Triple Flag Precious Metals - Q3 2023

Transcript

Operator (participant)

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Triple Flag Q3 2023 results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Shaun Usmar, CEO. Please go ahead.

Shaun Usmar (CEO)

Eric, thank you, and good morning, everyone, and thank you for joining us to discuss Triple Flag's third quarter, 2023 results. Today, I'm joined by our CFO, Sheldon Vanderkooy, and our Senior Vice President of Corporate Development, James Dendle. Our business continues its strong performance during the third quarter, with sales of 25,629 gold-equivalent ounces, resulting in $37 million of operating cash flow. Our portfolio is performing well, with many assets experiencing positive catalysts during the quarter, such as the high gold grade open pit E31 and E31 North deposits at Northparkes, continuing to progress down the development track and will start contributing to Triple Flag's GEOs in 2024. Exploration progressing at Cerro Lindo and resource expansion at Buriticá. Additionally, our earlier stage exploration assets continue to advance, highlighted by Hope Bay, Delamar, Tamarack, and Koné.

In addition, we acquired an additional 2.65% NSR royalty on the producing Stawell Mine in Australia for $16.6 million, continuing our solid pace of accretive transactions following the Agbaou royalty acquisition in Q2. Including the Maverix transaction, which we closed earlier this year, this brings the total value of transactions closed during 2023 to nearly $700 million. Just after quarter end, our commitment to sustainability was showcased through our improved Sustainalytics ESG rating, which now places us 3rd out of 117 companies in the global precious metal sector. We're proud to exemplify the values of sustainability that helped shape this business, and I appreciate the work of our team to get to this point. I'll now turn it over to Sheldon to discuss our financials for Q3 2023.

Sheldon Vanderkooy (CFO)

Thank you, Shaun. We had a strong third quarter, realizing sales of over 25,600 gold-equivalent ounces. We are comfortably on track to achieve our 2023 guidance. Our Q3 GEOs in turn resulted in strong revenues, Adjusted EBITDA, and operating cash flow in the quarter. We also recognized an impairment charge in the quarter, due predominantly to the Renard Diamond Mine being placed on care and maintenance. The diamond market has weakened significantly this past year, and the difficulties of the sector are well known. This is a non-cash charge, and we do not have any further exposure to Renard in our statements going forward. Our operating cash flow of nearly $37 million resulted in operating cash flow per share of $0.18, an increase compared to the same period in 2022.

Year to date, our portfolio generated a robust $116 million of operating cash flow to be used for dividends, debt repayment, shareholder returns, and external growth opportunities. Our quarterly dividend has been maintained at $0.0525 per share, or $0.21 per share on an annualized basis. I'd also like to comment on our strong balance sheet, which is increasingly important in today's high interest rate environment. We finished the quarter with $65 million in debt and just $50 million of debt net of cash. This represents just four months of cash flows at current run rates. Subsequent to quarter end, we repaid $8 million of debt, further strengthening our balance sheet. Lastly, our asset margins for the quarter remain strong at 90%.

High asset margins are a key feature of the streaming and royalty model and help ensure robust cash flow generation. I'll now turn to slide six. Slide six highlights three very important aspects of our portfolio, namely asset diversification, precious metals focus, and a portfolio which is predominantly centered in the Americas and Australia. Our revenue is well diversified across our portfolios. Cerro Lindo and Northparkes are our biggest contributors to the quarter, representing 21% and 15% of quarterly revenues, respectively. We are strongly precious metals focused. Gold and silver accounted for roughly 96% of our revenues, among the highest in the sector. Our portfolio is predominantly located in mining-friendly jurisdictions. By geography, the country with the single greatest contribution is Australia. Our Australian producing assets include Northparkes, Fosterville, and Beta Hunt, as well as a number of smaller contributors, including Stawell.

With our recent increase of the Stawell royalty, I am very pleased that we have increased our exposure to a low-risk jurisdiction. I'll now turn to James, who will speak to our asset highlights.

