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Royal Gold, Inc. (NASDAQ:RGLD)

F2Q 2013 Earnings Call

January 31, 2013 12:00 pm ET

Executives

Karen Gross - VP and Corporate Secretary

Tony Jensen - President and CEO

Bill Zisch - VP, Operations

Stefan Wenger - CFO and Treasurer

Bill Heissenbuttel - VP, Corporate Development

Bruce Kirchhoff - VP and General Counsel

Stan Dempsey - Chairman.

Analysts

Michael Peterson - MLV & Company

Shane Nagle - National Bank Financial

Operator

Good afternoon, ladies and gentlemen. My name is Aaron and I will be your operator today. At this time, I would like to welcome everyone to the Royal Gold Fiscal 2013 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will have a question-and-answer session. (Operator Instructions). I would now like to turn the call over Ms. Karen Gross. Ms. Gross, you may begin your conference.

Karen Gross

Thank you, operator, good morning. Thank you for joining us today to discuss Royal Gold’s fiscal 2013 second quarter results. This event is being webcast live. And you will be able to access the replay of the call on our website.

Participating on the call today are Tony Jensen, President and CEO; Stefan Wenger, CFO and Treasurer; Bill Heissenbuttel, Vice President, Corporate Development; Bill Zisch, Vice President, Operations; Bruce Kirchhoff, Vice President and General Counsel; and Stan Dempsey, Chairman.

Tony will open with an overview of the quarter and Bill Zisch will discuss our operations and will review our producing and development property.

After management completes their opening remarks, we will open the line for a Q&A session.

Before we begin, I want to remind everyone that this discussion falls under the Safe Harbor provision of the Private Securities Litigation Reform Act. A discussion of the company’s current risks and uncertainties is included in the Safe Harbor statement in today’s press release and is presented in greater detail in our filings with the SEC.

With that I will turn the call over to Tony.

Tony Jensen

Thank you, Karen. And good morning everybody thank you for joining us today.

Royal Gold had strong second quarter results for fiscal 2013 in which we achieved record revenue in EBITDA through increased production volume as well as metal prices. Royalty revenue increased 16% to $80 million compared to $69 million for the prior year period.

Adjusted EBITDA totaled $73 million or 92% of revenues compared to $62 million or 90% of revenues for the comparable quarter. Operating cash flow totaling $11 million was negatively impacted by provisional income tax payments of $23 million in a timing of the withholding tax payment of $17 million which is expected to be recovered prior to fiscal year end.

As we just mentioned in our calendar year, our fiscal year we have two tax payments that both come due in our second fiscal quarter so that’s always a consumption of cash in that particular period.

Net income was $27 million compared with $23 million for the prior year period. Although net income increased both period resulted in $0.42 per share due to the equity offering we completed in October to strengthen our balance sheet.

For the quarter just over 46% of our revenue came from our three producing cornerstone properties including Andacollo, Voisey's Bay and Peñasquito. Andacollo was largest revenue source contributing approximately $23 million followed by Peñasquito and Voisey's Bay both at about $7 million.

Compared with the prior year period we saw volume expansion at 8 of our 12 top paying properties, most notably at Andacollo. Our percentage of revenue from precious metals was 79% of which 73% was from gold. Approximately 30% of the revenue is derived from Chile with Canada, Mexico and United States each contributing around 20%.

During the quarter we increased our net smelter return option at the KSM property for a net cost of $3.6 million. This now gives us the right to purchase either a 1.25% NSR royalty for C$100 million, or a 2% NSR royalty for C$160 million on all of the gold and silver production from the projects. We do not expect to exercise our option until all material approvals and permits are received, construction funding is in place and a construction decision has been made.

With that I will turn the call over to Bill Zisch for a detailed review of our operations. Bill?

Bill Zisch

Thank you Tony and good morning everyone. To give you a more tiny review of operational performance I will compare December 2012 quarterly results with September 2012 quarterly results as in prior year comparables. We saw continued improvement from many of our principal properties including Andacollo, Mulatos, Canadian Malartic, Dolores, Holt, Robinson, and Wolverine. Solid performance from the core properties in our portfolio was offset by lower production at Voisey's Bay, Cortez, Las Cruces and Peñasquito.

