will be making forward-looking statements. They are subject to risks and uncertainties. Actual results may differ materially. These risks are discussed in our 10-K filings with the SEC. So for those of you who don't know our company, we are a royalty and streaming company. We're focused on precious metals, gold in particular. What this means is we are not an operator. We do not explore, we do not develop. We do not operate mining projects, but we are instead a passive investor with an interest in metal production or revenue. . We've been in the royalty and streaming business for over 30 years. We have a portfolio of 360 mineral properties, of which 80 produce revenue for us. We're gold-focused. 78% of last year's revenue came from gold, and over 50% of our revenue came from projects in Canada, the U.S. and Australia. So some of you may wonder why the royalty and streaming space is really the best way to invest in gold. So on a risk basis, physical gold is the lowest risk out there. It's gold that's already been mined, it's already been processed. It's in physical saleable form, but beyond that, you really have our sector and we generate revenue based on mine revenue. Unlike investing in operating companies, we don't have direct exposure to operating costs, capital costs, royalties and taxes, labor costs, fuel costs, and they all impact metal producers. And that's why we also think we have a higher participation in the upside. We don't have to spend any capital to benefit from mine life extensions, and we benefit from the upside in a very large portfolio of properties. Further out on the scale, you've got junior mining companies that may have a mine or 2, maybe 1 in development, and then you have exploration companies, which are really at the high end of the risk profile. Given the nature of our business, it's a very high margin business. We had an adjusted EBITDA margin of 82% in 2025. And it's a very efficient business. We have a market cap of $24 billion, and we only have 39 employees. So we like to think of our business model. It's a more comprehensive way to invest in gold. So that physical gold ounce, it is always going to be 1 ounce, and you're not going to receive dividends or interest on that investment. We have the potential for 1 ounce to become 2 ounces or 3 ounces as mines extend their lives and they find new reserves and resources, and we pay a dividend. So we like to say that this is a sector to consider when you're ready for that baby step beyond physical gold. So now I've tried to sell you on the sector, and let's talk about Royal Gold. We have the most diversified portfolio in our sector in terms of consensus NAV estimates. And that diversification really limits the risk associated with a single asset, and the mining industry is full of examples of event risk, whether that's due to technical issues, political issues, environmental, social. The biggest mining companies in the world don't have anywhere near 80 revenue producers, and they have to allocate capital to develop the assets that they have in their portfolio. So Royal Gold is the only precious metals company that has paid an increasing annual dividend for 25 straight years. We're the only precious metal company in the S&P High Yield Dividend Aristocrats Index. And that's really both a reflection of our high-margin business, our success over decades in finding new investments. And it's also a reflection of the discipline associated with our capital allocation and returning capital to shareholders. That concludes my intro remarks and looking forward to the conversation.

Thanks, Bill. So maybe we'll start to flesh at the business model first a little bit more because when you look at it, it's quite an amazing model where you can continue to get, as you said, margins over 80% over a year after year over year. But one of the things people push back with now is with gold prices going higher, is it harder to continue to do deals like in the past? Or does this business model only work at the bottom of the cycle?

No. I think the industry works no matter where the price is. You just -- we always think there are new investments, and it's typically -- it's balance sheet restructuring, it's project development or it's M&A. So if the price is high, you're probably going to have more project development opportunities and may actually generate interest in the sector in terms of M&A. And then if the price goes down, now you may have balance sheet restructuring opportunities where a company took on too much debt when the price was higher, it's come back down and they have to -- they need a liquidity event. So it is a model for all cycles.

And maybe just you mentioned development projects. Maybe talk a little bit about what you're seeing as opportunities out there in the market right now.

Yes. I mean, right now, I would say we have a few things. We have gold development projects. Obviously, these projects are coming forward at the current price. Equity markets are open, which is good. We're not trying to finance the entire capital investment. So equity markets being open is very important to us. We also have families that own royalties that are looking at the price side. You know what, this is a really good time to get out. I can secure generations of revenue for my family. So we see that. And the thing we're really excited about, I think, are the copper projects that I hope you'll see over the next 5 to 10 years, to the extent a copper project, zinc project, they have precious metal byproducts that can really create some very large investment opportunities for us.

And maybe just as we follow up on that, maybe it's worth discussing like arbitrage you can achieve by taking those precious metals that are potentially copper or zinc projects going forward.

