Royal Gold's CEO Presents at CIBC 17th Annual Whistler Institutional Investor Conference (Transcript)

Jan.27.14 | About: Royal Gold, (RGLD)

Royal Gold Inc. (NASDAQ:RGLD)

CIBC 17th Annual Whistler Institutional Investor Conference

January 23, 2014, 07:05 PM ET


David Harquail - President & Chief Executive Officer, Franco-Nevada Corporation

Randy Smallwood - President & Chief Executive Officer, Silver Wheaton Corp.

Tony Jensen - President and Chief Executive Officer, Royal Gold Inc.

Nolan Watson - President and Chief Executive Officer, Sandstorm Gold Ltd.


Cosmos Chiu - CIBC Capital Markets

Cosmos Chiu - CIBC Capital Markets

So we'll get started here. Thanks for coming to our Royalty Panel. We've had it the last few years with a pretty good outcome. So we've decided to do that once again this year. So we've had all the major royalty companies come and join us today. Much like in previous years, how we're going to run this session is we're going to have each royalty company come up, do a 10-minute presentation. And then at the end, we'll do a 20-minute discussion.

So given that it's Nolan's first time here, we're going to re-jag the order around a little bit. We'll get David to come up first. He's been to our Royalty Panel, I think, the most times. And then we'll have Randy, Tony and then Nolan. David?

David Harquail

Actually I love being at with CIBC, because Cosmos is one of the original analysts, I guess, first to pick up the royalty sector as a whole. I can recall him at CIBC making Franco-Nevada top pick in 2008 and he was spot on. I think he's won the awards as one of the best stock pickers in the mining sector. And I hope Franco-Nevada has been part of that achievement. Also, CIBC has been tremendously supportive. And this conference, I think it's one of the best. It's been first class all around just to join and being here.

In terms of our company, just simple metrics, we are now listed New York and Toronto. We got a big market cap. Randy will point out he has got a bigger market cap, but I think we're catching up. So I think that's important. We've got some great institutional shareholders in the U.S. and Europe. We're liquid. We're very happy we just joined the GDX index late last year and our liquidity has been picking up. So really for any institutional investor in the U.S., we've really hit all the metrics now in terms of qualifying as an opportunity for the gold portfolio.

In terms of our business principles, we're really out there to maximize the exploration optionality we get in our portfolio. So what we want to have is a long-term exposure to properties, where other people are doing the risky exploration and the risky development and risky operations. And what we want to do is minimize our exposure to cash calls. So really the majority of our portfolio, we really have no unscheduled cash requirements. We are running a free cash flow business.

One of the luxuries that we have in this business, because I've had an experience of working in operating companies, is that in our business I don't even need a black period on weekends, because the problem in operation of the royalty owners is the last person they call. And also, we don't have to spend time on existing operations or in health and safety committees or environmental committees. Our board meetings are mostly involved in what is it we're going to invest in next, how we want to deploy our capital. And that's a tremendous luxury. And I think that's what gives companies like our own the advantage to think forward rather than being a rearguard action and taking care of existing assets.

Again, for our companies, I think I'm delighted we actually have a panel and we're actually as a group together, because I really think we're totally different business segment for the mining operating companies. And as a result, we do trade on different metrics than mining companies. Our risk equation is different. Our performance related to gold and precious metals is different. And so I think as a result, it justifies a different investment category. I'd like to think of our company as something between ETF and operations. And we think this is another investment opportunity for investors.

And then in terms of the stock market performance, that's what really counts. I think our sector as a whole, all of our companies have outperformed their commodity. We have outperformed the indexes. And I really believe we have a business model that can continue to do that, because one of the aspects is we've managed risk, we can protect our margins. Our company, we've probably got the largest base of assets out there. With 370 assets, we've not had a single taking. We've not had any extraordinary fee equity request from governments. Our effective tax rates are currently in decline. And over six years, our G&A has stayed flat.

