Royal Gold - Q3 2023

Transcript

Operator (participant)

Hello, and welcome to today's Royal Gold's 2023 third quarter conference call. My name is Bailey, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press Star followed by one on your telephone keypad. I'd now like to pass the conference over to Alistair Baker, Vice President, Investor Relations and Business Development. Alistair, please go ahead.

Alistair Baker (SVP of Investor Relations and Business Development)

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's third quarter 2023 results. This event is being webcast live, and you will be able to access a replay of this call on our website. Speaking on the call today are Bill Heissenbuttel, President and CEO, Martin Raffield, Vice President of Operations, and Paul Libner, CFO and Treasurer. Randy Shefman, General Counsel, and Dan Breeze, Vice President, Corporate Development of RGLD Gold AG, are also available for questions. 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 and adjusted net income per share. Reconciliations of adjusted net income and adjusted net income per share to the most directly comparable GAAP measures are available in yesterday's press release, which can be found on our website. Bill will start with a preview of the quarter, Martin will give some commentary on the portfolio, and Paul will provide a financial summary. After the formal remarks, we'll open the lines for a Q&A session. Now, I'll turn the call over to Bill.

Bill Heissenbuttel (President and CEO)

Good morning, and thank you for joining the call. I'll begin on slide 4. Our third quarter was quiet and steady. We turned in good financial results with revenue, operating cash flow, and earnings all up compared to the same quarter of last year, and we maintained our strong margins. Revenue was $139 million for the quarter, and operating cash flow was $98 million. Earnings were $49 million, or $0.75 per share. After a minor adjustment, adjusted earnings were $0.76 per share. We made a dividend payment of $0.375 per share for the quarter. We also continued our focus on the balance sheet and repaid a further $75 million of the outstanding balance on the revolver, and we increased our available liquidity at the end of the quarter to about $770 million.

So far in 2023, we have repaid $250 million of the outstanding balance on the revolver. If you recall, we drew $200 million at the end of December last year to help fund the second of two royalty acquisitions on the Cortez Complex. We have now fully repaid that draw, and we've added a cash flowing asset with multi-decade production potential without diluting shareholder exposure. While interest costs have risen recently, we believe that paying debt service costs for a short period is a worthy trade-off for full exposure to long-life assets. Barring further business development investments in the short term, we will continue to allocate free cash flow to further reduce the outstanding debt balance.

Our capital allocation strategy of using non-dilutive financing to acquire high-quality assets has been effective over the long term, and our commitment to that strategy helps explain why we have the lowest share count in the GDX index. I'll now turn the call over to Martin to provide some comments on the portfolio.

Martin Raffield (SVP of Operations)

Thanks, Bill. Turning to slide 5, I'll give some comments on third quarter revenue. Overall revenue for the quarter was $139 million, with volume of 72,000 gold equivalent ounces or GEOs. Our royalty segment contributed revenue of $40 million, a 21% increase over the prior year quarter. The positive variance was driven by higher quarter-over-quarter metal prices and higher revenue from the Cortez Legacy Zone. Also, new revenue from both the Cortez CC Zone and King of the Hills royalties. This was partially offset by Peñasquito, where we recognized no royalty revenue in the quarter due to the production suspension that started in early June.

Peñasquito is one of our principal properties and is generally an important revenue driver, so we are pleased that the strike has been settled and operations are ramping up, and we look forward to seeing royalty contributions restart before the end of the year. Revenue from our stream segment was flat compared to last year, at $99 million. The largest variances were due to higher revenue from Khoemacau, Rainy River, and Xavantina, which were offset by lower contributions from Mount Milligan and Pueblo Viejo. I'll turn to slide six and give some comments on notable developments at operations.

At Mount Milligan, Centerra reported that production in the quarter was impacted by mine sequencing, with the mining of some residual ore waste transition material, as well as lower recoveries because of elevated pyrite to chalcopyrite ratios from blending low-grade gold, high-grade copper ore mined in phase nine, with high-grade gold, low-grade copper ore mined in phase seven. As a result, Centerra's lowered 2023 gold production guidance to 150-160 thousand ounces and expects copper production to come in near the low end of the 60-70 million pound guidance range. Centerra is expecting medium-term recoveries for gold and copper to be similar to those seen in 2023 and is undertaking metallurgical reviews to increase recoveries. For 2024, Centerra expects higher levels of gold and similar levels of copper production compared to 2023 guidance levels.