Yes. I mean if you think about a base metal company, what do they trade at, 6x EBITDA, 8x, 10x EBITDA, whatever that is, we trade at a multiple of that. So the precious metals that are a byproduct, as long as you're not streaming away metal that they need for their all-in sustaining costs, the value we apply to it is much higher than what the base metal company sees or experiences. And we just actually had a transaction in our sector where BHP streamed the silver out of its Antamina investment. And what they said was the value they got was actually equal to the entire joint venture interest that they had in this project that's going to go on for decades. It's just -- the metals are worth more in our portfolio than they are in a base metal portfolio.

I guess another topic before we get specifically, I mean, people say, the other thing you mentioned about here is it's a great business. There's 39 of you and you generate lots of revenue. You did it last year, but why hasn't there been more consolidation in the industry? Because if you take the view that you maybe need one more to buy somebody else or whatever the number is, doesn't it make sense to see more consolidation than we do?

It makes sense. The issue you have in our sector is the bigger companies, they trade at higher valuation multiples, the mid-tier companies that really would be the targets trade at lower multiples. And oftentimes, when you talk to those mid-tier companies, what they will always say is, yes, I trade at this multiple now, but I'm 1 or 2 catalysts away from trading at that higher multiple. And then at that higher multiple, I want you to pay a takeover premium. And that's where it doesn't make sense. What we did last year, when we had a situation where the CEO of the company just said, "Look, I think our shareholders are better off in a larger company. I'm willing to negotiate over my current valuation multiple" and in the end, we were able to do an accretive transaction for both sets of shareholders.

So I guess the other thing that's happened, I mentioned you've been around -- you were one of the pioneers in the industry, but there's lots of other people starting to get into this industry, which I guess nothing like somebody copying your business to say it's a good business. What do you see out there? How are you competitive in the market right now? Because obviously, there's more capital around chasing the same deals.

Yes. I mean you compete really 2 issues: value and structure. Value being, are you going to pay the most for that particular asset. And I would say we rarely win that end of the transaction. There's always somebody who is willing to pay more. Where we try to differentiate ourselves is the structuring. And I often tell our business development team don't sit on the opposite side of the table negotiating with the company. Imagine yourself on that side of the table, how do we structure this investment so that it works best for them. And the example I always give is a mining company has a project, but they also have a bond issue that's going to mature in 3, 4 years. Why not take the stream investment and have a lower stream payout over that period of time, allow them to have the liquidity to pay off the bond and then take the stream obligation up. It's that there are no boxes that we have to tick when it comes to structuring these, so we say everything is a blank canvas and just use your imagination to structure good investments.

So maybe if we explore that a little bit more. I mean one of the things you've seen some people do is put step downs or caps or collars. How do you think about that? Because I think when you start the process, the objects to try and pay for what you see and get everything else for free, if I can put it that way.

Yes. I mean the industry really has changed. And just to be clear, we really try not to do caps. I don't think we've ever done a cap. These are life-of-mine contracts. We want exposure to that mine over the full extent of its life. Now step-downs are commonplace in our industry. And by that, I mean your stream rate is, say, it's at 10% until you get through what is known as the reserve and then maybe it drops to 5%. And the thought process there was we want the operator to have an interest in continuing to extend the mine life. So if you say to them, you're going to get half of this economic interest in gold or silver back, does that provide more incentive to explore and maybe expand? And that's really the reason behind the step downs to better align us with the operators because these are life-of-mine contracts.

And just maybe not to get in too much into details, but I think one of the things that comes up is you're taking the gold and silver, say from the producer. Why don't they mine in another area if you have a big royalty on a certain area and they don't, how do you think about that when you try and structure stuff so that you are motivated again to do the same thing that's best for everybody.

Yes, it's probably -- it's one of the bigger challenges and again, example is sort of an underground mine where you may have a zone that is precious metals rich. And we look at it and say, well, we want you to mine that as soon as possible and maybe the operator says, well, the economics to me after the stream are I should mine in a different area, and that's where you have to build in covenants that basically say, you're not going to disproportionately hurt our interest. You're going to mine this mine as though you own 100% interest in all of the metal. And I think so far, those covenants have worked. We haven't had an issue where people were changing the mine plan because they didn't like the economics to us.

