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 Noella Alexander-Young, Virtual Event moderator here at Renmark Financial Communications. On behalf of our team, we want to thank everyone in New York and surrounding areas for joining us today for the presentation to Royal Gold trading on the NASDAQ under the ticker symbol RGDL. Presenting today is Alistair Baker, Senior Vice President of Investor Relations and Business Development. The presentation will last approximately 25 minutes and will be followed by a Q&A session for which you can participate by using the chat box in the top right-hand corner of your screen. With that being said, I will now hand the floor over to Alistair.

Well, thanks very much, Joelle, and thanks, everybody, for your attention today. It's great to be here and give you an update on Royal Gold. We've been very busy over the past year or so. And it's been a while since I've spoken to you in New York. So very happy to give you an update. As always, I will be making forward-looking statements during 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 filing with the SEC. So during today's presentation, I'm going to give you the investment thesis for Royal Gold. And we are in a very short sentence. We're a high-margin business that generates consistent cash flows from precious metals. We're not a mining company. And this presentation covers the various key attributes of Royal Gold as we see them. So the first is our focus on precious metals and gold in particular. The second is our high-margin business with a consistent commitment -- long-standing commitment of returning capital to shareholders in the form of a dividend, our diversified portfolio, which is the most diversified amongst peers in terms of assets, operators and jurisdictions, limited operating risks in our business model as well as steady margins without direct exposure to inflation, being the right size and a small sector where we can compete for the largest transactions and the smallest transactions can be meaningful to us. And then finally, the optionality embedded within our portfolio, where we don't have to pay for organic growth from my expansions or extensions. But before we get into that, I just want to give you an overview or highlight a little bit our 2025 activity. 2025 was a transformative year for us at Royal Gold. We completed 2 corporate transactions, Sandstorm and Horizon that added significant growth and diversification to our portfolio. But we weren't just active on the corporate front. We added 2 significant gold streams to our portfolio. Kansanshi, Tier 1 operating asset in Zambia. We have goldstream there that provides immediate cash flow and Warintza, embedded and emerging Tier 1 asset in Ecuador, we have exposure to a very attractive gold and copper development project. But it wasn't just acquisitions in 2025 where we saw very positive news. We saw some very significant optionality surface within the portfolio in Mount Milligan and Fourmile. And since we closed those transactions, we've had very -- 2 very strong quarters of positive results. In the first quarter of this year, we had record revenue, cash flow and earnings. In the second quarter this year, we had -- we followed it up with record operating cash flow in the second quarter. So we've repaid $1 billion of debt since this time last year since closing the Sandstorm and Horizon transactions, and we've repurchased and canceled about $30 million of shares. We've also raised our dividend for the 25th consecutive year, and we increased our portfolio of reserve life by about 25% to 18 years. So in summary, we added scale, diversification and growth to the portfolio but we did not change our strategy. And I want you to keep that in mind as I get towards the end of the presentation and talk about valuation. Now when it comes to Sandstorm and Horizon, we've seen some very positive over the past several months, and we've been owners of these assets. We've seen significant revenue and operating cash flow to come from these portfolios of these 2 corporate transactions, but we've also done a lot of work to try and simplify some of the parts of the transactions that weren't very popular with the market. The very first thing we did when we closed these transactions was we collapsed the intercompany arrangements between Sandstorm and Horizon, simplified the story in a pretty meaningful way. We've also divested about $200 million worth of noncore equity positions that were held by those companies. We've restructured some of the more complex arrangements, Bear Creek relief can you be 2 of those. And we've reduced our direct equity ownership of the Hod Maden project from about 30% to 15%. We've also seen some very positive developments for more than the operating side of the portfolio, we've seen at Mara in Argentina, we've seen RIGI -- the approval of the RIGI application, and Glencore has actually started mining at the Alumbrera pit 6 months ahead of schedule. At Platreef, we've received our first delivery under the stream agreement, and that asset continues to ramp up. Top Madden, the development is about 25% complete. At Fruta del Norte. We've seen some very strong exploration results. We've also seen some very attractive or interesting news at Omai and Lobo-Marte as those projects continue to advance. And on top of that, we've seen good revenue from Antamina, Caserones and Chapada, to name 3. So it's been a very positive experience for us over the past several months with the Sandstone and Horizon transactions within our portfolio, and we're very pleased with the developments in a short period of time. So what does this all mean? We provided our 5-year guidance outlook for the first time in March of this year at our Investor Day. And we have a pretty strong growth runway ahead of us. Compared to last year, we're expecting the midpoint of guidance to be about 30% higher than we were last year. And then if you look ahead 5 years, we expect to the midpoint of guidance to