Royal Gold Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 8, 2024

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to the Royal Gold 2024 Second Quarter Conference Call. My name is Seb, and I'll be the operator for your call today. I will now hand the floor to Alastair Baker to begin. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's Q2 2024 results. This event is being webcast live, and a replay of this call will be available on our website. Speaking on the call today are Bill Heisenbuttel, President and CEO Paul Leibner, Senior Vice President and CFO Martin Raffield, Senior Vice President of Operations and Dan Breeze, Senior Vice President, Corporate Development of RGAG. Randy Sheffman, Senior Vice President and General Counsel is also available for questions.

Speaker 1

During today's call, we will make forward looking statements, including statements about our projections and expectations for the future. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties are discussed in yesterday's press release and our filings with the SEC. We will also refer to certain non GAAP financial measures, including adjusted net income, adjusted net income per share, adjusted EBITDA and net cash. Reconciliations of these measures to the most directly comparable GAAP measures are available in yesterday's press release, which can be found on our website.

Speaker 1

Bill will start with an overview of the quarter, Dan will provide an overview of our most recent acquisition, Martin will give some commentary on the portfolio, and Paul will provide a financial update. After the formal remarks, we'll open the lines for a Q and A session. I'll now turn the call over to Bill.

Speaker 2

Good morning, and thank you for joining the call. I'll begin on Slide 4. We had strong financial performance during the quarter with near record revenue of $174,000,000 a 21% increase over the same period last year. Operating cash flow of $114,000,000 and earnings of $81,000,000 or $1.23 per share. After minor adjustments, earnings were a record $1.25 per share.

Speaker 2

Revenue was 74% gold and over 56% of our revenue was generated from the U. S, Canada and Australia. Our adjusted EBITDA margin remained strong and steady at 81% for the quarter. And despite a 21% increase in revenue, our cash G and A was flat, providing further evidence of the scalability of our business model. Solid portfolio performance and the strong gold price helped us generate significant cash flow during the quarter that we allocated in line with our long held strategy, which included payment of our regular quarterly dividend of $26,000,000 repayment of $100,000,000 of the balance outstanding on the revolving credit facility.

Speaker 2

We ended the quarter with $50,000,000 of debt outstanding and we have now returned to a net cash position. After quarterend, made a further repayment of $25,000,000 and so far in 2024, we have repaid $225,000,000 of debt. And finally, we reinvested in the business with the acquisition of 2 more royalties on the Back River Gold District, which increases our exposure to the Goose gold development project in Nunavut, Canada. We'd like to give you a brief overview of this acquisition, and I'll turn the call over to Dan to review the asset.

Speaker 3

Thanks, Bill. I'll turn to Slide 5 and spend a few minutes on the Back River royalty purchase. In late June, we completed the acquisition of 2 royalties that cover the entirety of the Back River District for cash consideration of $51,000,000 Back River is an 80 kilometer gold belt in Nunavut being developed by B2Gold. Most of the development activity underway is at the Goose project and the deposits to the north, including the George project, are at an earlier stage. The royalties we acquired cover all reserves, resources and potential extensions thereof in the district.

Speaker 3

The first royalty is a 0.7% net smelter return or NSR royalty that starts paying immediately and declines to a 0.35 percent NSR royalty after Canadian $5,000,000 of revenue has been delivered. The second royalty is an approximate 1.3 percent gross smelter return or GSR royalty that begins paying after about 780,000 ounces are delivered. The first royalty is a deduction against the second. So while we have acquired 2 royalties, the interaction between the royalties allows us to account for the purchase as one asset. Together, the royalties are equivalent to an approximate 1.1% GSR royalty.

Speaker 3

If you recall, we already had exposure to the Back River project through ownership of other royalties that we acquired in 2,008. So these royalties complement and add to that existing position. Turning to Slide 6, I'll give a brief overview of the Back River project. V2Gold is currently advancing construction of the Goose project, which will be a combined open pit and underground operation, completing the 4,000 tonne per day conventional gold each process plant. B2 currently expects 1st gold production in the Q2 of 2025, and they are estimating production of between 120,000 150,000 ounces in 2025, increasing to over 310,000 ounces per year from 2026 to 2023.