Unfortunately, in this sector, too, you can't move your assets. So we've seen some challenges where some companies have lost some assets for maybe governments changed a rule or something, maybe we're entering that sphere now, too. How do you think about jurisdictional risk when you structure your portfolio? And what can you maybe do to -- you can't totally get rid of it, but minimize it?

No. I mean when we're making investments in Turkey or Zambia or Ghana, I mean, the reality is we are taking political risk. And you can't just look at the current administration, the President, the Congress, whatever it is, and you say, Oh, they're mining friendly. Now it's the time to make the investment. Our investments take decades to develop. And I guarantee you're going to have 5 or 6 regime changes within a country, and some of these people are not going to like mining. So what we try to do is identify countries where mining is important. It's important to the economy. It's important to employment, important to export earnings. And the more you can find that, the better off you're going to be. I think I was commenting, Peru is on its seventh President in 6 years. I mean, in 10 years, I don't know what it is, but it doesn't matter. Peru is a mining country. And the local politics are probably more important than what's going in Lima at that time. The one event risk that we did have was in Panama, and it wasn't in our portfolio. It was a competitor's portfolio. And if you look around and say, well, how did the Panamanian government allow this to happen. Well, there's no mining industry in Panama. There's no industry to destroy if you get in the way of 1 particular mining operation. So that's really what we look for there. So there's safety in numbers. And we're looking for the numbers.

And maybe when you start to try and do one of these deals, like what sort of targeted IRRs do you start with, and I imagine you adjust for regions and everything else. But maybe just to give people a general feel because there's lots of numbers thrown in the market about what the rate of returns are on deals.

Yes. It's funny. The only time anybody talks about returns on deals is on day 1, which is exactly the wrong time to look at our investments because you may see a 10-year reserve life and our investment, you may calculate and say, well, that's a 3% return. That's a 4% return. That doesn't make any sense. Well, the reason we did it is because our geologists looked at the upside and said, this isn't a 10-year mine life. This thing is going to go for 20 years or 25 years, and we have a demonstrated history of investing in assets that get better with time. We always say good mines get better. And so we talk about ultimate returns, and ultimate returns are often north of 10%, which in our business is very acceptable. So it's a little bit hard. There isn't an initial hurdle rate. There isn't an initial IRR that we have to have. It's all about the upside.

And maybe if I ask you, one of the questions we get from investors is in a bullish gold market, we should just buy producers and not royalty companies because they don't have as much optionality. If I ask you that, what would your rebuttal be to that?

If that's the way you want to invest in gold, go find the highest cost producer because that's where the greatest leverage is going to be. I just say, just to understand that if the gold price turns around, leverage works the other way as well. And our leverage is different, and it's longer term and maybe it's a little harder to identify when the gold price goes up, what do operators do? They tend to increase the price they use to calculate reserves and resources. So now that 15-year mine life because of those assumption changes is now 20 years or 25 years, we have an interest in all of that. So it's a much more subtle leverage to the gold price. And we -- I mean, we have a portfolio of exploration properties. These companies are now -- some of them are able to raise equity, and they're putting it in the ground. We don't have any value on our balance sheet for those investments, but they are being advanced without us spending any money. That's leverage to gold price. It's just not the obvious one that's in EPS or cash flow per share.

And I guess the other thing that comes up is they tend to trade at higher multiples than producers. Why do you think that is? The Royalty companies in trade.

It's a very different business model. I mean, when I was talking, you look at what's going on in the world right now. Do you think operating companies are a little worried about what the price of diesel is going to be very shortly? We don't have that exposure. We don't have exposure to labor costs. I'm sure there are governments out there that are thinking of increasing royalty rates and taxes given where the metal prices are. We're not impacted by any of that -- and so I'd say, yes, we do trade at a premium, probably a premium that many generalists are not as comfortable with. But I think it's just a lower risk, high margin business that deserves a premium. And the other thing I would say, I mean, we've been in this business for decades. It's always been this way. It's not as though you're buying into some blip in valuations. This sector has always traded at very high multiples.

Maybe moving directly then to some of your assets and stuff. I'll maybe just start. Last year, you did 2 big transactions. And one of the things you've been very -- you haven't done a lot of is issue shares. But you did for a transaction last year. I mean, I think before this, you hadn't issued a single share since 2012, which in this sector is rare. Can you maybe talk about why that was done, why you used shares and then why you did Kansanshi with debt?