be about 17% ahead of where we are this year. So very nice growth. And we're seeing growth beyond that from some pretty material assets like Mara and Fourmile. The good thing about our growth profile is that it's diversified and it's not dependent upon one single asset to get us there. Now on this next section, just to give a touch on gold and our focus on gold. And we've been around for over 40 years with a very gold-focused very gold-heavy focus. The company started in the mid 1980s. This year is our 45th anniversary on the NASDAQ. And our strategy has been pretty consistent over that time. We are focused on gold revenue from good assets and jurisdictions run by good operators. And our revenue has grown consistently and the metal mix has not changed. We try to provide our shareholders with gold exposure in a conservatively managed vehicle. And this next slide shows you why we think we're a good alternative for those who are looking for conservative exposure to gold. On the left-hand side, you can see our beta of 1.6, very strong leverage to the gold price. On the right-hand side, you can see our share price performance over time. This is the beginning of the GDX index in 2006. Since that time, we've actually outperformed the gold price, we've outperformed the GDX index itself, and we've also outperformed the S&P 500. So we have been a very good long-term investment in a very volatile commodity. I'm going to spend a few minutes here just talking about our business model. And we have a very high operating margin in our business. The model is unique. It is, as I said, high scale -- high model -- or margin, pardon me, but it's also very scalable. Our trailing 12-month EBITDA margin is about 83%. So that's a good software company. And our cash G&A, the cost we have to incur to run this business was about 3% of our revenue. Our costs are low, and they're fixed and cost inflation should not be something that causes significant risk to our margins. Now our business model is also very efficient. We have a pretty low head count for the scale of our business. We have 39 employees working for Royal Gold today. and our market cap is about $20 billion. So on a per employee basis, we compare well to any company in any sector. And return of capital is something that's a key strategic objective for us at Royal Gold that is an attribute that makes us unique amongst all the other ways you can invest in gold. We paid a growing and sustainable dividend since 2000, and we've increased the dividend every year since 2001, despite volatility in the gold price. We've increased the dividend for 25 consecutive years and now paid out well over $1 billion in dividends to our shareholders. We're the only company in the GDX that's paid an increasing dividend every year since the index was formed in 2006. We're the only precious metals company in the S&P high-yield Dividend Aristocrats index. So that should show you how we are committed to our dividend and returning capital to shareholders. I'm going to talk in this next section about our portfolio, and this really -- it underpins the performance of our business. We have a global portfolio that's weighted towards lower risk and mining-friendly jurisdictions and our portfolio spans the various stages of mining project development. We have over 360 assets in the portfolio, 80% of which produce revenue today, about 30 are in development. So that means they should start producing revenue in the near term. And then beyond that, we have over 250 that are earlier stage exploration or evaluation. Organic growth comes to us from within the portfolio as assets move through that pipeline from development and exploration stage into revenue-producing and operations. Having a diversified portfolio is very important. It reduces single asset and counterparty risks. And our portfolio is very gold-focused, but we do have some important silver and copper. Our gold revenue percentage is actually the highest of our large cap peers. When you think about geographically, our portfolio is also very well diversified. We do have a North American focus, but we do have a spread and other mining-friendly jurisdictions. And on a net asset value basis, the most -- we have the most diversified portfolio in the mining -- or in our sector, in the royalty streaming sector. 9 of our top 10 assets are producing revenue today. And we have expansion and extension projects underway at about 5 of those assets. Our operators are best in class. They're generally seeking large, well-capitalized and experienced. And we've recently added First Quantum Glencore and Rio Tinto to our counterparty list. So very strong operators. Portfolio diversification is very important because it reduces our exposure to a single asset or operator or jurisdictional risk. And it's a very important feature when it comes to generalist investor doesn't want to spend the time understanding the assets underpinning your portfolio because we've got such a diversity of those assets. Now we have a -- our business model provides for a limited operating risk. And one of the advantages of investing in the royalty model is it provides the best of both worlds. Our model provides gold exposure with reduced risk. This slide shows you the different ways you can invest in gold and how we are positioned. We provide exposure to gold and optionality and a dividend while reducing downside risk through holding a diversified portfolio that doesn't have direct exposure to operating and capital cost increases. You can invest in gold in many different ways. You can buy physical gold if you want to be conservative. But if you buy an ounce today, it's always going to be an ounce, you won't get upside, you won't get a dividend. You can be more aggressive and you can buy equity in an operating company or an exploration company. But with that, you'll also get operating and capital cost risk exposure and inflation can impact margins as those costs increase. There is a perception from some in the marketplace