And so I think as a result, we can have a business that's very effective for investors. And in terms of just the track record, you can see the five year numbers, a lot of metrics. We'll have our six year numbers out shortly. But we're proud we've got a six-year dividend track record, and we've paid out $108 million of dividends last year. And our ambition is to continue to grow that every year. And we'll have our year-end results out on March 19th.

And then in terms of where these results are coming from, very proud of the portfolio. I think only one of, I guess, the differentiators is we've got a huge pipeline of exploration properties and development properties and we are diversified in oil and gas. The like the optionality that comes from these large land positions. Right now, our mineral royalties extend over 47,000 square kilometers.

And then, I think, just to show you an example of what comes from and one of the benefits of the royalty portfolio is six years ago when we were buying our assets from Newmont, we bought 176 royalties from Newmont. And these were the reserves and resources that we were attached to those assets. Just looking at the same assets, not looking at our acquisitions we've done since then, we've taken $750 million in royalty payments in five years. It's higher now, because we're having out the six year. But our reserves and resources have more doubled. It didn't cost us $1. We didn't have to have a single geologist to work to make that happen. Our assets are worth more than when we bought them at today and no cost to us. So it's a really powerful business model.

And then finally, these are examples of where some of those big wins occurred. Our best deals have been assets that we bought for $2 million that have become worth hundreds and millions of dollars. But on top of that, I think management has been adding value. We've been very active in terms of putting new assets in the portfolio. As I mentioned, we started with 176 assets. We're now right now 233 mineral assets and we've of course got the oil and gas assets. And we've been very busy not only adding incremental cash flow, but also some optionality for the future.

Our three most recent deals, we've just spent $240 million in the last quarter. The Teranga Sabodala deal was very well received by the marketplace. I think it's really an innovative structure. We also did one at Macassa, the Kirkland Lake break. We just put $50 million there. And we haven't yet closed, but we're actually re-discovering our roots. People remember the old Franco. One of our rocket launchers was the Midas in Nevada. Newmont kept that mine when we went public and our royalties on that mine. We are now re-acquiring royalties on that project by financing Klondex mines. And on top of that, we're getting royalties on a very promising Fire Creek property. And I'd like to point out Nevada is our middle name, so it's only appropriate we're doing these Nevada deals right now.

And then finally, I'd like to point out I think we still are the most liquid gold company in the world right now in terms of net cash. We have no debt on the balance sheet. We are generating free cash flow. So even net of the $240 million that we just spent since the end of the third quarter, we believe we got $1.2 billion in available capital and we're looking forward to deploy and we see a lot of opportunities right now.

And again, one of the themes that we're going to be marketing is that we think a lot of people that own gold ETFs should actually be considering royalty companies like our own. And Cosmos, that really sums up our story.

Randy Smallwood

Thanks, everyone. Randy Smallwood, President and CEO of Silver Wheaton. Thanks to CIBC for putting this one on. Whistler is my second home. Anyways, a few cautionary statements, I encourage you to read them. I will make some forward-looking statements. I figured Dave was right off and start off by saying who is Silver Wheaton. And we've got a market cap enterprise value, first slide.

You can see what we've been. We started this company back in 2004. We are a streaming company. We don't have royalties. We only stream. We came up with a business model and it's been successful. We've been able to build that to a pretty healthy company through this slow process. And you can see how we compare amongst the peer group. We are of course silver focused. And so there is a slight difference amongst the peer group. But we had been adding a little bit of gold over the recent time.

By liquidity, we trade twice as much as everyone else in this space group, very active. The silver space is something that's got a strong retail holding and we do most of our trading done in the New York on the stock exchange.

By operating cash flow and earnings, you can see how we also compare amongst the peer group. So we're a pretty healthy company. We've got very strong cash flows. We've got a good strong asset base going forward. This is the asset base. It was a total 24 assets all together, 19 of which are delivering metal to us already and five different development/permitting stage projects. And so it's really Americas-focused. Political risk is something that's very important to us. Mexico and Peru of course have been the two dominant silver producers worldwide. They're also countries that are very, very important to us, but also Canada and Europe Americas-focused with a healthy dose of European exposure.