Yes. So first of all, the senior management team at Sandstorm wanted shares, they wanted to participate, the transaction was accretive. So we didn't mind issuing those shares. But more importantly, when we announced Sandstorm, we knew the Kansanshi process was ongoing. There was a bidding process. We knew First Quantum, the operator, needed cash to address debt service obligations. So if we had allocated a lot of cash to the Sandstorm transaction, we would not have had the cash available to do Kansanshi and we really wanted to do both of them. I think it would have helped the market understand why we did shares if we had announced Kansanshi first, but that's not the way things work in our sector. So it was really a function of this is what the target wants, but more importantly, we had to preserve liquidity for a transaction that then got announced less than a month later.

And I guess where we sit today now, you do have some debt on your balance sheet. Maybe you can talk about capital allocation, again, the same issue you want to keep capacity available in case you -- because you never know when these deals are going to come up. How you're looking at allocating capital now over the next year or so?

Yes. I mean look, we're still open for business. We're looking for new investments. That's where I think we can add value if we can buy an asset at a PNAV price that is below where we trade, that is going to enhance the value. But as you say, it's a really lumpy business. And there are years when we don't make an investment and with the debt on the balance sheet to the extent we have that cash, we will repay the revolving credit. Currently, there's about $725 million outstanding and we think at the current metal prices, that would be paid off in about a year. But that doesn't mean we're not looking for new investments, but that will be -- that's sort of the second step for allocation. And then the dividend that I referred to is really the third leg to the stool. We're very proud of the 25 consecutive years. And I will say, when we increase it in a year, we're not looking at it saying, well, we can afford to pay this next year, we look at it and say, if we increase it to this level, can we continue to increase it in years 3, 4, 5, 10 and so there is a -- you might look at our dividend increases and say, well, given where the metal price is, you could have done more, and they say, well, we're trying to retain this record. And if you pay out a huge amount 1 year and you have to pull it back, that would be -- that would not be a good outcome for us.

Progressive dividend basically at the end of the day. The other thing that people will bring up is you trade maybe at a little bit of a -- I mean, we -- generally, the larger companies get much better liquidity and they get a premium in the market. But you may be trading at a discount, I would argue in a moment versus your 2 big competitors. Why do you think that is at the moment?

Well, a couple of things. They are much bigger. So I'm sure there's a liquidity factor in there. But we were so busy last year. I mean, we did almost $5 billion of investments. I can tell you that previously, the highest investment year was about $1 billion, and that was in 2015. So these years don't come around very much. And I just think there was so much going on in the portfolio, I think people had a hard time and still have a hard getting their arms around what this company looks like on a consolidated basis. We only had 1 quarter of Kansanshi. We only had 1 quarter of Sandstorm's assets. So we'll get a full year this year. We have a couple of other projects that I expect will come in this year. But I think that's part of the discount. I think there is always with investors a show-me element. You don't always get paid for what's coming. They want to see it. And that's what I hope happens this year as we put 4 quarters together with very boring, no noise, and we can demonstrate what the company can do.

And maybe to address the other thing, when you did the Sandstorm transaction, we might just say some of the -- some of it was a little more complicated than a standard royalty model. Can you talk about what you've done to clean that up and what you may have to do going forward? And really put in perspective how big that really is in the overall portfolio now?

Yes. So I mean Sandstorm was a complicated company. They had created this affiliate Horizon Copper to house a joint venture because they didn't want the joint venture on their balance sheet. And we could have just bought Sandstorm and kept Horizon independent. But there were so many intercompany transactions, streams, loans. It was taking a lot of time. So we just -- let's just collapse the whole thing, let's get rid of all of that intercompany -- all the intercompany relationship. And so what we were really left with Sandstorm did make equity and debt investments in a number of companies, and we said that's not core to our business. let's try to get rid of them. We've done a pretty good job. We got -- we sold the Versamet shares. It's another royalty company that Sandstorm had owned about 25% of. We sold that in a block and then we restructured another debt and equity investment in a smaller mining company by supporting a merger. So we're really down to 2, we have a 24% interest in Entree Resources, which has a joint venture in Mongolia on the outer edges of Oyu Tolgoi and we think there's going to be -- we think there's a possibility of there being a value event. They're working with the government of Mongolia on a couple of things. So we'll be a little bit patient but it's the same concept. We don't want to hold it, let's try to sell it. We know people are interested. And the other one is the Hot Maden joint venture. This is the joint venture that Sandstorm tried to get off of its balance sheet. And we are going to try to convert a joint venture interest, which has capital cost and operating cost exposure into something that looks more traditional, more familiar in our portfolio. Those discussions are early stage, but that's -- it's really a priority for us this year.