Across the portfolio our production stated in terms of net gold equivalent ounces paid to our account was about 1% below the September quarter. A 4% increase in metal prices with relatively flat production resulted in another quarter of record revenue. At Teck’s Andacollo mine production once again exceeded the preceding quarter as the benefits of the recently installed crushing circuit were realized and as planned slightly higher grade ore was mined. Teck has reported they will continue the optimization and de-bottlenecking process. Production to our account at Andacollo was up 12% over the September quarter.

Alamos Gold’s Mulatos mine produced a record 67,800 ounces of gold exceeding the preceding quarter by 41%. The company reported that production in the fourth quarter benefited from higher than budgeted throughput in grade from the gravity mill, which is processing ore from the Escondido high grade zone.

In addition, quarterly crusher throughput achieved a record levels averaging 17,900 tons of ore per day and ore stacked in the leach pad exceeded full year budgeted grades by 20%. Alamos’ 2013 annual guidance builds on these successes as they anticipate producing between 180 and 200,000 ounces of gold.

During the first six months of Pan America Silvers ownership of the Dolores mine they produced about 1.7 million ounces of silver and 29,000 ounces of gold. Production during the fourth quarter of calendar 2012 approached about 1 million ounces of silver and 15,000 ounces of gold slightly ahead of the first six months quarterly rate.

Pan American’s 2013 production guidance of 3.25 to 3.45 million ounces of silver and 63,500 to 68,000 ounces of gold will be supported by capital projects that include construction of the first phase of leach pad three significant pre-stripping and a systematic rehabilitation of the mining (inaudible).

Osisko continued to improve operations at their Canadian Malartic mine during the quarter with sales to Royal Gold’s account exceeding the preceding quarter by 5%. They took a 6-day shutdown to complete installation and integration of the second pebble crusher and to make modifications to various conveying systems in the crushing and grinding circuit. Prior to the shutdown production in October to November averaged about 49,000 tons per operating day a 13% increase from the preceding quarter.

During the fourth quarter mine production was affected by delays in access to the north sector of the pit thus limiting production. These delays affected the mine sequencing and will have an impact on early 2013 production. With no throughput expected to stabilize Osisko estimates that 2013 gold production will be between 485 and 510,000 ounces.

St Andrew Goldfields mine lateral development advance that was above expectations for the quarter and the year was one of the enablers for production of 1000 tons per day. Commissioning of a new ore pass was scheduled in mid-January to provide for a further increase in production. With a 4% increase in the royalty rate associated with the higher gold price and strong production results Holt exceeded its previous quarter’s revenue contribution by over 20%.

As reported by Inmet production at Las Cruces in 2012 increased by more than 60% to 67,700 tons of copper up from 42,100 tons in 2011 over the past nine months ended December 2012 Las Cruces averaged designed capacity output. As this operation settles in the steady state production the sales that report the Royal Gold’s account will fluctuate with normal shipping variations. This was the case during the fourth calendar quarter as Las Cruces contribution was lower than the preceding quarter when higher levels of sales were realized.

Inmet estimates the 2013 production will be between 68,500 and 72,000 tons of copper. As we stated in the past Royal Gold’s results from Vale's Voisey's Bay operation have tied the variability in the shipping schedule. Copper concentrate sales that reported the Royal Gold’s account during the September quarter represented about 60% of the year’s production or about three times the expected level. As a result sales in this quarter were significantly lower. In December Vale reported that construction of the Long Harbour hydrometallurgical facility continued on schedule with an estimated startup during the second half of this year.

At Goldcorp’s Peñasquito mine production for 2012 totaled 411,300 gold ounces exceeding their guidance of 370,000 to 390,000 ounces. During the quarter mill throughput of 900,000 tons per day was constrained by the availability of water. Goldcorp has stated that a water and tailing study to develop a comprehensive long-term water strategy for the Peñasquito district is underway and is expected to be completed during the first half of calendar 2013. Goldcorp will continue to bring additional water wells into production within the Cedros Basin in addition to new dewatering wells within the Chile Colorado pit. The additional water wells to be added in calendar 2013 are expected to increase mill throughput to 105,000 tons per day. Mining in the lower grade portion of the pit over the first half of calendar 2013 is also expected to impact overall production, which Goldcorp forecasts at between 360,000 to 400,000 ounces of gold with an associated silver production of between 20 million to 21 million ounces.