My background, I'm a geological engineer and I come from the corporate development side and focused on quality of the resources that we're investing into. It's the quality of those resources and reserves that we invest into. In the silver space, we've built up a portfolio that includes more reserves than other silver company out there, including Fresnillo with their excellent assets down in Mexico. But we've got well over 800 million ounces of reserves and of course the 1.6 billion ounces of total reserves and resources in the silver space along with, as I mentioned, a healthy dose of gold over and above this. But definitely within the silver space, we've become the dominant company.

This is the most important slide that sort of identifies Silver Wheaton and what we build on. We really focus on asset quality. And in our eyes, in the streaming business, even in the royalty business, asset quality, it comes down to the operating margins of those assets and how successful, how profitable those will be for the operators, because if our partners aren't healthy, we are not healthy. And this really comes down to is making sure we make investments into assets that have high operating margins, because when commodity prices go down and we know they do, I've been in the business long enough, it's cyclical, we want to make sure that our investments will survive through that whole process, through that low cycle to still continue to deliver metal to us.

So what we do when we look at our assets out there, we focus on where they fit within the respective cost curve. If it's a copper mine, where does that copper mine fit in the copper cost curve, where does that gold mine fit in the gold cost curve, where does that zinc mine fit in the zinc cost curve, where does the nickel fit. And you can see the current production, 88% of our production comes from assets that are in the lowest quartile of the respective cost curves. These are assets that will continue to produce for us. And through the highs and the lows of commodity price cycles, they will withstand royalty changes. They will withstand poor management. They will withstand all the issues. They will still provide incentive to the partners, even construction delays. They will provide incentives to the partners to bring these things to production.

And so you can see how that changes by 2017. With the growth that we have up over 42.6 million ounces a year silver equivalent, we are still over 90% in the lowest half of the respective cost curves. So a good strong portfolio that will produce through those lows and highs.

You can see how diversified our portfolio is. San Dimas, the company that we found in the streaming business model on, is still our largest producer. But we are confident that it will eventually get surpassed by Peñasquito and ultimately by Pascua-Lama when it comes on. We do not have Pascua-Lama in this forecast. Barrick is of course working the way through the permitting process to come up with a schedule as to when it will come into production. And so you can see we're at 42.5 million ounces in 2017 without Pascua-Lama. You still have the optionality of the Pascua explosion.

More recent transaction we did with a company called Sandspring towards the end of last year, it's the first of what we call early deposit structure, an early deposit agreement. And in the past, we have made equity investments. The claim supports the earlier stage projects as they move their way forward and advance their way forward. And basically what it is, is the small amount upfront that will carry the company through the completion of a bankable feasibility study, at which point we can make the decision as to whether we want to continue with a further investment to the construction process going forward.

We think in this market, there is a lot of opportunity for this type of business model. There is a lot of junior single asset companies out there that have promising assets and they just don't have the equity support and of course there is no debt for those entities out there. And so this is the way for these smaller companies to get capital without diluting their current shareholders. If they'd done this in terms of an equity financing, they would have diluted their current shareholders' value by 50%. So this is very attractive Sandspring. Their current shareholders get to advance this project all the way through to the completion of bankable feasibility study, at which point ideally the company will be judged based on the business model around that bankable feasibility study.

So it's a good strong model. We've got a lot of interest in this. In this current market environment, a lot of feel for this type of a structure and we're pretty excited about where this is going to take us. A little bit higher risk investment, very small upfront payment and great exposure for that going forward. So really happy with the way this has turned out and look forward to doing a few more of these.