James Dendle (SVP of Corporate Development)

Thanks, Sheldon. There were a number of important advances made across the portfolio during the third quarter. Northparkes has commenced mining the E31 open pits, which host higher gold grades, and we expect to see E31 pit ore processed later this year, which will drive GEOs growth in 2024. Camino Rojo had a strong performance during the quarter and the first half of the year, with Orla increasing 2023 production guidance to between 110,000-120,000 ounces of gold from 100-110 thousand ounces previously. At Delamar, a successful drilling program increased heap leachable ounces in the measured and indicated categories by approximately 25%, and in the inferred category by 31%....

Lindo had a strong quarter after renewed access to the high-grade areas that was restricted during heavy rainfall from Cyclone Yaku earlier this year, in addition to an ongoing exploration program. At Buriticá, the operation continues to perform consistently, and Zijin has been able to grow the gold resource by approximately 700,000 ounces in the measured and indicated categories, and approximately 570,000 ounces in the inferred category over the last 12 months after production completion, highlighting the significant prospectivity within this district. And finally, Agnico Eagle's exploration program at Hope Bay continued during the quarter, with 119,000 meters of drilling completed in the first 9 months of the year. Agnico is evaluating larger production scenarios at the project, which will directly benefit our royalty.

Turning to the next page, as Shaun previously mentioned, late in the quarter, we acquired an additional 2.65% NSR royalty on producing Stawell Mine, operated by Stawell Gold Mines for $16.6 million, bringing our total exposure to the mine to a 3.65% NSR royalty. Stawell is clearly, clearly an asset we know well, and we're happy to increase our exposure to this well-run operation. Stawell is a predominantly underground mine, located 250 km northwest of Melbourne. The mine commenced production in 1981 and has a strong track record of production and a history of reserve replacement. A plant refurbishment was completed in 2019, and ongoing exploration expenditure and results have driven a significant increase to the resource inventory, placing the mine on a solid long-term footing.

Stawell is expected to have at least a 10-year life of mine, with forecasted annual gold production ramping up to approximately 70,000 ounces per annum in the long term, from around 50,000 ounces currently. Over to you, Shaun.

Shaun Usmar (CEO)

James, thank you. As the snapshot demonstrates, Triple Flag is primed to build on our leading track record. And as Sheldon mentioned, I'm happy to say that we're on track to achieve our guidance range for 2023, which remains unchanged at 100,000-115,000 ounces. With the amplified power of roughly $650 million in available liquidity, a broad base of 234 assets, and a five-year average annual production outlook of 140,000 gold-equivalent ounces, we're excited to continue growing Triple Flag into a leader in the sector with our top sustainability ratings and prudent capital allocation decisions. With the board and management team being large shareholders ourselves, we're completely aligned in ensuring the best outcomes for all stakeholders and are looking forward to what 2024 has to offer.

With that, Eric, please open the floor to any questions.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, press Star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Lawson with BofA Securities. Please go ahead.

Lawson Winder (Senior Equity Research Analyst)

Yeah, thank you very much, operator, and good morning, gentlemen, Shaun, Sheldon, and James. I just wanted to ask about the two writedowns and kind of your thinking on potential lessons learned, both Renard and Beaufor, sorry. I mean, obviously, they were very inexpensive investments relative to, you know, your overall investment. But, I mean, is there something to glean from that that can be applied going forward to other assets? Or is this just a case of, you know, unfortunate market conditions and unknowable unknowns?

Shaun Usmar (CEO)

Lawson, look, firstly, good morning. It's a, it's a good question. I think, you, you know, any organization with its weight is trying to look at the things that are within your control that you can learn from. You know, if I go specifically to the Renard transaction, we were discussing this just with our, our board yesterday. You know, that was a $200 million transaction done five, six years ago. Diamonds, as you know, are sort of non-core, and we tried at the time to bifurcate a gold stream, in particular, from a diamond stream, and it was sort of a package deal.

I suppose that at the time, we rationalized it by saying, "it's a producing Canadian asset with strong support from, you know, Quebec and other institutions." I worked with a former friend and colleague of ours who had run Debswana, gave us some expert input into the due diligence at the time, because it is outside of our ordinary sphere. You know, that all went quite well. And I think as we look with hindsight, you made the point, it's 234 assets. I think if you look at our overall percentage of writedowns as on our net invested capital, we actually will, we will be the best in the sector amongst any of our peers. But that's still cold comfort.