Yukon Zinc’s Wolverine mine increased its contribution to our account by over 80% as they continue to ramp up to design capacity and to improve metallurgical performance and recoveries in the mill.

Three Nevada based operations realized increases in production versus the preceding quarter, these include Gold Corp’s Marigold Mine and Barrick’s Bald Mountain Mine where in both cases sequencing resulted in increased production within our area of interest. And at KGHMs Robinson mine where operating improvements were sustained resulting in a particularly strong December.

As we see several projects continue to ramp up towards full capacity during this year we will also experience a few projects that will be stopping production to our account. Those declines will be offset by the addition of new production that is scheduled to begin during this calendar year. Properties where we expect reductions in calendar 2013 include AuRico’s El Chanate Mine where our interest is cap, Xstrata’s Mt. Goode mine that has been put on care and maintenance and (inaudible) Martha and St. Barbara’s, Southern Cross mine that have exhausted reserves. These four projects totaled about 4200 net equivalent ounces in calendar 2012.

Offsetting these decreases our four projects expected to add approximately 4200 net gold equivalent ounces during 2013. These new producing properties include Reed Resources, Meekatharra gold project in Western Australia, Amara minings previously Cluff Gold, Sega property and Burkina Faso, West Africa, the Kinross operated gold mine in Nevada and Atna resources Pinson mine also in Nevada. While none of these projects are major contributor it’s a good demonstration of how the portfolio affect work to balance our results.

With regard to our development properties Eric has stated that Pascua-Lama they have reset and strengthened the project management by hiring four to execute EPCM of the project. Eric has received and is currently reviewing the definitive estimate of cost and schedule for the project provided by floor. They’ve also stated that they will release the results of the estimate with their year-end 2012 financial results on February 14. They report that essential work to be completed this summer in preparation for the winter season is progressing well.

As of the end of September, Thompson Creek reported that progress on Mt. Milligan reflected that engineering and procurement are essentially complete and overall completion of the project is estimated at 75%. Of course this information is already four months old and Thompson Creek will be publicly reporting the project status as of the end of December on February 25th.

Milestones achieved in the third quarter of 2012 included the completion of tailings storage facility core construction enclosure of the concentrated building and the installation and assembly of the SAG and ball mills which remain in progress and are on schedule. Actual project spending as of September 30, 2012 was 935 million Canadian or about 64% of the anticipated total with commitments including these actual expenditures totaling 1.3 billion Canadian or 85% of the total. Again these numbers are also now about four months dated.

The company reported that on January 14, 2013 they received notification from the Department of Fisheries and Oceans approving its fish habitat compensation plan as required by environment Canada’s Metal Mining Effluent Regulations. This approval was the final step to authorize deposition of tailings material into the zero discharged tailing storage facility and the final authorization required to operate the Mt. Milligan copper gold mine. Thompson Creek reiterates that the Mt. Milligan project remains on schedule with commissioning and start up expected in the third quarter of 2013 and commercial production expected in the fourth quarter of 2013.

With that I’ll turn the call back over to Tony.

Tony Jensen

Thank you, Bill for that comprehensive review.

As many of you have seen in your other gold investments mining companies are experiencing notable year-over-year operating cost increases. In addition, you are likely heard that the industry is moving to a more transparent cost reporting structure to better communicate the total cost in gold production, previous convention has not included cost such as corporate and exploration expense in total cash costs. In these respects, Royal Gold will continue to look very attractive due to our business model that provides this exploration upside at no cost as well as installation from inflation in high corporate overhead.

In summary, this was a very solid quarter of operational and fiscal results. Once again we achieved record financial performance due to the strength and diversity of our portfolio. We anticipate continued improvement in Andacollo, Peñasquito, Canadian Malartic and Wolverine as these projects worked towards achieving full production capacity. And more importantly, we look forward to the start up our production in Mt. Milligan in the second half of this calendar year. Our first investment at Mt. Milligan was in mid 2010 so it’s exciting to see that we are now only months away from project commissioning.

With that operator we’d be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Peterson from MLV & Company. Your line is now open.

Michael Peterson – MLV & Company

My question regard to the expansion of your portfolio, with more than billion dollars in liquidity, you are poised to take advantage of what’s why they regarded as a buyer’s market and I think Tony’s comments just a few moments ago detailed that in particular. Now I know you can’t speak to any specifics regarding the future transaction, however any insight you could share with regard to this issue would be helpful, I think it’s been a modest overhang on share performance and I think additional clarity would certainly help us on this end.

