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

Okay. Good morning, everyone. We'll get started. Welcome to our fireside chat with Royal Gold. Just as an introduction to myself. My name is Fahad Tariq. I'm a mining analyst at Jefferies based out of Toronto. I cover large-cap precious metals, including Royal Gold. Royal Gold is a precious metals royalty and streaming company with a current market cap of about $23 billion. Following its 2025 portfolio expansion, Royal Gold has materially increased its scale and diversification. In the second quarter, gold represented 76% of the company's revenue. No individual asset contributed more than 13% of revenue and the portfolio generated revenue from established operations, including Cortez, Pueblo Viejo, Mount Milligan and Penasquito alongside newer interests such as Kansanshi, Antamina, Caserones and Greenstone. Joining us today is Bill Heissenbuttel, President and Chief Executive Officer. Bill, welcome.

Thank you very much. .

As I mentioned in my introduction, 2025, I think, was very transformative for Royal Gold with the acquisition of Sandstorm. It increased the company's scale, diversification. Maybe as a starting point, can you talk about how the first half of this year has gone and kind of demonstrated that scale and portfolio diversification?

Yes. Actually, we're very happy with the first 6 months of this fiscal year. And you actually stole some of my points with the introduction because when we announced the acquisition of Sandstorm, there were a couple of things that we really pointed to. Number 1 is diversification. And as you just noted, the largest asset producing rev for the first 6 months of this year was only 12.5%. There was 1 other 1 at 11. So we only have 2 assets that represent more than 10%. And of our revenue. And so when you compare us to some of our competitors, all of whom have some sort of concentration risk, in the portfolio, what we're trying to do is reduce event risk at any 1 particular mine because things happen at mines. And if we can diversify the portfolio, that certainly reduces the event. I'm very happy. If you went back to the first 6 months of 2025, I think the top 5 assets represented over 60% of the revenue for the first 6 months to this year was 44%. So on that basis, it's been a real success. When we bought Sandstorm, we talked about diversification of NAV, not necessarily short-term revenue. So I actually think we're ahead of ourselves in terms of diversification. The other part of the Sandstorm story or strategy had to do with growth. We certainly readily admit that -- the old Royal Gold growth portfolio was a bit limited. Sandstorm actually had the opposite issue. Their operating assets were okay, but not that notable, but they're growth assets. were quite strong. And so you look at Hot Maden, you look at Mar, you look at Platreef. Those were the 3 key assets that we identified at the time. And let's look at where they were when we closed on the acquisition in October of last year and where they are now, Platreef was in construction. It's now delivered its first metal. Hod Maden didn't even have an updated technical report and had an operator that we clearly found out later did not have the social license to develop that project. That project is now in construction. And then with respect to Mara, we really didn't have a time line. Glencore hadn't really talked about it. It had been on a few lists of potential projects. And then in December, they came out and said, no, 2027, it started construction, 2031, first production. And they announced at the end of the second quarter that in fact, they've started mining the old Allambe pit earlier than expected. So when I look at the whole portfolio, and I'll even throw in there Antamina, which through the first 6 months, generated $26-or-so million of revenue. The record year for that royalty is 40%. So we're sort of on a record pace on one of the biggest producing assets in that portfolio. So I'm extremely happy with the way the first 6 months have gone with the acquisition.

Great. And One of the things the management team has done a really job is simplifying the inherited Sandstorm interest and assets. An example of that would be Hod Maden. As you think now of how the portfolio is today, is there a further portfolio rationalizing that needs to happen or ranges that need to happen? Or what could a fully optimized portfolio look like?

Yes. I mean as you said; we've made great progress. I think a lot of institutional investors looked at the Sandstorm portfolio and said, it's really complicated. There's just too much going on. It's not a pure royalty and streaming. You've got the intercompany relationship with Horizon Copper. And then you have these, I'll call it noncore equity investments and debt investments. And so since we've we purchased Sandstorm, we sold the Versamet shares, we restructured the Bear Creek investments turning it into cash and additional royalty. We've simplified Americas Gold and Silver. We've done other things that aren't that notable. But all those things take time or away from the management team that's not focused on royalties and streaming. And we've gotten so much of that. I think we've generated over $200 million in revenue from those actions, which has allowed us to pay down debt a bit fast. What work do we have still have to do? I think number one, we still do have that 20-plus percent interest in Entree Resources. What we've said to the market is we think there may be a value-enhancing moment if Rio Tinto and the government of Mongolia can sort of resolve the issues with the mining licenses. And so we're sort of holding onto it right now. We're a little patient. But if we find the right opportunity, we do want to dispose of it remains noncore. In our portfolio, and then the other one, obviously, is Hod Maden. We did take the step with the restructuring with SSR's exit to take some risk off the table. I will see the offer to get out fully would have been at a significant to value. We didn't think that was the appropriate thing to do. And what we're now trying to talk to investors about really is, okay, it's a 15% interest on a $900 million project. So we've already funded over half of our equity capital and the rest is not very large relative to the cash flow. So with respect to Hot Maden, the ideal optimized portfolio is we don't own it. We don't own the 15%. We just have a royalty interest. But if that takes some time, maybe get it through construction where there we can generate more value, we may do that. if someone is interested in buying it today, call us up. We're certainly interested in having that discussion. But we're going to be a little more flexible with that investment.