You know, the things that with hindsight, I think happened in that lesson, firstly, is the transition from open pit to underground. Clearly, they struggled, which impacted liquidity, and primarily, it's been a story of difficult diamond conditions and inflation. And if you think back, you know, we supported the business through a difficult period, along with other investors, that made cash, and it was fine. It prolonged optionality. But in this environment, that market has really got crushed in the last number of months, which are-- you know, we feel really bad for the teams that we try to support through this period. So, you know, as Sheldon said, there's no more investment in there. The lessons learned for us primarily is, you know, this wasn't a thing we'd pursued in isolation. We only look outside of gold and silver by exception or base metals.

We won't be rushing into any future diamond investments. And then the other one, you know, that was a small investment that we had made. I'm not quite sure if Sheldon or James, just either that or general, if you have any questions. I don't think there was anything necessarily diligence-wise we would have done differently.

Sheldon Vanderkooy (CFO)

Yeah. But Beaufor is, you know, it's a more recent investment we made. They just struggled with the ramp up, and a bit of the grade issues there in that mine. And I think they're probably also, it's indicative of the struggles the junior mining sector has had on the equity front. And, you know, they, they've run through the process. We've taken the write down now, it's written down to zero on our books. So this is behind us at this point. But, you know, and there's a press release that was out recently that IQ has made some motion to enforce some security. So we just thought it was prudent to put this behind us.

But I think the real story there is the junior equity markets just aren't very open, and more cash flow wasn't available to them from investors.

Shaun Usmar (CEO)

James, anything you'd want to add?

James Dendle (SVP of Corporate Development)

No. I mean, we acquired this initial interest, you know, as part of a larger portfolio acquisition, and, you know, followed it on when the mine looked like it was positioned to come into production. But as Sheldon said, you know, they don't have the latitude to deal with the challenges they experienced, given the state of the markets.

Shaun Usmar (CEO)

You know, Lawson, I think I'd end by saying, you know, I think it is one of those situations we're finding, which is presenting opportunity and risk, and we're focusing, I'd say, more intensely as a consequence. It feels like the access to capital and the equity capital markets for the juniors and even intermediates is atrophied, and I think that presents really interesting opportunities for our form of financing for ourselves and our peers. But it really means, you know, being extra vigilant, in the event the, you know, they run into any issues, that they've got sufficient liquidity. So that's been a thematic for us all year, and we've posted up a number of interesting deals as a consequence. You know, that's a big focus for us.

Hopefully, that gives you a bit of an answer, probably more than you bargained for.

Lawson Winder (Senior Equity Research Analyst)

It was, but you know, very, very helpful perspective. I mean, I appreciate that. I think it will help anybody listening on the call, too. I also wanted to ask about Pumpkin Hollow and you know, what you're thinking is around that asset. I mean, I mean, I think if I look over the portfolio, I mean, that's probably the one other asset that you know, would give me any sort of level of concern. The others seem to be doing very well or relatively well. Are you expecting production from that at all next year? And then... I mean, I think the plan is more for sort of 2025.

And then, what are your thoughts on potentially, deploying more capital and what, you know, could be a potentially high return asset in the long term?

Shaun Usmar (CEO)

Yeah. So, I mean, you know, that story is, is you, you've traveled the journey with us. You know, we had, as we tend to have, we funded five development stage assets with meaningful checks into production. You know, that was one that, even with a conservative set of adjustments, has really struggled. And, I think importantly, our form of financing has been very supportive and defensive. We supported that team, you know, through this. They've hit an important milestone now with, you know, getting the mill back on. But they've got some work to do still, obviously, to ramp up ultimately to, you know, nameplate, which will take time.

I think you remember at the start of the year, I think we were quite clear that assets like that, in general, we handicap our numbers for all sorts of good reasons. We have assumed no ounces for this year, and you know, we haven't put out public guidance yet on the year ahead. I think we are gonna continue to maintain a sort of conservative posture. But I think the one thing that is sort of important to us, particularly in this environment where, you know, you've seen what's been happening in Central America and elsewhere recently. You know, copper is a commodity which remains sought after. Putting aside the ebbs and flows of shorter-term supply, demand, you know, it is an essential commodity for the energy transition.