So why invest in Silver Wheaton? David mentioned ETFs, you can see in the silver space, back in 2004, before we created Silver Wheaton, basically the only way to get exposure to silver was investing in the traditional silver producers. You can see how that's changed over time. We created in 2004 where the blue bar across the bottom. But you can see what ETFs have done. There was much more trading activity with respect to ETFs than even Silver Wheaton or the producers themselves. But we have made our mark in this space.

Versus the silver producers, I think it's pretty simple to understand the advantages of investing into the streaming company over a traditional producing company. The graph shows it all. I'd like to say production companies have cost curves, we have a cost line. It's fixed. We can tell you exactly what my cost per ounce will be in 2015 and 2020 and 2024. There is not cost surprises. It's predictable all the way through. It's not a function of commodity prices. It's not a function of inflation. We have got a hard 1% factor that kicks us in going forward. So having that confidence allows our investors, potential future and past, to assess value with confidence. And that comes down to the risk of the investment is the commodity price itself. We take the cost risk out. And that is easily the biggest differential between us and a traditional mining company.

Versus the ETF, I'm going to sort of reiterate some of the stuff that David mentioned with Franco, leverage. And the best way to look at that is what we've done over five years compared to the price of silver. 179% increase in silver price since. Over the last five years, our share price has been 40% up. We do have leverage just over to our base cost per ounce, but also other factors that we fit into that, one being organic growth. You can see when we started this company, we had about 215 million ounces in reserves and resources. We've added 1.8 billion in silver reserves and resources. We've mind 276 million. But organically, we've had already 385 million ounces of silver equivalent growth at our projects. And I would argue that the bulk of our project is still relatively immature. There's still plenty of growth to come in that space, as these projects get optimized and move forward.

So organic growth, ETF holdings grow. They definitely provide that exposure in terms of good quality mines that have that organic growth. Accretive growth, acquisitions, and I think this is a good slide. Not many companies will show this. And this goes back to the amount of ounces per share. Back when we started this company, 1.5 ounces of silver per share in Silver Wheaton, we're now over 6 ounces per share. And most of that is now reserves. So it's high confidence. That is on a per share basis. We're not issuing shares to grow. We're not diluting ourselves just to get extra metal in. We're adding value on a per share basis back.

Where do we grow Silver Wheaton? The reason we are still silver-focused is we see lots of opportunity. 70% of silver is not produced at silver mines. It comes from mainly copper mines actually. Zinc is second and gold mines is third. And then 30% of course comes from the traditional silver companies. Our target is that byproduct production, especially the base metal miners. It trades at a discount. There's a value arbitrage and we pull silver out of a base metal company and put it into Silver Wheaton. It's the only type of transaction that I know of where our stock will gain value and the other party's stock will gain value.

Every one the mining transaction I know of, there is always a clear winner and loser. Every time we announce a stream, stocks will again. So it creates value. And that's reflected in the market interpretation through that. So we've got plenty of market there. As you can see, we've only got about 4% of the current market silver production and 6% by 2017.

On price record, we do focus on not buying in the peaks. We have a policy of trying to buy in the bottoms. I think everyone has that policy. It's a matter of actually being able to pick the bottoms. And we've had a pretty decent track record in terms of being able to do that. A few anomalies, but we do focus on that space.

In terms of balance sheet capacity, we've got $1 billion in debt at a very, very attractive rate, 1.67% right now. So attractive that we've decided to carry that for a while. We've also got $1 billion revolver available to us, operating cash of course. It gives us still plenty of capacity and lots of market support. We're continually receiving offers in terms of equity financing and such like that. So we're very comfortable with the start to our capacity to continue growing Silver Wheaton.

Dividend yield unique type to operating cash flow and 20% of operating cash flow gives a little bit to our shareholders. Over time that 20% will go into 30%, 40%. It also will capture our organic growth, our production profile that we have moving forward.

So this is worth highlighting. When I add that all up with respect to ETFs and stuff like that and look at our G&A, how cheap we are relative to the ETFs and moving in accounts out there. We deliver all of that over the same price. And if you add in the dividend, we actually pay it on our shares versus the ETF. So pretty healthy and competitive. You can see our performance in silver and the silver indexes. So I believe it has been a very good place to be.