Also at Mount Milligan, Centerra has launched an asset optimization review to assess productivity and cost efficiency opportunities alongside mine plan optimization, and their goal is to drive incremental operational improvements. They expect the review to be completed in 2024. At Pueblo Viejo, equipment design deficiencies impacted ramp-up of the expansion project during the quarter, and gold production was impacted by lower ore grade processed due to the mine sequencing, as well as lower mill throughput and recovery associated with the commissioning of the mill. Barrick is working to address these issues. Approximately 81,000 ounces of silver were deferred during the quarter, and the total deferred amount was 688,000 ounces at the end of September. We don't expect any material deliveries of deferred ounces for the remainder of the year, while the expansion is commissioned and ramps up to full production levels.

We expect it will take several quarters to deliver the entire deferred amount after the plant is running at full capacity. At Cortez, Barrick released the results of a conceptual preliminary economic assessment on the Fourmile Project, which indicates a potential gold production profile of 300-400,000 ounces per year, in addition to the Cortez Complex production profile of 950,000 ounces to 1.2 million ounces per year over 10 years. Barrick has stated that ongoing drilling demonstrates the potential to increase the grades and size of the project, and work is underway to assess an underground exploration decline to support a pre-feasibility study. Both of the royalty acquisitions we completed last year on the Cortez Complex provide exposure to this project, and we're pleased to see the upside potential advancing so quickly.

Finally, we are pleased to see continued positive developments at smaller assets in the portfolio, including significant reserve and resource growth at the King of the Hills mine in Western Australia. First gold produced last week at the Bellevue Gold Project in Australia. Construction progress at Côté in Ontario, with first production expected in early 2024. First production expected at Mara Rosa in Brazil in the first half of 2024, and strong quarterly production at Rainy River in Ontario, and progress towards first ore production in the second half of 2024 for the new underground mine zone. I'll now turn the call over to Paul for a review of our financial results.

Paul Libner (SVP and CFO)

Thanks, Martin. I'll now turn to slide 7 and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended September 30, 2023, to the prior year quarter. Revenue was up 5.5% to $139 million for the quarter. As Martin mentioned in his remarks, contributions from the new Cortez royalties and the ramp-up at Khoemacau were large drivers to our increased revenue this quarter. Metal prices also contributed to the increase in our revenue this quarter, as the price of gold was up 12%, silver was up 23%, and copper was up 8%. Gold remains the dominant revenue source, making up 78% of our total revenue for the quarter, followed by silver at 11% and copper at 10%.

At 78%, Royal Gold has the highest gold revenue percentage compared to major peers in the royalty and streaming sector. Turning to slide 8, I'll provide a bit more detail on specific line items. G&A expense increased to $10 million and was due to higher corporate costs and higher employee-related costs, which include non-cash stock compensation expense. While we are not directly exposed to inflationary pressures that have impacted operating costs in the mining sector, we have seen some inflation impact on our cash G&A. Although we did see an increase over the prior year, our margins remained high, and with a small employee count and a focus on cost control, our cash G&A costs remain low at about 5% of total revenue. Our DD&A expense increased to $40 million from $38 million in the prior year.

On a unit basis, this expense was $558 per GEO for the quarter, compared to $497 per GEO in the prior year. The higher overall DD&A per GEO this quarter was a result of revenue mix. Specifically, we had higher overall revenue contributions from our Cortez royalties in the current quarter, which royalties carry a higher average depletion rate. In addition, we had no revenue from Peñasquito, which has one of our lowest depletion rates in the portfolio. These two factors resulted in the higher DD&A per GEO for the quarter, as there were no other significant changes to our depletion rates during the period.

Provided that Peñasquito can return to full capacity by the end of the fourth quarter, we are currently forecasting that our DD&A per GEO will be near the upper end of our previously provided guidance range of $490-$540 per GEO for the fourth quarter. Interest expense decreased to $7.3 million for the quarter, from $8.8 million in the prior period. The decrease was due to our continued focus on debt servicing during the quarter, as we had lower average amounts outstanding under our revolving credit facility when compared to the prior year. The all-in interest rate for borrowings under our credit facility was 6.7% at the end of the third quarter. Tax expense for the quarter was $11 million, resulting in an effective tax rate of 17.8%.

This compares to a similar tax expense of $11 million and an effective tax rate of 19.3% in the prior year period. We continue to expect our effective tax rate, absent discrete tax items, to be in the range of 17%-22% for the fourth quarter and full year. Net income for the quarter was up over the prior year to $49 million, or $0.75 per share. After adjusting for a small change in the fair value of equity securities, our adjusted net income was $50 million, or $0.76 per share... which is 5.5% higher than our adjusted net income in the prior year quarter of $47 million or $0.71 per share. Our operating cash flow was strong again this quarter at $98 million, compared to $95 million in the prior year.