You know, US-based copper is just an intrinsically useful and valuable asset. So we remain very supportive of that. We'll continue to remain a sort of defensive posture on that, on that investment. But I think we're also very well positioned in terms of, you know, where we rank and how we think about that. And we've got a lot of optionalities, you know, it's not just the underground. We also have exposure to the open pit. But Sheldon, James, anything you would wish to add?

Sheldon Vanderkooy (CFO)

I think that covered it very well.

Shaun Usmar (CEO)

There you go. Lawson, do you wanna ask us about our really good assets or, anyway, any other questions you wish to cover?

Lawson Winder (Senior Equity Research Analyst)

No, that covers it off. And I would just say I agree. I think you covered both questions extremely well. Thank you for that. I appreciate your thoughts.

Shaun Usmar (CEO)

No, no, no worries. Thanks so much. Yeah.

Operator (participant)

Thank you. As a reminder, if anyone has any questions, please press star followed by the one. Your next question comes from the line of Carey MacRury with Canaccord Genuity. Please go ahead.

Carey MacRury (Equity Research Analyst)

Morning, guys. So maybe just to follow up on Renard, to keep with the not great performing assets going, but just wondering if you can summarize your ownership position in Stornoway, and is there any potential for any future liabilities to flow through to Triple Flag?

Sheldon Vanderkooy (CFO)

Yeah. Hi, Carey, it's Sheldon. I'll answer this one. Like we hold a stream on Stornoway, and we also hold a debt interest, and we also hold a minority shareholding interest there of 13%. We've written everything down to nil, so we don't see any further exposure there, and we don't see any further exposure coming out from the Stornoway level up to the Triple Flag level.

Operator (participant)

... So no potential exposure to closure costs or anything like that?

Sheldon Vanderkooy (CFO)

No, I don't think we're liable for any closure costs there. I know they have arrangements, they have bonding facilities and some cash reserves available at the Stornoway level, but that is actually, you know, we're a minority shareholder there, and a stream holder and a debt holder, where we don't see any exposure.

Operator (participant)

Great. That's helpful. Thanks, guys.

Sheldon Vanderkooy (CFO)

Thanks, Carey.

Operator (participant)

Thank you. Your next question comes from the line of Tanya Jakusconek with Scotiabank. Please go ahead.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

Hi. Good morning, everybody. Thank you for taking my question, and I won't ask about diamonds, even though I could talk about diamonds all day. I'll move on and just talk about just the M&A environment. I'm just interested in the comment you made, Shaun, about just the challenges of the equity markets for the juniors. Should I read into this that you are looking at, you know, at future deals, having more involvement on the equity side and the debt side of financing these junior companies on top of the stream? Or should I think of it in a different way?

Shaun Usmar (CEO)

Yeah, Tanya, firstly, yeah, it's good, good to hear from you. We, I think, have been consistent over nearly eight years now, where when we started, we were told to compete, we had to actually, you know, write big equity checks and do a host of other things. And I think, you know, with the business we have today, we've really not done that. You know, you heard on Renard, we've got a small position. We helped them in during a period of distress, but those have always been small checks in the context of our primary business, and you can see that in our NAV. I mean, we're within spitting distance of 100% of just streams and royalties.

And so we've achieved what we've achieved, and I don't see a reason, notwithstanding that we've seen some of our larger peers engage in doing that. I think it violates the model, and I also think that there are complementary and very capable pools of capital that, you know, we've shown in the past, we've been able to work with quite successfully to arrive at sort of full funding solution. So, you know, just this last week, I won't disclose the party, but, you know, we are receiving inbounds from groups that are interested. They see perhaps a generational opportunity on the resources space, and they're looking for knowledgeable financing partners to work with. And we've been able to, I think, successfully compete in that way in the past.

I think the largest equity checks we've ever written, but in the context of much, much larger overall checks for a transaction, where perhaps our money is contingent on going in on a full funding solution, and we act maybe as a cornerstone, is something like $10 million on a, say, $100 million check or thereabout. So, you know, I suppose what I'm saying is, notwithstanding those difficulties, I think what it means is we are—we spend probably more time looking at downside pricing scenarios and liquidity scenarios when we stress test our models. It's not just, you know, blind IRR lens that we're applying. We never have.