I can summarize here, cost certainty leverage, I hope all of that is apparent to this presentation. So thank you.

Tony Jensen

So thank you, Cosmos Chiu, for the chance to speak here. It is one of my favorite conferences as well and I really enjoy these panel discussions that, I don't know, David and Randy, we've been doing this for probably two or three years now. I think Cosmos here is one of the first pioneers of putting this all in a panel together, and I think it's an excellent forum. And I hope you enjoy that today.

Before I begin on Royal Gold, just let me say some of the things I say to you are likely to be forward-looking in nature and we just ask you to make yourself familiar with our cautionary statement.

Now what I would like to do is just outline what I call an elevator speech for Royal Gold. It's just very succinct, a few points, a few slides. And these are the things that I think are pertinent to you as a shareholder today. We got a tremendous amount of embedded growth, and I want to go into that in detail and show you what's likely to come in just the next several quarters as we look forward.

The financial strength that we have in the company is about $1 billion of liquidity and we're in a position at the present time where the market really needs the liquidity that this industry has to offer. And so we're certainly in a position to be able to deliver that.

And finally, I'd like to spend a slide or so just on our favorable position as far as where we are on a price point. I think there is a lot of the upside in your stock and I'll explain why that is in just a moment. But let me start on I think probably the most important slide that we have here. And that's the growth that we have embedded in the company. We have about $1.2 billion that are completely invested at Mount Milligan in Pascua-Lama.

If you look at that bar on the left, what we're showing there is that's the gold equivalent ounces that came into Royal Gold last year. And if we take our revenue divided by the average gold price, that tells us about the gold equivalent ounces that we have. About 180,000 ounces completely cost-free ounces, because we don't pay for the production. But as we look at Mount Milligan in Pascua-Lama at full production, it will take some time. As Randy said, Pascua-Lama is a ways out. But if we look at those two, that full production, you can see the kind of contributions that we're making on gold equivalent basis coming into our company.

And I ask you to focus right on Mount Milligan. We're about six months into the ramp-up there. And it's going very good. From my perspective, I think they're just about online with where we would have expected them to be at this particular time. We've always said it's likely to be a 12 to 18 month process. They started into the production phase in about late August or early September of last year. So we're very happy with the startup as it's going now.

So that growth in Mount Milligan really is the reason that we think that we have an industry leading compounded average annual growth rate amongst the three major royalty companies that are in the business today. By the way, we took Pascua-Lama off of that both in Randy's and in our case to have a look at that slide. So I'm very pleased with where we're positioned at the present time.

Let me just give you a bit of an update on what we call our five cornerstone assets and we'll spend very much time on this. Hopefully you're quite familiar with many of them. Let me start with Pascua-Lama first. These are the assets that are either in ramp-up or not in production today. We have 5.23% royalty at Pascua-Lama, which is right off the topline on the gold, 800,000 ounces of gold projected in a year there. Now it's further field, and I don't think there is any real value that we are receiving today from this asset. We probably won't get any value until there is a construction schedule that's put back on the table by Barrick and we actually sit more closer to production. So we keep that one aside for a moment and focus on Mount Milligan.

We have 52.25% of the gold if you consider these assets, about 50% copper and 50% gold. We have essentially 25% of the revenue that's coming off the property. And one of the questions that we get asked is you think you've got too much of the flow there, is that something that actually could make the mine uneconomic. And I think David or Randy were talking about the quality in your investment decisions. We too look very, very closely to how does our investment impact the operator. And if we push them too far up the cost curve, it just doesn't make any sense for the project to go for. And we don't think that's the case for Mount Milligan. So that was coming along quite nicely. In the next couple of quarters, I think you'll see a lot of that revenue starting to move the other direction for us.