Speaker 3

B2 is forecasting total production of 3,300,000 ounces over a 15 year mine life. Total measured and indicated resources contain approximately 6 point 3,000,000 ounces of gold, which includes approximately 3,600,000 ounces in proven and probable reserves. Inferred resources contain an additional 2,900,000 ounces and according to Beach Agold, the average historical resource conversion rate from inferred to measured and indicated has been 73%. The area is highly prospective and B2 has an extensive exploration campaign underway to add to this resource base. Royal Gold's exposure to the Back River District increases significantly with this transaction and the summary royalty rates on Slide 6 should help you understand how the royalty rates on the Goose project change as various production levels are achieved.

Speaker 3

We expect that the threshold for the 1st royalty rate increase will be reached in 2026 and the threshold to reach the GSR royalty rate of 3.3% will be reached in 2028 based on B2Gold's production forecast. We are pleased with this transaction as it increases our exposure to a very attractive project in a stable jurisdiction being developed by an experienced operator. I'll now turn the call over to Martin.

Speaker 4

Thanks, Dan. Turning to Slide 7, I'll give some comments on 2nd quarter revenue. Overall revenue for the quarter was near record $174,000,000 with volume of 74,500 GEOs. Higher prices were the primary driver for the increased revenue. Our royalty segment contributed $51,000,000 about 29% of total revenue for the quarter.

Speaker 4

Royalty revenue was up about 34% from the prior year quarter with higher contributions from Penasquito and Robinson and approximately $2,000,000 in new revenue from Marra Rosa, Bellevue and Northern Starz Wonder Underground. These increases were partially offset by lower revenue from the Cortez legacy zone. Revenue from our Stream segment was $123,000,000 up by about 16% from last year with increased contributions from Mount Milligan, Savanchina, Wassa and Andacollo, partially offset by lower revenue from Pueblo Viejo. I'll turn to Slide 8 and give some comments on notable developments at our principal properties. At Mount Milligan, Centerra reported last week that they're on track for completion of a PEA in the first half of next year to evaluate opportunities to extend the mine life beyond 2,035.

Speaker 4

They also reported progress on the site wide optimization program with significant reductions to date on milling costs and improvements in mining costs expected in 2025. At Pueblo Viejo, Barrick reported in mid July that production in the second quarter was flat compared to the prior quarter and a shift to recovery rate optimization will occur in the second half of the year as throughput is ramped up. Silver recovery remains lower than target and while we received deliveries of 333,000 ounces, we saw a further deferral of 140 3,000 ounces in the 2nd quarter. At Andacollo, Teck reported an improvement during the 2nd quarter in the drought conditions that have caused water restrictions and limited throughput rates. Teck expects the improvement to continue in the second half of the year.

Speaker 4

Turning to Slide 9, at Penasquito, 2nd quarter production was strong driven by high gold and zinc production resulting from higher grades in the Chile, Colorado pit and good mill throughput and recoveries. Newmont expects production levels to remain steady in the Q3 with an increase in gold production in the 4th quarter as mining returns to the higher gold grade Penasco pit later in the year. At Khoemacau, M and G reported the 1st full quarter of results at the Zone 5 minutee since the ownership transition. Production was impacted by equipment availability and high turnover of skilled labor. MMG reported that it is hired and is training a significant number of replacement workers.

Speaker 4

There are also measures being taken to reduce dilution with the expectation of achieving better ore grades in the coming quarters. In addition, MMG reported their intention to complete an expansion of Khoemacau by 2028 with the target of producing 130,000 tons of copper per year. Recall that Royal Gold Silver Stream interest covers expanded production from the portfolio and note the initial gold pour at Manchow and the achievement of commercial production at both Cote and Marauroso. And finally, it's worth noting some positive developments at a couple of our Australian royalty properties. At Bellevue, a 5 year plan was announced to significantly grow production by increasing underground ore movement and processing capacity.

Speaker 4

Bellevue has a June 30 fiscal year end and gold production levels are expected to increase steadily from 165,000 to 180,000 ounces in fiscal year 2025 to 240,000 to 260,000 ounces in fiscal year 2029. And at Wonder Underground in Western Australia, we received our first royalty revenue in the quarter from high grade development ore being blended into the Thunderbox Mill. Northern Star is to continue with production stoping to start later this year. I'll now turn the call over to Paul for a review of our financial results.