Maybe I'll stop. Are there any questions in the audience?

Given where the gold price currently is, can you talk about the contracts that you have with mines, which will come into operation if the price stays at these levels? In other words, how much sort of embedded production do you have if gold stays at the current price versus your current volume of production?

Well, I mean, I think the growth projects that we would talk about would be in production at $4,000 an ounce or $3,000 an ounce. I mean one of them is Platreef in South Africa. That's a PGM mine. So it really is not driven by the gold price, MARA in Argentina is basically a copper project that is owned by Glencore. That's not dependent on the gold price. If there are projects that move forward because the price is where it is, that's gravy. It's not even anything more we're talking about in terms of growth. I'm sure there are projects that are right on the edge and make sense here. But you can't -- the mining industry, you don't just flip a switch and a mine can come on. There's exploration, study, permitting, it takes years, even if you wanted to, today, bring a gold mine in at $5,000 an ounce, you really can't do it. It's going to take 3, 4, 5-plus years.

But have you seen ones at say $3,000 earlier on last year, might now be progressing.

They might be, but they're probably not very large in our portfolio.

Do you have any [indiscernible].

No, I don't think so. I look at the evaluation and exploration as where we may see things blossom that we're not even talking about right now, but the chance that they are of significant value to our company, it's a little unlikely.

Though maybe it's worth -- one of the other things that was done a year ago was the Cortez stuff. It might be worth just talking about, there's a lot of chatter now about this new discovery Fourmile, I think not everybody realizes you even have a royalty on it. But that's -- to your question, that's an example where you probably bought something and you thought you'd find something, but...

We thought -- yes, we thought -- we were very confident that there was upside at Cortez. Cortez is the backbone of Royal Gold. It was -- through the '90s, it was 95% of our revenue. We've had decades of exposure to it. Three years ago, we actually expanded our footprint to include the whole complex. We did not have all of Cortez. And those transactions in 2022 actually brought us exposure to Goldrush to Cortez Hills and to Fourmile. And I think we expected something like Fourmile, but not the grade, not the scale and not in the time since the acquisition. I thought this would play out over 5 to 10 years, and here we sit 3 years later with one of the best discoveries in the industry recently.

Does that help?

Yes.

Are there any other questions? So maybe just -- we just got about 1.5 minutes left. Maybe just talk a little bit about concentration risk, too, because one of the things that used to be talked about was it's a chicken and egg thing. The best assets you want to have a lot of them. But if you have too much of them if something goes wrong, that's not so good either. Can you maybe talk about what the portfolio looks like now on a concentration risk basis because it's changed substantially after all your work last year.

Yes. The rule #1 of mining, something's going to go wrong. I promise you that. So if you were to go back 10 years. Mount Milligan, our biggest asset, probably would have been 35% of our revenue and 30% of our net asset value. And we had -- there were certain events that happened. One year, they ran out of water to run the mill and they had to shut down and our share price just really felt the impact of that. And so it's really been a strategic goal of ours to diversify the portfolio. So yes, if something bad happens at Milligan, you're going to see it, but it's not to the extent that it did then. And if you look around our sector, every one of the major companies has some sort of concentration risk, whether that's Salobo at Wheaton, you've got Cobre at Franco, Malartic [indiscernible] I mean everyone has it. And that's why I made the point up there of having the most diversified portfolio. No asset other than Milligan represents more than 10% of our NAV. And that also helps with political risk. You say, oh, you're in Turkey, I'm nervous about Turkey. It's 4% of our NAV. Diversification to me is critical to having a quality portfolio.

Well, that's a perfect segue. And thank you very much, Bill, for going through the model and look forward to seeing the multiple catch-up to everybody else. Thanks very much.

Thank you very much.

For anybody who's interested, there'll be a breakout in Cordova 6.