that our business model doesn't provide good leverage to gold. But I think if you look at our financial results, that shows otherwise. Now our margins actually expand quite nicely with rising gold prices. And this slide shows -- producers in gold -- producers in Royal Gold have very different cost structures. Our costs are low and fixed. So margins should expand as metal prices increase, whereas operator costs are subject to inflation. So margins may not expand as quickly and in some cases, they may actually compress as operating costs rise faster than metals prices. And you can see in this next slide, what our cost structure looks like relative to the average producer. Producers are exposed to inflation and input costs. So anything that costs them or any costs that they have to incur to run their operations. So labor, energy, consumables, anything like that, those costs often rise with commodity price increases. If you look at our G&A costs on the other hand though, and they're mostly study, things like salaries, services and office rents. They don't move in short-term bursts. They typically don't change that much from one period to the next. Anything that impacts cost impacts margins. And we haven't seen it yet, but I think the operating sector of the mining business is going to start seeing higher operating costs. Oil and gas prices and diesel especially, those are big parts, big input costs for mining companies. So we will see, at some point, there will be some inflation in those costs, which may actually compress margins. We're not directly exposed to that. I'm going to talk about where we sit in our sector right now. And we are large enough to compete yet small enough to show growth. Our sector is built on relatively small transactions. And if you look back over the history of our sector, most transactions are smaller than about $300 million. The average transaction size is just over $100 million. We sit in a very interesting position because we're big enough to compete for the largest transactions. We have significant cash flow and access to capital and the $1 billion consent stream last year is evidence of that. Yet, we're also small enough to show growth. A small transaction to us can actually have meaningful value. The $200 million Warintza transaction last year is also why I've said that. We're not aiming to be the biggest in our sector, but we do want to be the best. And we think the Goldilocks position that we sit in provides us a great platform to execute our strategy of growth in gold. Now there's embedded growth and optionality from within our portfolio. But before I start talking about that, I do want to talk about capital allocation. Our growth and successful growth really does depend on successfully allocating capital. Our strategy remains simple and consistent. The first thing we always try and do is reinvest in our business using nondilutive financing. The second is we try to maintain a strong balance sheet and access to liquidity. And the third is we want to continue returning capital to shareholders. Now we have to be flexible when it comes to allocating capital because market conditions are changing every day. But our framework provides for us to target double-digit returns when we invest in new transactions and that provides per share growth. We also want to repay debt quickly because we want to rebuild our liquidity. So we've always got cash on hand and the ability to execute on new transactions as they come available. And then the third is we want to continue growing our dividends. and returning capital to shareholders, as I said before, is a key strategic attribute. Now we've introduced a couple of new tools to our capital allocation toolbox. And in the second quarter, we put in place a $600 million uncommitted accordion facility on our revolving credit facility. So that should allow us up to $2 billion of liquidity, if we were to fully execute that accordion. And the second thing we did was we instituted the buyback program, the Board gave us authorization to buy back up to $500 million worth of shares. And we put that in place not so much as a return of capital tool, but more to address a valuation disconnect and apply our capital to where we saw the best opportunity, which earlier in the second quarter of this year was certainly our shares. So how have we done over the past 25 years. This slide sums that up. Since 2000, we've seen significant revenue and cash flow growth. But there are 3 aspects to this growth that are really important to understand. First is our G&A costs have not risen anywhere near our revenue and cash flow growth. Our revenue growth far exceeds the increase in G&A costs, and that shows that our business is scalable. We don't need to add people when we add assets to the portfolio. The second is our revenue growth is not dependent only on metal prices. the gold price has been a very positive tailwind for us over the past couple of decades, but we've also been able to add volume during that period. And we've seen organic growth come to us from within the portfolio as well. So it's not just metal prices that's been helping us. And finally, we've been able to grow mostly from using internal resources without causing shareholder dilution. We did issue 19 million shares last year for the Sandstorm transaction. That was the first time we had issued equity since 2012. So even with the new shares that we added last year, we have the lowest share count on the GDX index. And like I said earlier, we're one of the founding companies of that index over 20 years ago. So we want to avoid shareholder dilution and providing per share growth to our shareholders is something that we're always looking to do. I'm going to talk a little bit here about returns on transactions that we do. We aim for double-digit returns, but we have to be patient for it to become clearer to the market and what returns are actually going to be. When we look at any new investment opportunity, we're always looking at