I think you answered the question I was going to ask about Hod Maden, but just -- maybe what's the latest there in terms of where the project is and next steps?

Yes. I mean early stages. I think [Liddy] has done excellent job from an engineering, procurement, construction I think we're probably 25% overall progress into the project. We're probably still looking at the 2028 around their production time line. And 1 of the things about that project is very much a civil works project, right? tunneling and Lidya being part of the group, the Chile Group having all of that expertise, they were going to be the contractors anyway for much of the Civil works contract. So it's not as though we stepped into a project with somebody who doesn't have the experience to bring this thing into production. They made a couple of changes with respect to the project that our technical team certainly agrees with so so far, so good, very happy with it.

Okay. Great. And then just taking a step back and thinking about the company's capital allocation. So the focus right now appears to be repaying the debt, which is I think going faster than expected, paying a growing dividend, repurchasing shares and, of course, looking at new royalties and streams. How do you think about the balance between all of those things? And specifically, buybacks versus looking at new royalty streaming interests.

Yes. I find it interesting. We got a lot of pressure at the end of last year about a share buyback program. And in retrospect, the feedback we were getting was probably correct -- earlier this year, we did move forward with the first buyback program in the company's history. We were active in the first quarter at a price relative to where it is today. It was very attractive. But it's not a math problem. And by that mean we have people say, well, your free cash flow yield is ex in your cost of debt is why, you should only be buying back shares, buying back shares as a higher return than making a new investment. But when I look at it and I say, okay, the cost of debt may be than the free cash flow yield, but you know what, when you pay back a revolving credit, your liquidity is preserved. If you're buying back shares, your liquidity is not. And liquidity is key in our business to be competitive for new investments and on new investments, share buybacks may be great in the short term. But if we make an investment in an asset that has a 20- or 25-year mine life and could go to a 30-year mine life, that's the long-term potential for the company? And how do I look at cash flow a year versus the optionality on the gold price over 30 years. Those are all things that don't always factor into math equation. So I would say the preference would still be to find new investments, first and foremost. We just came through this period where people said, where is your growth? If all we do is buy back shares, and we're going to have to answer that question again. And in a few years. So the buyback is formulaic in the sense that we've got our valuation at the time. How is it on an absolute basis, on a relative basis but then we look at what are the other competing uses of capital, it may make sense to pay down the debt, increase the availability on the revolving credit, so that we're positioned for new investments. as opposed to buying back shares. So again, it's a -- there's flexibility with respect to what management does there.

And then this is a good segue into the next question on just the capacity to do larger transactions. So you mentioned the extended RCF revolver -- revolving facility. Maybe talk about the deal pipeline and just transaction size, competition, willingness of base metal producers to monetize precious metals byproducts as you appreciate because you've been doing this a lot for a long time that base metal companies today are in a very healthy position, right? They're looking at record copper prices, balance sheet is healthy. So maybe just touch on that dynamic and just what you're seeing out there.

Yes. So we've always said there are 3 purposes for, I'll call them, just streaming advances. There's project construction, there's M&A and there's debt restructuring. What I always like to say is it's almost a cyclical thing. If you've got a balance sheet issue, you're not building a new project. if your balance sheet is healthy and the copper price is up, maybe that is an opportunity to build mine. So we're always busy. I think we saw 2 things earlier this year that I think are great for this industry. Number one, BHP did a $4 billion transaction. And what we always find is when the big guys, 1 big guys decides, the streaming is okay. We don't mind it. I can create value from it. It does get the attention of the other diversified. Most mining companies don't want to be the first one to do something. So that is positive. Go back to 2015 where you had Tech and Glencore and Barrick all do it. But you know what, then it stopped. So when they get interested, when the bigger companies get interest, you got to have the liquidity to be in a position to take advantage of because those opportunities may not be there for the long term. . I think the other thing is BHP is in Australia, and we've now seen a number of streams being done in Australia. Australia has been a market that has been close to the streaming business for a long time. the Australians just don't like it. They don't like royalties. But again, all it takes is 1 and now I think we've got about 3. So we're very hopeful and going to spend some time in Australia that maybe there's more openness to the product. So I feel really good about the opportunity set. The competition really hasn't changed. I mean they're effectively 5 of us that can compete. When you're talking about multibillion dollars, you're talking about 3 of us that can really compete. That dynamic hasn't changed in years, quite frankly.