Speaker 5

Thanks, Martin. I'll now turn to Slide 10 and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended June 30, 2024 to the prior year quarter. Revenue was up 21 percent to $174,000,000 for the quarter, which is the 2nd highest quarterly revenue in the history of the company. As Martin covered in his remarks, one of the primary drivers for the near record revenue this quarter was higher metal prices as gold was up 18%, silver was up 20% and copper was up 15% over the prior year.

Speaker 5

As Bill mentioned, gold continues to be the dominant revenue source making up 74% of our total revenue for the quarter, followed by silver at 13% and copper at 10%. Royal Volk continues to have the highest gold revenue percentage when compared to our major peers in the royalty and streaming sector. Turning to Slide 11, I'll provide a bit more detail on specific financial line items for the quarter. G and A expense increased to $10,500,000 from $9,100,000 in the prior year. The increase was due to higher non cash stock compensation expense.

Speaker 5

Excluding non cash stock compensation expense, our cash G and A was $7,200,000 which was unchanged from the prior year quarter. Our cash G and A costs as a percentage of total revenues have remained low despite inflationary pressures that have impacted the metals and mining sector in recent quarters. Our DD and A expense decreased slightly to $36,000,000 from $38,000,000 in the prior year. On a unit basis, this expense was $4.80 per GEO for the quarter compared to $5.27 per GEO in the prior year. The lower overall depletion expense and DD and A per GEO this quarter was due to 3 primary factors.

Speaker 5

1st, a decrease in our Puma Cal depletion rate from $17.41 to $15.21 per ounce. 2nd, lower gold and silver sale to Pueblo Viejo and finally, higher contributions from our royalty segment, specifically Penasquito, which royalty has a lower overall carrying value and depletion rates. We continue to forecast that our total DD and A expense will be within our previously guided range of $141,000,000 to $157,000,000 Interest expense decreased significantly to $2,500,000 from $8,400,000 in the prior year. The decrease was primarily due to lower average amounts outstanding under the revolving credit facility when compared to the prior year. The all in interest rate for outstanding borrowings under our credit facility was 6.5% at the end of June.

Speaker 5

Tax expense for the quarter was $19,000,000 resulting in an effective tax rate of 18.9%. This compares to a tax expense of $2,000,000 and an effective tax rate of 3.1 percent in the prior year. The lower tax expense in the prior year period was due to a discrete tax benefit of $8,500,000 attributable to the release of a valuation allowance on certain foreign deferred tax assets. The 19% effective tax rate for the quarter was in line with our expectations for the full year. Net income for the quarter was up over the prior year to $81,000,000 or $1.23 per share.

Speaker 5

The increase in net income was primarily attributable to higher revenue and lower interest expense. After adjusting for a small discrete tax item and other minor adjustments, net income for the quarter was a record $82,600,000 or $1.25 per share. Our operating cash flow this quarter was nearly $114,000,000 up 5% over the prior year. The increase in operating cash flow was primarily due to higher cash receipts from stream segments when compared to the prior year period. I will now turn to Slide 12 and provide a summary of our financial position as of June 30.

Speaker 5

During the quarter, we returned the balance sheet to a net cash position with a repayment of $100,000,000 on our outstanding credit facility balance. As of June 30, we had $50,000,000 of debt outstanding and total available liquidity of approximately $1,000,000,000 made up of the undrawn revolver balance and our working capital. Will also note that our working capital at quarter end was abnormally low. The lower working capital this quarter resulted from the acquisition of the Back River royalties from our available cash and also from the reclassification of the remaining $50,000,000 revolver balance from a long term liability to a current liability. We reclassified this amount as a current liability given the $25,000,000 repayment we made in early July and the final $25,000,000 payment we intend to make early next week.

Speaker 5

With the repayment expected early next week, we will have 0 debt outstanding. That concludes my comments on our financial performance for the quarter, and I will now turn the call back to Bill for closing comments.