exploration and production upside. And that is where we get that additional return. It takes time though for some time for that to show up in the assets where we invest. We do have extensive due diligence of new opportunities. We take a bottoms-up technical fundamental approach to any asset acquisition. And analysts on the sell side often don't have a benefit of that work. And so when you see an analyst publish a research note on a transaction that we've completed, it often looks like the transaction returns are pretty low. And it may take a bit of time, in some cases, years for the upsides to become clear to the market. And this slide illustrates this point. As time has passed, expected returns have increased with production expansions, my life extensions, that's all driven by resource and reserve growth without us having to fund or contribute anything further to that expansion. This next slide shows the same story in a slightly different way. As time passes, we recover our investment from cash flow and we -- any value added to the assets where we invest by the operators increases the future value of our interests. And that's, again, measured by The Street in terms of the -- looking forward, the net asset value of the assets we have in the portfolio. And this really comes from -- this growth or an increase in value comes from 2 sources. It's really a multiplier effect. Any extension to mine life provides a double benefit we get, obviously, an extended mine life provides more production, more revenue. But an extended mine life means that you are able to capture volatility in the gold price over a longer period of time. Operators are always looking to expand mine lines. they've sunk capital to develop assets. They want to try and squeeze as much value out of those assets as possible. And we benefit because we don't have to pay for any of this. So last year, for example, 2025, operators spent or they drilled about 2 million meters of exploration drilling and the assets in our portfolio, significantly expensive. But we didn't have to pay for that, but we do get the benefit based on the structure of our investments. And that optionality, the ability for us to extract additional value from the assets is one of the most important features of our business model. Now we do have a pretty robust development pipeline. And this slide shows some of the key catalysts we see today from new assets that provide organic growth potential. It's a pretty significant organic growth pipeline, and we see catalysts basically almost every year for the next decade within the portfolio. So if you want to start on the left-hand side, Back River started production last year -- late last year, is ramping up now. We've got -- our newest contributor was late they started milling ore late last year. We got our first screen delivery in August, just a couple of months ago. Robertson, Cortez complex is expected to start producing in 2027. Then we've got Hod Maden, Great Bear or [indiscernible] towards the end of this decade. And then beyond the beginning of the next decade, we have Mara and Fourmile expected to start contributing. This slide doesn't show growth at producing assets today. So last year, we had an increase in the -- about 1 million in mine life to 2045, that adds significant value to our portfolio. We also saw, and we're still seeing it today, MMG, the operator of Khoemacau, is putting in an expansion to increase production at Khoemacau that should increase our silver contribution by about 35%. So this is one of the best organic growth pipelines in the industry today. Now as we think about what that means and valuation, I would say that we're performing very well. Our business has got strong cash flow, good organic growth. We're executing on our priorities. But a snapshot relative multiples today compared to our peers show that we're trading at an NAV discount to our large gap years. We're actually trading at the bottom of the price to cash flow multiples compared to our large and smaller cap years. And what does this mean? It means that if you were to invest the same amount of money in Royal Gold versus our peers, you actually get more in terms of gold and GEO exposure per dollar invested in Royal Gold than you do from our peers, a long-duration portfolio that with embedded growth wides upside beyond that current revenue. So kind of an interesting situation when you think about it from a valuation perspective. And this is just -- we hope this is a temporary feature. This slide shows where we've traded over the last 10 years relative to our peer group. And we are trading -- there's a bit of a valuation connect in place today. We hope this is a short-term issue, and it's -- we hope it's because the market is just not absorbing yet. They haven't had a chance to absorb the scale and growth potential of the portfolio. And instead, it's probably more focused on some of the integration risks from 2025 acquisitions without recognizing solid financial results. Now we've only had 2 quarters of results to speak to. So it's a pretty short period of time. We're expecting to we will release our third quarter results in 3 weeks. But in the first 2 quarters of this year, we had $770 million of EBITDA. We've paid down $1 billion of debt. And we've seen some pretty significant advances in the portfolio. So our focus right now is to make sure the market understands how well we're executing to address this valuation disconnect. So with that, I've come to the end of the formal part of the presentation. I'll wrap it up by saying we have done a lot to strengthen Royal Gold's position and position it for a strong gold price environment. We've added scale, diversification and growth of the portfolio. We have a strong balance sheet, significant cash flow. And we think our patient approach and our commitment to our long-term strategy that works should be rewarded by the market in the hopefully near term. So with that, Noella, I'll turn it back to you to start the Q&A session.