But, it's less—it's more about debt and risk to the portfolio, unless we find religion, and we really see a much larger opportunity perhaps to write a, a partly an equity check for a much larger financing. So hopefully that answers your question.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

So I read from this that you're, you know, most of the transactions you're looking at would have a minimal component of equity within your overall size of your transaction?

Shaun Usmar (CEO)

No. So I'd say at the moment... Yeah, I'd say the you know, it's been a really interesting year, and we've touched on it previously, where we've seen a return of cash generating streams coming onto our deal pipeline for the first time in a while. And we've been very active on those, a number of site visits and the like, and we've chosen, as you've seen with some of these, these have been smaller transactions, high return relative to what we're seeing in the market, decent jurisdictions. But those have not been combined with equity checks. Those have been provided by other people. We've seen some very large ones where the reason, in some cases, we've walked away and we've chosen not even on exclusive transactions, is because of overall leverage and too much risk to the capital spend.

So I, you know, I think the ebbs and flows of the deal pipeline continue the way they always have, and we're still seeing a very active pipeline. I think at the moment, you know, we're seeing things that are high quality, don't involve an equity check, you know, still in the sort of low hundreds of millions of dollars. There are sort of more difficult things that are larger, which may or may not come to book, either for ourselves or for the sector, perhaps a little bit later on. But yeah, I don't know. I'm not feeling like I'm under pressure for us to start building like a Triple Flag, you know, equity portfolio.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

Mm-hmm. Okay, so $200 million sort of build a range for the deal, and mainly streams and/or royalties without an equity component?

Shaun Usmar (CEO)

Yeah.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

I think that.

Shaun Usmar (CEO)

And then the usual sort of the trifecta of non-core stuff that's non-producing, that's really... We'll only entertain by exception. It's not, you know, it's got to be really interesting when you've got, like, 200 assets in that category already as a portfolio. You know, our focus is more on, you know, as I think it's always been, but particularly right now, it's more on things that are generating cash or where there's a very clear line of sight to that. So, it served us well, and we'll continue to focus on that.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

Any opportunity to, as you did this recent transaction in increasing your exposure to other projects that you already have exposure to, like additional royalties? Do you see any of that added within the portfolio?

Shaun Usmar (CEO)

... James, do you want to comment?

James Dendle (SVP of Corporate Development)

Yeah, I think there's a number of opportunities, I think, where there's capacity to further increase our streams and royalties to, you know, provide additional capital for expansions and things like that. I won't go into specifics, but, you know, we're very keen to basically invest more in our portfolio assets, in particular, some of the producing assets right now. I think the question really is, you know, how our form of funding stacks up with the alternatives companies have at their disposal. So, you know, we think we're well positioned in that regard, particularly given the rate environment.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

Okay. So there are opportunities there, James?

James Dendle (SVP of Corporate Development)

Yeah, for sure. You know, we've just done one with Stawell, you know, as you would see.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

Yeah, exactly.

James Dendle (SVP of Corporate Development)

Which provides, you know, it's a small deal, as you know, but it provides capital, you know, for an expansion of a new mining area that, you know, actually benefits our initial royalty while increasing our exposure to that asset. So it's, you know... It's a great example of a deal that, you know, we'd like to do, particularly on producing assets in good jurisdictions, like Stawell.

Tanya Jakusconek (Managing Director and Senior Equity Analyst)

Okay, perfect. Great. Thank you very much.

Shaun Usmar (CEO)

Thanks. Thanks, Tanya.

Operator (participant)

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll now turn the call back over to Shaun Usmar for closing remarks. Please go ahead.

Shaun Usmar (CEO)

Yeah, look, thank you all for your time. We try to keep this very focused. It's good to see it, you know, half an hour, we've done that and covered off, I think, some very relevant questions for our business. You know, this quarter has been, I think, another demonstration of quite steady performance, not just on the ounce portfolio line, sensible accretive additions on the deal-making front, a robust balance sheet. You know, as we look back now, we're gonna celebrate eight years next year. I think when you look at the sustained growth that this business has in a very diversified portfolio, high margin, I feel very fortunate that we're in this situation with the opportunity set that we see ahead. So, yeah, with that, just thank you all.

We look forward to ending the year well and coming out with our guidance for 2024 and beyond. I think the business is in great shape. So thanks so much, everyone.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.