Speaker 2

Thanks, Paul. Our Q2 was strong and we were diligent in sticking to our long standing strategy of allocating capital to our dividend, the balance sheet and new business. I'm particularly pleased with our progress on debt reduction. With the coming $25,000,000 repayment that Paul noted, we will have repaid all the borrowings we incurred to fund some of our recent portfolio additions. Looking back 2 years, we have spent over $900,000,000 to acquire royalties on Cortez, Great Bear and Back River and we did not dilute our shareholders by issuing equity to finance these transactions and a fully replenished liquidity available for future acquisitions.

Speaker 2

These are high quality gold royalties in Tier 1 jurisdictions, and I expect them to offer significant upside over the coming decades. Our financing choices mean that our shareholders will enjoy the full benefit of that upside. As one considers the current state of political instability and market volatility, we are very well positioned for this uncertainty. We are tracking well toward our full year guidance for overall sales, DD and A and effective tax rate. Our balance sheet is solid and we have excellent liquidity available to take advantage of business development opportunities that may present themselves.

Speaker 2

Operator, that concludes our prepared remarks. I'll now open the line for questions.

Operator

Thank you. Our first question on the call comes from Tanya Jakusconek from Scotiabank. Please go ahead.

Speaker 6

Okay. Great. Good morning, everyone. Thank you for taking my questions. Congrats on your deal.

Speaker 6

Maybe I will just start on Back River. I'm just interested on the royalties you purchased. Were they from existing like individuals? Like I wasn't aware that other companies had little royalties. So maybe just starting off with who was the seller of these royalties?

Speaker 6

Individuals or companies or

Speaker 2

Yes. Thanks, Tanya. Dan, do you want to take that one on?

Speaker 3

Sure, Bill. Hi, it's Tanya. Yes, thanks for the question. The Hill royalty, Tanya, came from a private trust and the CAM royalty was from a subsidiary of a U. S.

Speaker 3

Company, 3rd party royalties and it was a competitor process as well.

Speaker 6

Okay. I think it's a good question.

Speaker 3

Does that help with that?

Speaker 6

Alright. Are there more of these royalties than available on this property? Or are these that?

Speaker 3

So the property itself has a few royalties, Tanya. This is the bulk of

Speaker 5

the royalties. There are a

Speaker 3

couple of smaller royalties. I don't think they're available to purchase, but this is the bulk that we're talking about here in terms of our ownership now.

Speaker 2

Ken, I know yours and I

Speaker 3

know there's other now.

Speaker 6

I know yours and I know there's other companies as well that have exposure. I'm just always intrigued on how many pop up and I wasn't sure whether this is the end of it. You said there's a couple of smaller royalties that are not available. Are those individuals as well?

Speaker 3

Again, without having all the detail in front of me here, Tanya, I believe that some or at least one is held by an individual and another is held by a company off the top of my head here. But I do agree with you. It's interesting that we see these things sometimes pop up and sometimes they surprise us as well. I think what we're seeing right now in the market, Tanya, is a pretty robust market for these 3rd party royalties. There's been a number of transactions announced that you've seen already this year.

Speaker 3

And I

Speaker 2

think it's a

Speaker 3

combination of stronger commodity prices that's motivating sellers and then a pretty robust buyer market. So all of us in the sector have lots of capital to deploy. It's pretty competitive. So it's a good market to sell into.

Speaker 6

And we'll talk

Speaker 3

about that. So in general, I wouldn't be surprised to see more.

Speaker 6

Okay. And so historically, we had talked about this $100,000,000 to $300,000,000 range. So the first thing I need to ask is, is that still the range of obviously, you did something in $50,000,000 but would you say that these royalties obviously are smaller and you're saying that you're seeing more of them, so maybe we can see this range go down to $50,000,000 to $300,000,000 versus $100,000,000 to $300,000,000 which maybe be more the stream. I'm just trying to differentiate now what you're seeing more. One of your competitors mentioned they much higher range on the upward side.

Speaker 6

So I'm wondering if you're seeing a larger range, but on the downward side.

Speaker 2

Dan, why don't you keep going? Yes,

Speaker 6

go ahead.

Speaker 3

Sure, sure. So, yes, I think Tonya, I think the way that we see the market right now is, and I think I mentioned this perhaps in the last call or 2, is that sub $100,000,000 level, that's been pretty busy for us in general. And I think the Back River royalties are an example of that category of opportunities. It's good size, good quality transactions. Those are the things we're looking to add in the portfolio.