Thank you very much, Alistair, for the great presentation. We'll now begin the Q&A. Your first question is how has the ownership restructuring at Hod Maden changed the project's risk profile expected returns and time line to production?

Well, the ownership change hasn't really changed anything with respect to the project. Lydia, the new operator is working on the same development plan that was all plan SSR before when SSR had an ownership position in the project. They are doing a review of the capital cost and execution plan, but that's standard practice. I think when anybody takes over a new asset, but they haven't said anything around time line or production levels or anything like that different. I think from our perspective, what it's done is it's -- we have now got lower exposure to the asset directly, which is what we wanted. When we announced the transaction with Sandstorm last year, the one thing that we did not like and we made it very clear in our commentary was that the 30% direct interest in the development project or any project for that matter. That's not core to us. That's not the kind of structure that we like. We very much like the Hod Maden asset, I think it's a great asset, but the ownership structure doesn't suit our business model. So we've gone from a 30% direct equity interest to 15%. We took back an equivalent value and royalty for that delta at 15%. And where we are today, it's a $900 million project. We have 15% exposure to it. If you think about the cash flows from Royal Gold's portfolio, really any exposure to that project and any increase in costs that may occur that's pretty de minimis within the scale of our business. The -- this was something that strategically we wanted to get to. We want to get to 0 actually a direct equity ownership. But these things take a bit of time. We've taken a very meaningful first step to get to 15% from 30. It really does mitigate risks to us and our shareholders' risks in terms of capital cost increases or any development risks. But we would like to get to 0 eventually. And hopefully, that will happen in the medium term.

