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

I do have some housekeeping to take care of. Well, I can do it. I just have to read our forward-looking statement here. So during today's presentation, I will be making forward-looking statements. Risks and uncertainties could cause those actual results to differ materially from these statements, and these risks are discussed in our most recent 10-K filed with the SEC. None of the fun stuff.

Great. Well, maybe to start at a high level and to set the stage, for those of people in the room who don't know the Royal Gold story, maybe can you bring us up to speed on where the company stands today following the Sandstorm acquisition and what you see as the investment thesis as it is today?

Yes. I think last year was so transformational for the company as a whole. And the Sandstorm transaction and the Kansanshi transaction allowed us to do a few things that have been strategic goals on our end for a number of years. And the first one is diversification of the portfolio. Those of you who have followed us for a long time have followed Mount Milligan, the ups, the downs when it was 25% or 30% of our revenue and our NAV, and that posed challenges at some point. With the transactions last year for the first 6 months of this year, we only had 2 assets that generated more than 10% of revenue and the largest was 12.5%. So what we're talking to investors about at this point is relative to all the other royalty and streaming companies you may talk to, we believe we have reduced the event risk in our portfolio better than anybody else in the sector. I think everybody else has a concentration risk that far exceeds the concentration risk that we now have in our portfolio. Secondly, growth. Again, if you followed us for a while, there was a question about the growth profile of the company. And by adding Sandstorm, which was a very development asset-rich portfolio, we were actually able to take our producing asset portfolio, which was quite strong and put it together with the development assets. And that's MARA, that's Platreef, that's Hod Maden. And so we have this nice balance. We've got a diversified revenue base currently. We have a nice growth profile, which we highlighted at our Investor Day in March. So I think we have a much more balanced portfolio. I think the third thing about the portfolio that's different is the duration. We've increased the average reserve life from 14 years to 18 years, and it's not just the Sandstorm acquisition. If you recall last year, Centerra announced the Mount Milligan life-of-mine plan extension that took that reserve life to 20 years. And it's nice to have our biggest asset have 20 years of life in front of it. So I would say from a portfolio perspective, those are the things that we're stressing. I'd also like to stress that notwithstanding the equity we issued for Sandstorm, we're still the leader in our industry in terms of per share metrics, looking backwards. And I think one of the particular strengths is our management team, which has been around, I think, on average, between 10 and 15 years. And one of the things this management team has certainly demonstrated is the ability to identify resource upside. So that when you look at a particular transaction, it might have a 10- or a 15-year reserve life. Our team is able to look at that and say, it's not 10 or 15 years, it's probably 20, 25, 30 years. And so you see a growing IRR in that portfolio, and that skill base is still in the company.

Great. You touched on scale, diversification, duration that you achieved through the acquisition. But there were also more complex structures that came into the portfolio. As you think about the first, I guess, half year of having the expanded portfolio, what has been done to maybe simplify it? And as you think ahead to the portfolio, are there -- is there more simplification to come?

Yes. I think the only complex thing that we really inherited was the intercompany relationship between Sandstorm and Horizon Copper. I don't think investors understood it. I think some investors said, I don't really want to spend the time to understand it. And that was actually the easy part. We just brought the 2 companies together and collapsed it. So that complexity is gone. I would say we inherited a number of noncore assets when we acquired Sandstorm and Horizon. By that, I mean, public equity, debt, joint venture equity. And it was a priority of ours when we closed the transaction to try to simplify those things because they take time, especially if you've got a debt investment and the company needs a waiver, they need something else done with the agreement. You're not focused on buying royalties and streams, you're focused on something else. So we've done a number of things. We sold the Versamet shares probably within a month of acquiring Sandstorm. We have rationalized the Americas Gold and Silver investment. We rationalized a very complex Bear Creek situation and really turned that into a very simple royalty and increased royalty on Corani, which looks like it's now moving forward. And then Hod Maden, we took that joint venture interest from 30% to 15%, and we took a royalty back. So I think we've done a very good job. We generated over $200 million in revenue from those transactions, and we were able to use that to repay debt. In terms of what's left, okay, we do have, say, a 24% interest in Entree Resources, and we still have the 15% at Hod Maden. Ideally, those things will also be rationalized, but I think we have a bit of flexibility in terms of time to resolve those situations.