Tony Jensen

Thanks for the question, Michael. Yeah, you are absolutely right, this is a very good market for royalty companies. The equity performance of many of the operators are not in a situation where they can issue equity at a reasonable cost to the company and of course that is available and sometimes expensive for others, but the point is that I think the royalty business model and financing is very much appropriate in this particular time and space. So, we did take a lot of time during the course of the calendar 2012 to restructure our balance sheet and get us prepared for opportunities as they may come on. We have seen a lot of good things. We are continuing to sort through and make sure that we invest in properties that we have a lot of confidence in, and in management teams that we have a lot of confidence in, you are quite correct, I can’t comment in any detail, but we do feel very good about where the royalty financing is at, at this appropriate time.

Michael Peterson – MLV & Company

Thank you, Tony, I appreciate the detail and just a little more of your perspective. Before I hand the call off to other analyst, I would like to take a moment and thank Karen for all of her help. Karen we wish you well in the next stages of your life and really appreciate all your efforts.

Karen Gross

Thank you. I appreciate that.

Tony Jensen

Michael you stole part of my closing remarks.

Michael Peterson – MLV & Company

Well I think we all share sentiment here, so well deserved for sure. That’s all I have this morning. Thank you.

Tony Jensen

Okay, thank you, Michael.

Operator

Your next question comes from the line of Shane Nagle from National Bank Financial. Your line is now open.

Shane Nagle - National Bank Financial

Just one quick question guys on the Voisey's Bay, as you mentioned the hydro met facility coming online back end of the year, I just want to see if you know how that impact will be with NSR, I know you’ve had some issues, we thought that was calculated in the past obviously, is that going to be – are we going to see a similar structure with the smelting refining fees that they showed you internally similarly spread or would you see an impact on your revenue at all?

Tony Jensen

Yeah, Shane, thanks for the question. I think it’s probably premature to see that or to be able to respond to that question. We will continue to work through collaboratively with Vale and the payments of that royalty and would [expect] to see once the calculation happens if it meets our expectations.

Shane Nagle - National Bank Financial

Okay, and what do you expect with the taxation, obviously the sales should smooth out as they start selling the [cathode], does that impact this tax issue that you currently have, where you charge more in your fiscal Q2 I guess?

Tony Jensen

Okay, I think we are probably confusing some tax issues here. Are you speaking specifically to Voisey's Bay?

Shane Nagle - National Bank Financial

Yeah, just to the laboratory tax and specifically with Voisey's Bay, yeah.

Tony Jensen

Yeah, the laboratory tax I think is 20% in Province right, Stefan, yes.

Stefan Wenger

Yes, your estimates are correct.

Tony Jensen

And that won’t have any impact whether it’s at the hydro met facility or if the concentrate shift to Sudbury, so I might be missing your question, if I hit on it or not?

Shane Nagle - National Bank Financial

No, I think that’s fine. I guess they should be with the revenue, the concentrate shipments obviously you have a lot coming in this quarter with the shipping season, but that revenue should smooth out which would smooth out some of the top line with no impact on the taxes I guess then?

Tony Jensen

Yeah, I think you are correct there. This was been the last two quarters, I am looking to Bill’s issue, usually the stronger shipping quarters….

Shane Nagle - National Bank Financial

That’s right.

Tony Jensen

Stronger payment quarters for us and so obviously that would be a higher tax in Province taxes time as well.

Operator

(Operator Instructions). We are showing no further questions at this time. I will turn the call back over to the presenters.

Tony Jensen

Well, thank you, operator. It is been a very solid quarter for us. I don’t think there was any real surprises in the overall portfolio and we continue to look for strong performance going forward. As Michael and Shane both alluded to Karen Gross has elected to retire from Royal Gold and she is been with us - Karen since have been 1980s, probably our longest serving employee now, certainly our longest serving employee and she will be dearly missed by the entire management team here at Royal Gold, but we wish well in her retirement and she plans to get off the call clubs and enjoy lot of courses around the Colorado and the United States. So with that we will conclude the call and conclude it by saying thank you very much Karen.

Karen Gross

Thank you.

Tony Jensen

We look forward to updating you at our next conference call if not sooner. Bye for now.

Operator

This concludes today’s conference call. You may now disconnect.

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