Thank you for clarifying that. Next the viewers' asking at Co Macau, how much improvement in silver deliveries do you expect from operational recovery? And can higher volumes meaningfully [indiscernible].

Well, we -- the recovery of silver is actually decent at Khoemacau. I think where we're expecting to see the bigger jump in silver deliveries is going to come from the expansion. And as I mentioned in the presentation, we're expecting about a 35% increase over deliveries to us once the expansion starts and gets up to full production levels, which will likely be in the '28 and '29 time period. the silver price, yes, the silver price has come down. But when we announced this transaction in 2019, the silver price and the valuation that we did the transaction was about $16, $17 an ounce. So we're multiples higher than that. We would like to obviously see the silver is continue to stay high because that obviously provides additional return to us. But relative to where we were when we did this transaction, and we calculate our returns based on a much lower silver price than we are today. So I think it's a combination of maintaining the silver price where it is today, but the higher production levels. from the expansion will be what drives the higher return there at Khoemacau.

Your next question, what is your cost of debt? What are the terms of the $400 million debt? And how will rising interest rates effective rate you pay back to that debt?

So the $400 million was the balance outstanding on June 30. We have paid down -- we announced that we -- when we did our second quarter conference call, we announced that we've made an additional $75 million payment. We're going to make another $100 million shortly after that. So we are working very hard to get the debt level down to 0. And we expect by sometime in this quarter, we should be there. That was the time line that we gave the last time we reported to the marketplace. Our revolving credit facility, I think cost on the order of [ 60% ] today, maybe a little less than that. But it's relatively small dollars when you think about how quickly we're able to repay this debt. So it's not something we see as being a real drag on our performance. It's a revolving credit facility. So it's a bit like a credit card. If we see an asset that we like and we don't have cash on the balance sheet, use our revolving credit facility to provide funding to acquire that asset. And then we'll just repay the balance very quickly based on cash flows and our trailing 12-month EBITDA is about $1.3 billion. So you can see very quickly that even if we drew the role in credit facility to the maximum of $1.4 billion, it's about 1x, just over 1x our EBITDA on a trailing 12-month basis. So it's not something that really burdens the company. And obviously, we're trying to get the balance down as quickly as possible to rebuild our liquidity and the cost of the revolving credit facility is relatively low compared to the returns that we ultimately try and achieve when we buy a multi-date asset.

Thank you for clarifying that, Alastair. Next the viewer's asking. As major mining companies see rising capital costs could lease to expansion projects, reduce the expected growth in local stream and royalty deliveries?

By any delays to development projects, yes, that can cause risks Absolutely. But I think as I made the point during the presentation, our growth, if you look forward and you look at our growth and where we expect it to come from is not from 1 asset it's from a multitude of assets. So if we do see 1 asset or maybe 2 assets slip, then it's not going to impact materially. It shouldn't impact materially the long-term growth potential. If you do see things slip, that's -- obviously, you don't want to see it happen, but it's not the end of the world because those ounces are still there, just so we're not going to get them as quickly as we were planning on it before. But we don't see that being a significant risk. I mean it's a risk in any -- in any scenario when you've got development assets, you could always see time line slip, but we don't see it as a significant risk because it is a very diversified development pipeline. So that should mitigate any impact from one single asset slipping. And hopefully, we won't see all of us look at the same time.

Thank you for clarifying. Your next question does retaining a 15% equity interest in Hod Maden create any capital requirements that investors should consider as development advances.

Yes. So we have about 15% direct equity interest based on a $900 million project capital spend is about $165 million. That's our exposure. We've already funded $70 million, so we have about $65 million remaining. So it's not in the context of our cash flow it's not a huge amount.

Thank you, Alistair. Next, has the company found it more difficult to find single asset royalty or streaming deals that will move the needle given the larger portfolio?

No. We have been -- I think if you look back at what we've been able to do over the past several years, you'd see that the size of our existing portfolio doesn't really limit us from looking at new opportunities and adding the Kansanshi transaction last year. I mean, it's now 1 of our top 5 assets. So those are opportunities that come up every so often. We're not limited because we have a large portfolio. I think it -- if we were if we're a much larger company in terms of market cap, yes, that would be more of a consideration because you need to do much larger transactions to show an impact on a company that's much larger. So that's why we -- we think we're in a good spot. We're about a $20 billion market cap company today. We can do transactions that are typically in the $300 million to $500 million range, and we should see [indiscernible] significantly to our financial results. So I think we're in a good spot. If we are much larger, it would be a much bigger challenge.

Thank you for commenting. Next, what valuation criteria determines when you buy shares versus directing capital or debt or acquisition?

Well, we -- I'm not sure I understand where the question is coming from. We're always very focused on royalties or streams. And that is what we want to own typically go out looking for equity or debt investments. But what we will do in some circumstances, if an operator needs more capital, and they're limited for whatever reason, how much stream or royalty they can offer, we will look to make up any delta using equity or debt. We've done that before. We've done that in the past. We don't like to do it because it's owning equity and owning debt is not really -- we're not going to get full value in the marketplace. But if we own a royalty or a stream, we should get full value. And that's why our shareholders own us get royalty stream exposure. It's not to get exposure to a portfolio of equity and debt investments. So if we can, we'll always very much focus on our core business, which is royalties or streams. And sometimes it will take a little bit of equity or a little bit of debt because that may be the need of the counterparty. And so it's helpful in getting that larger investment, which is obviously the royalty of the stream.

Thank you for that intel Alistair. Your next question, are there any producing assets in the portfolio with the potential to become significantly larger contributors in the future?