The increase during the quarter was the result of higher royalty revenue, primarily from the additional Cortez interests we acquired in 2022. I will now turn to slide 9 and provide a summary of our financial position at the end of the quarter. During the quarter, we repaid $75 million on our revolving credit facility and reduced the amount drawn to $325 million. As Bill mentioned, we have repaid $250 million of our revolver balance so far this year. And in keeping with our approach to capital allocation, we expect to repay the remaining $325 million before the end of 2024, absent significant business development activity and as cash flow allows.

The $675 million undrawn revolver capacity, combined with $93 million of working capital, provided us total available liquidity of just under $770 million at the end of the quarter. That concludes my comments on our financial performance for the quarter, and I will now turn the call back to Bill for closing comments.

Bill Heissenbuttel (President and CEO)

Thanks, Paul. We had a solid quarter, and our portfolio generally performed well. However, we did see short-term production delays and interruptions at a small number of our larger assets. As a result, we expect that total sales for 2023 may come in at the low end of or slightly below our initial April sales guidance of 320,000-345,000 GEOs. The main drivers for this are well known, and they are, one, the slower-than-anticipated ramp-up of the planned expansion at Pueblo Viejo, and two, the 4.5-month suspension of operations at Peñasquito. We hope that these issues are behind us now, and we are pleased that Newmont has restarted operations at Peñasquito, and we feel confident that Barrick is working to address production levels at Pueblo Viejo.

Finally, I want to comment briefly on the metal and jurisdictional mix of our portfolio, both of which are important differentiators for Royal Gold. Gold has remained strong this year with strong central bank demand and has performed well despite steady increases in interest rates. As Paul highlighted, 78% of our revenue came from gold this quarter, which is the highest among our large-cap peers. And jurisdictionally, the two most significant revenue sources for this quarter were Canada and the U.S., which combined provided about 53% of our revenue. We seek to acquire precious metal assets in safe jurisdictions operated by high-quality counterparties, and we believe the transactions we've completed over the past couple of years will continue to enhance our shareholders' exposure to gold revenue in low-risk jurisdictions. Operator, that concludes our prepared remarks. I'll now open the line for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handsets before asking your question, and please do ensure that you are unmuted locally. Our first question today comes from the line of Jackie Przybylowski from BMO Capital Markets. Please go ahead. Your line is now open.

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Thanks, thanks very much for taking my questions. I have a couple, so maybe I'll start with a quick one just to get it out of the way. On Peñasquito, you mentioned that the mine restarted after the strikes. Can you just remind us what, if any, of the lag you expect to see between the mine restart and sales or production to your credit?

Bill Heissenbuttel (President and CEO)

Yeah, Jackie, this is Bill. The Peñasquito royalty, we get paid on provisional and final settlement. So if either of those occur in the fourth quarter, we should receive revenue. There isn't the delay that we have in some of the streams. What I can't tell you, and Martin can interject if he disagrees, is how fast they're going to start up. That's just an unknown for us.

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Yeah. That's fair. But no, I appreciate that. It gets, it's the difference between a royalty and a stream in kind where you're accepting delivery, right? It's. This is a little quicker. And,

Bill Heissenbuttel (President and CEO)

It is quicker, but I would say the delays in the streams are unique to two contracts, so that doesn't apply to all the streams-

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Okay

Bill Heissenbuttel (President and CEO)

where there's a few months delay.

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Got it. That's helpful. Thank you. If I can ask, I think this is probably the first opportunity I've had to ask you about the press release you put out in September about the ACG transaction. I read through the disclosures that ACG had on its website, as well as your disclosure, and maybe I'm not enough of a legal expert, but if you can maybe just simplify it a little bit, is that opportunity completely off the table for you now, or is there still... Like, I know it's obviously delayed from the original timeline, but is there still an opportunity at some point that could rematerialize?

Bill Heissenbuttel (President and CEO)

Well, the original transaction has terminated. Our involvement-

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Okay

Bill Heissenbuttel (President and CEO)

was based on the satisfaction of certain conditions precedent, and those conditions were not satisfied. The assets still remain with the seller. To say, could it come back yet? It might come back, but we're not going to know that for a period of time.

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Okay. No, that's helpful. The disclosures that ACG had on its website, it sounded like they were sort of still working on it, but I don't know. It's just my poor reading of the text, I think. I'm having a hard time understanding exactly what they were saying.

Bill Heissenbuttel (President and CEO)

Yeah, as we sit here today, what I would say is just assume there is no transaction there.

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Okay, that's helpful. Thanks. And maybe just on like a bigger picture on that, on that point, Bill, what is your outlook for new royalty or stream transactions right now? Is there a lot sort of in the pipeline? Is there a lot that you guys are kind of working on, or how optimistic are you at the moment?