Speaker 3

I think when we're talking more in the $100,000,000 to $300,000,000 range, which I think is still fair to say, I know we always give you kind of the same answer, but that's what we continue to see. We are aware of a couple of larger opportunities outside of that range. But I think in general, it's fair to say the $100,000,000 to $300,000,000 range is still very consistent in the broad sort of range that we see across both royalties, some royalties, but mostly in the streaming side.

Speaker 6

Okay. And then maybe Bill, can you talk to me a little bit about how this we hear about all of these deals and everyone has been super busy and has a lot of opportunities out there. But maybe you can walk us through from the time you are approached on an opportunity or you're proactive and start looking at opportunities. Can you just walk us through like what it takes to get the deal announced and sort of the timeline so that all of us are aware that we hear all of these deals that like they're not going to be completed tomorrow?

Speaker 2

Yes, I'm happy to. And just to be clear, when we talk about our business level of activity, we're not trying to sort of handicap the likelihood of closing a transaction. We're not looking to signal anything to anybody about a timing, something coming up in 6 weeks or 6 months. We're just trying to tell you that we're busy. We're looking at things that could be that we're looking at a number of earlier stage opportunities.

Speaker 2

And there are many exit ramps in this process going from first looking at a transaction to the point of signing 1. In the best of all worlds, this thing takes 6 to 8 weeks to close. Everything is lined up, all the information is available. That would be ideal for us. It never happens that way.

Speaker 2

And I will share with you that over the last 18 months, we were the preferred bidder on 3 different transactions that did not close, one of which the market knows about, that's ACG. I'm not going to go into the other 2 that are not public. But just to give you a flavor, what can derail these things, even when you won the contest amongst your peers and yet they still don't close and it could failure to achieve the CPs that was ACG. Metal price changes, right? You've been working on something for 6 months and a company looks at the gold price going from $1900 to $2,400 valuation expectations change.

Speaker 2

But the bigger issue for us, I would say, are the capital markets. Debt and equity, I think, are our biggest competitor. And as things go along, if interest rates come down and they said, well, the debt markets are open, we'd rather do that. Or the equity markets just open, well, we can do that. And we've seen these things happen.

Speaker 2

Even coming down to the management and the Board may not be on the same side of looking at our product. So it's really, really hard. I would say 6 months is probably a good estimate, but and Dan, I think you have a couple of examples. It can take a lot longer, but it can also be a lot shorter when things come up that we didn't even know about. So I don't know, Dan, is there anything you want to add there?

Speaker 3

Yes. I think I would just add, Tanya, just stepping back, we try not to overpromise on what may come out of our pipeline. And that's why we tend to keep our BD environment comments at a high level. And I appreciate that's a little bit frustrating for the analyst community. It's just a very fluid part of our business, and it can be very uncertain.

Speaker 3

And just thinking about our own recent transactions, if you look at Khoemacau as an example, I think we learned about that opportunity in early 2016. And we didn't agree on a transaction until early, I guess it was early 2019, after the team there decided to do some further technical studies and whatnot. So we may not see something come through for a number of years. And thinking about looking at say Red Chris, the royalty that we acquired there, sometimes we know about that royalty well in advance, but the chance to acquire came very quickly. And so we had to act very quickly on that one.

Speaker 3

And looking at Cortez, after we acquired the Rio Tinto royalty there in 2022, the additional Cortez Idol royalty, that came as a result of the private sellers that we had a relationship with for many years deciding that that was the right time for them to sell. The market didn't even know about that opportunity. I just kind of surprised the market to some degree. So to Bill's point, it's very hard to predict. And I think Bill's comment there about sort of 2 quarters at a minimum, we can do things quicker, but I think that's a reasonable general timeline to consider.

Speaker 6

Okay. So 2 to 6 months sort of benchmarking ourselves, too optimistic, 6 on average. Okay. That's helpful. Thank you.

Speaker 2

Yes. Go ahead. Sorry.

Speaker 6

No, no. It's just for ourselves to just benchmark when you hear about these things, somewhere between 2 to 6 months is sort of a reasonable time range.

Speaker 2

Yes. 2 months is an ideal world. 6 months probably closer to reality.