Great. And then as you think out -- so that's kind of the inorganic growth. If you think about what's already in the portfolio over the next couple of years, manically Greenstone, Platreef, Red Chris, Fruta del Norte, Wassa, there's a number that are either ramping up or coming online or could be abandoned. Maybe of the ones that I mentioned or maybe ones that I've excluded, which ones do you think have the most potential to add to the cash flow profile for oil gold over the next several years? .

Yes. But it's interesting that you use that long list because when we talk about diversification of current revenue, 1 of the other really nice things about the portfolio is we have diversification of growth. I think the ones you mentioned, Platreef would probably make biggest impact. But you look at, okay, Greenstone is ramping up. We're in the first full year of this Sandstorm portfolio. We're in the first full year of the Kansanshi acquisition, their contribution to us. You look at some of the Sandstorm assets, you're talking about expansions at Caserones at Chapada. You're looking at all of what's been discovered to Del Norte. And then maybe you go a couple of years out, you've got Hod Maden and you've got Robertson. You've got Warintza, Great Bear. And again, not -- we don't look to 1 asset and say, that's going to generate 40,000 GEOs and that's our growth. We probably have 10 assets that may come in and make not an enormous contribution, but in the aggregate, we'll make a material contribution to the company. And again, that goes back to diversification.

One of the areas that's been particularly strong year-to-date has been the copper and other metals revenue. And I think the company is even suggesting that it could be above the top of the guidance range. How do you think about commodity diversification. You talked a lot about asset diversification portfolio, having diversification in the portfolio of just number of mines. But what about commodity diversification? Do you -- does Royal Gold have a certain percentage that needs to be precious metals? Or is there a targeted precious metals kind of exposure versus other metals?

I think the old adage was you had to be like 70% gold to get the gold premium. I mean we don't hold ourselves to any particular minimum percentage. We're focused on precious metals, we're focused on gold. Being 3/4 of our revenue in gold, another 10% of silver, that's great. That's not a bottom limit. I think we've been pretty consistent in saying that if there are other opportunities that come to us in other markets, we just -- we need to be able to understand those markets. We know base metals, right? Because we're looking to buy product opportunities all the time. We have some background in other areas in iron ore. So we can look at that. Lithium, uranium, rare earths, I mean we just have no expertise. We don't know what drives the market. We don't know what drives the prices. So try to stick with what you think you know on diversification. But just like the Cactus royalty that we bought is probably 2 years ago now, we weren't looking for it. Someone called us up and said, we have this royalty. We looked at it, hey, we like the project, we like the location, we like the operator. And now Hudbay come in and is now the owner. But that's just, it's a one-off transaction. And I would just say that the copper exposure that we have, really, it's not as though other than Cactus, we really went out to find it. We got Robinson as part of a package. We got Voisey's Bay as part of a package. We got the Milligan copper stream out of a restructuring of the original Milligan gold stream. So it's not as though we were looking to diversify into copper. But we want to retain the ability to to have royalty interest in good assets in markets that we can understand.

And that's really helpful. So I feel like we've applied a lot of filters as to how the company is thinking about potential transactions. One that we didn't cover, though, is jurisdiction. Maybe if you could touch on that, just especially because we've seen some of your peers maybe going to jurisdictions that historically they wouldn't have. Just your thoughts there.

Well, and you can look at Sandstorm and Kansanshi and say, in 1 year, we got into South Africa, Zambia, Turkey in a bigger way in Argentina. And again, it comes back to the diversification of the portfolio, okay, we -- big billion-dollar investment in Kansanshi, okay, is that 9% of AV or 8 or. Turkey is like 3. So that's part of it. I kind of like that diversification element to it. There are obviously places we're not going to go, but they're pretty obvious. And the way we -- I think the way we approach political and was say, a couple of years ago, we were not active at all. And really, there were just some countries that we could quite wrap our minds around, whether that was [indiscernible], was Ethiopia. We just couldn't we just weren't comfortable making a big investment at that point in time. Maybe we just needed to learn a bit more about those countries. But the way we approach it is political risk we make investments that last decades. Some of the payback is 10 or 15 years, and you just have to understand that in that period of time, you could have multiple, multiple changes of administration and policy I mean you look at Peru on what their ninth president in like 10 years or 11 years. So what we look -- try to look to is the culture. And is mining important to the economy, do people understand it, does it contribute to employment, to taxes. And if you find those markets, you're better off. And the thing I think we learned from Franco's issue in Panama is there is no mining industry. I mean, there's 1 big mine. And so when they got into trouble, there wasn't an industry there to say to the government, No, this is what we contribute. And we're that important to the economy. It was like a learning experience for a brand-new country.