That's super clear. And then as you think about the broader portfolio, there's lots of growth and optionality. If you think about Hod Maden, Platreef, Greenstone, Antamina. In your view, which assets or operator decisions have the greatest potential to move Royal Gold's cash flow and NAV over the next few years?

Well, in the next few years, I think the decisions by the operators have been made, which is great. I would say if you're going to look at what might be the most impactful, probably Platreef ramp up. Next year, Kansanshi grades or throughput are supposed to increase, which will actually bring our gold stream up as copper production comes up and towards the end of 2028 is sort of our expectation for Hod Maden. And I would say those probably would have the most material impact. But that sort of overlooks things like Robertson at Cortez or the ramp-up of our royalty at Goose. And I would say the thing about our -- the growth portfolio is that it's as diverse as the producing portfolio, which is nice. We're not relying on one big asset coming into production at a particular time that people are counting on.

Great. And then the Royal Gold, like any royalty streaming company has very limited direct exposure to mine site inflation. It's one of the qualities of royalty streaming company. But higher OpEx and CapEx can influence operator decisions and what your counterparties may do. Do you see risk across the portfolio as you think about what's happening with input cost pressures or build-outs that are costing a lot more than initially expected? And does that present an opportunity for a company like Royal Gold?

I'm not too worried from our current portfolio perspective. As I look at where these assets sit on the cost curve, I just have a hard time imagining inflation getting to the point where a mine closes or suspends its operation because that's really the issue here. As long as they're operating, the vast majority of our interests are revenue based. So that's good. I think the only NPI of any note is Antamina. And I think in the first 6 months of this year, that probably represented 2% to 3% of our total revenue. So as far as inflation's impact on our current portfolio, I don't -- I'm not that concerned about it. Where you do have to pay attention to it is on the capital cost side for new projects. The projects that I noted for growth, I think one of the nice things is they're sort of already in ramp-up or it's an expansion and they're relatively far along. And as I look in the portfolio, if there were a couple of assets that I think you might want to pay attention to inflation, it is something like MARA. It is something like Great Bear, maybe Red Chris, where they're in the sort of the earlier stages of those projects. But you did mention opportunity. Anytime this industry needs capital, we're ready. And so if there are cost increases that a particular operator, developer cannot cover, we welcome the call. Because we can be -- you go back to Mount Milligan. Mount Milligan was originally supposed to be a $314 million investment, and it became a $780 million investment because of cost overruns, we were able to cover it. We've had a very successful investment. So we do have a history of helping when costs increase.

Great. I'm going to turn to capital allocation. So the company is currently in the process of deleveraging, which is going very well and should be kind of complete by the end of the year. You're paying a growing dividend, you're repurchasing shares and you're continuing to evaluate new opportunities. How do you think about the priority between those uses of capital? And particularly on the deal pipeline, now that Royal Gold has become a larger company, has the deal size become larger as well?

Yes. This is the tricky one. I would say from a capital allocation perspective, I can make it very simple. We like to find new investments, priority #1. Priority #2, if we borrowed money to make an investment, we want to repay that to restore our revolving credit facility so that we are ready for the next investment. And then there is our dividend. We've increased the dividend every year for 25 years. Nobody else in our sector can say that. So it is something sort of near and dear to our heart. In the second quarter, we did introduce a share repurchase program. We looked at our share price and felt that there was just a fundamental disconnect between the way the market was looking at us and the way we looked at us, and we were active on that in the second quarter. But this -- it's not a formula. This isn't a math problem. We don't look at free cash flow yield and the interest rate on the debt. And the investment -- to me, share repurchase is great in the short term. But if you ignore the long term and the long term are those new investments. It's putting that 20- or 30-year mine life into the portfolio that preserves value that gives you, to my mind, net asset value. And so we don't want to go down one road and not the other. So it's always a balance. I know that's not the greatest response. I know people want to say, I'm going to allocate so much capital -- so much cash to capital returns. But as you say, the opportunities are getting bigger and bigger. So liquidity, having available liquidity is precious right now to make sure you're well positioned if those attractive investments come up.

One of your competitors, and we may hear this tomorrow, is talking about we're at a start of much larger transactions. We've seen a $4 billion stream transaction, which I never thought we'd see. But what are you seeing in the pipeline? Is that something that you're anticipating as well? You alluded to that with the comment on liquidity just now, but just what's out there? What are you seeing deal sizes? Where are they coming from across commodities?