Bill Heissenbuttel (President and CEO)

I'm always optimistic. We're always busy from a business development perspective. But maybe if I can get Dan to chime in here and give you his perspective as head of our business development team.

Dan Breeze (SVP of Corporate Development and RGLD Gold AG)

Sure, Bill. Hi, Jackie. Hope you're doing well. Thanks, thanks for the question there. Yeah, I agree with Bill. It's been quite busy for us, Jackie, and I think where we're seeing a lot of the activity right now is in, let's call it the sub-$100 million range, so more on the royalty side. And I think that's just a function of where the equity markets are right now. As you know, it's really difficult for smaller companies to raise equity, and so they're talking to groups like ours. Maybe that'll change with gold at $2,000 here or so, and maybe that window will open up. But right now, they're very interested to talk to a group like ours. So we're quite active on that side. We're looking at geology, we're looking at the land packages.

Our geologists are quite busy, and we're just trying to look for good investments with interesting upside. So that's really where a lot of the focus is right now. And if you look at what Martin talked about in the comments there, and the various royalties that are just starting to produce, we've had good success with these smaller royalties, so we'd happily add more of those in the portfolio. But, you know, we always talk, Jackie, about this $100 million-$300 million range, that's still very much intact, and so we do see opportunities in that range. It's more development-type project financing that we're seeing and more on the gold side as well. So overall, quite busy for us right now.

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

That's great. I mean, it-

Dan Breeze (SVP of Corporate Development and RGLD Gold AG)

Does that help?

Jackie Przybylowski (Managing Director and Equity Research of Metals & Mining)

Yeah, absolutely. It's totally understandable in light of the relatively high cost of other sort of project financings that yours would be fairly attractive, but also if equity and debt are unavailable, it makes it difficult to do those bigger streams. So I appreciate that. It's helpful color. Thanks, Dan, and thanks, Bill. That's all for me.

Dan Breeze (SVP of Corporate Development and RGLD Gold AG)

Thanks, Jackie.

Operator (participant)

Thank you. If you would like to ask a question, please press Star followed by one on your telephone keypad. Our next question today comes from the line of Brian MacArthur from Raymond James. Please go ahead, Brian. Your line is now open.

Brian MacArthur (Managing Director)

Hi, good morning. My question has to do with the deferred silver stream at PV. Can you just remind me, you know, when we finally get this up and running, how this trigger works? Do you get back... I mean, once they get the fixed rate 70% and it works, you're entitled to 75% of the silver, as I understand it. But to catch up, do you go right and get 100% of the silver when the trigger works, or is there a scaled-in function? Because you made the comment it would take a number of quarters going forward. I mean, any details you could give us on that would be helpful.

Bill Heissenbuttel (President and CEO)

Yeah, Brian, well, the thing that sticks in my mind is, I believe, and someone on the team can correct me, if the recovery goes above somewhere around 52.5%, we start to recoup the silver. So it is gradual. We don't jump to a given number. The reason there's deferred silver is we could not demand from Barrick more than 100% of their share of the silver. So-

Brian MacArthur (Managing Director)

Right.

Bill Heissenbuttel (President and CEO)

It's not as though we can go beyond that. But that, that's really, yeah, to me, that's the number I'm looking for. If the recovery gets above that, above that 52.5, we'll start to see it. And I think at that point, we can probably do a better job of helping you figure out when it might come in.

Brian MacArthur (Managing Director)

Okay. But you do get, like, technically, just in the stream, right, you get 75%. You can't go over 100, but the minute you get the trigger, then you can go and take... You can basically sweep all the silver that comes out any quarter, theoretically. Is that fair?

Bill Heissenbuttel (President and CEO)

Theoretically. Yeah, their share.

Brian MacArthur (Managing Director)

Okay. Right, their share. Okay, I think I've got that. It's just I've always—because I noticed last year you did get some, you did catch up some, and then it went the other way. So I was just trying to figure out exactly.

Bill Heissenbuttel (President and CEO)

Yeah.

Brian MacArthur (Managing Director)

Because it is starting to build up to be a significant amount right now, so I was just trying to figure out how fast that would come out going forward. Great. Thanks very much, Bill. That was my question.

Bill Heissenbuttel (President and CEO)

Thanks, Brian.

Operator (participant)

Thank you. There are no additional questions waiting at this time, so I'd like to pass the call back over to Bill Heissenbuttel for any closing remarks.

Bill Heissenbuttel (President and CEO)

Well, thank you very much for 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 (participant)

This concludes today's conference call. Thank you all for your participation. You may now disconnect.