Speaker 6

Reality. Okay. Well, we live in reality. I wish I lived in an ideal world. If I could see yes, well, maybe I am living in an ideal world.

Speaker 6

If I could squeeze one more in. Just on the back river, I haven't had a chance to model the additional royalties that were purchased. But just as a benchmark, if we were to use your guidance pricing and look at this project, would it be safe to assume? I'm assuming that the interim rate of return would be sort of double digit. But again, I haven't done that.

Speaker 6

I'm just trying to benchmark myself.

Speaker 2

Yes. Dan, I think you've got that number. I think we looked at it on a spot price basis here.

Speaker 6

Okay. Even at Boston,

Speaker 3

I think I think the mid to upper single digits is a reasonable way to think about it at the moment.

Speaker 6

Med to the single, okay, upper single digit and that's on top pricing or 20%?

Speaker 3

Yes, upper single digit. Yes. Yes. Somewhere around that $2,350,000 $2,400 spot price.

Speaker 6

That's very helpful. Thank you. I appreciate all the time you spent with me. I'll let someone else ask questions. Thank you so much.

Speaker 6

Thanks,

Operator

Next question today comes from Brian MacArthur at Raymond James. Please go ahead.

Speaker 2

Good morning and thank

Speaker 7

you for taking my question. And it sort of follows on Tanya's last one. So I thought I worked this out, but given your guidance on the slide, sorry, Slide 6, which is the Back River Royalty. So if I read this from 0 to 400,000 ounces, do you just get the 0.7 NSR and then from 400 to 7.80 you get the 2.5 less to 0.7 because you deduct it. And then after 7.80 you get $3,300,000 less the $700,000 which eventually goes down to $300,000 once you get $5,000,000 royalty on that thing.

Speaker 7

Is that the way I'm supposed to think about it? And secondly, if that's true, I'm trying to figure out how we get to the 1.3% GSR that you comment on for Kilometers post 780. Look, maybe it's easier offline, but any guidance on how that works? Because when we're doing these IRRs, obviously, if this thing ramps up more over time, it makes a big difference in what you get here.

Speaker 2

Yes. Brian, let me take a crack at it, but we might want to take this offline just to walk through it. I think what we were trying to do with the chart and it's exactly I think what we tried to do with Cortez is take a really, really complicated royalty situation where you've got deductions and sort of boil it down for you to say this is the rate you should apply to the production to do your forecast. And we're trying to do the deductions for you and tell you what the effective rate is. Dan, if I stepped in the wrong direction, please correct me.

Speaker 3

Yes, I think that's right. And Brian, it is fairly complicated, just to tell you his question about royalties on the property and their deductions and things like that. So that's exactly what we tried to do is just to make it as simple as possible. And just think about it in those 3 buckets, ultimately getting to that 3.3% GSR rate and very early in the mine plan as well.

Speaker 7

Okay. But you also say that's what I'm trying to get at. You also say together they're equivalent to a 1% GSR early on. And that's a lot different than getting up to 2% or 3% early on. That's all I'm really asking.

Speaker 7

I don't need all the details. So I be using 1.1% through the whole thing or should I be higher in the early years and dropping it off later? Because that's I think goes to Tanya's question too.

Speaker 3

Sure. So Brian, the 3.3% is the combined Kilometers and Hill royalties. So that's the 1.1% plus our existing royalty there, which is 2.2%. So that's how you get to the 3.3%. So just to step back, this chart is all of our royalties combined into one rate.

Speaker 7

Right. Which is basically the we get that footnote that talks about you already own 51.25 percent of it or whatever. So you're bringing that into it as well when you do all

Speaker 3

that. That's right. Yes, that's right.

Speaker 7

Got it. Okay. Thank you. That's very, very helpful. Thank you.

Speaker 7

Thank you very much.

Speaker 2

Thanks, Brian.

Operator

All right. We have no further questions on the call. So I'll hand the floor back to Bill to conclude.

Speaker 2

Well, everyone, thank you for joining taking the time to join us today. We certainly appreciate your interest in Royal Gold, and we look forward to updating you on our progress during our next quarterly call. Take care.

Operator

This concludes the conference. Thank you all very much for joining.

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Royal Gold Q2 2024
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