Turning to our cornerstone assets that are in production today, there's a few pieces of news here. We've guided that graders. They're starting to come down according to the mine plan there. It's something that we anticipated when we got into the transaction. So we're starting to see that come off a bit. But offsetting that in the current portfolio of other assets like Peñasquito that are actually increasing production in 2014. One of the reasons for that I think is industry type of reaction that you're going to see a lot of gold price environment. As folks start to re-optimize their assets and use $1,100 or whatever they might use for the reserves, we're likely to see some of our reserves come on.

But what that means is they're looking at higher quality ounces and that's likely to be a higher value to us in the short-term. At Peñasquito, the reserve went from about 19 years down to 13 years, but again they did increase the grades. So we're looking for a much stronger 2014 as a result of the mine plan.

Turning to the balance sheet, here is the $1 billion of liquidity and we have nearly $700 million in working capital, $350 million on undrawn credit facility, 2.875% in after-tax interest rate, that's a very good place to be. And we do have some converts of $370 million of convertible price to $105 at the conversion point at the same interest rate that I just quoted. So we think that's a great piece of capital to have in our company.

But the point that I really want to drive here is the bottom bit there that shows that we've got $150 million of cash flow in fiscal 2013 and more cash flow coming from Mount Milligan just around the corner. So we've got a lot of free cash flow without a home for right now. We don't have a lot of capital commitments. We have one project that we've committed $50 million to that's on schedule. So we have a fantastic position to continue to grow our portfolio in new areas without equity dilution.

And I think this is the time in this chart to kind of revise why it is a good time for our sector as a whole. Just the yellow one, the slide show the follow-ons and the initial equity offerings that have been done. There just hasn't been very much activity in that space for a good reason. That has been available for some, but not all and sometimes a higher class. So we think that this is a great time to continue to build our business. And when you look into capitalizing a mine you see today, it often takes two or three sources of capital. It's wonderful that each one of these companies here have had a good role in providing a new source of capital into the marketplace, a new source that I think is now well respected.

So let me just leave you on this slide, valuation slide, where I think we're very favorably positioned. If we look at our valuation on a per share basis and compare it to our book value per share, you see on an average we've traded at about 2.3. And today, we're quite a bit lower than that about 1.5. And yet, the fundamentals of the company are extremely strong. And we do look at everything on a per share basis. We're not trying to be the biggest, we're trying to have the most value returned to our shareholders. And if you look at the EBITDA per share, you can see that we're continuing to have a very solid base.

With that, I turn the podium over to Nolan.

Nolan Watson

My name is Nolan Watson. I'm the President and CEO of Sandstorm Gold. And I'll just walk you through here. I don't even know if I'll take a full 10 minutes, but just sort of a brief synopsis at Sandstorm Gold. We are a streaming and royalty company and a little bit of a highlight here. So right now, we have eight gold streams. We have 27 royalties. And a vast majority of our assets that are material assets are up and running at Billiton. We'll talk about that in a second.

Right now, Sandstorm Gold has $100 million of cash in the bank. We're completely debt-free. This year, we anticipate a significant amount of cash flow and we have about $30 million warrant money that should be coming in.

So very quickly, biggest problem of our business is going to be how to deploy that capital. It might not seem as much capital as some of these other companies have, but relative to our market cap, our market cap is only about $0.5 billion, we could be in a position right now or by the end of the year 35% of our company's market cap will be cash-backed.

Over the next couple of years, we see a 25% increase in our production. That's all organic growth. It's all already paid for. We don't have to make any additional payments for that. And right now, we expect next year to have about 35% reduction in G&A compared to the past years. We spent a tremendous amount of time building a team to grow a company. It's very hard when you start with one asset and you're trying to grow portfolio of eight streams and 27 royalties and to do it in four years. But we managed to do that. Now that we have the business up and running, we're funding a lot of efficiencies, including we recently purchased Premier Royalty, which was a subsidiary of ours that still publicly trades and there're kind of two separate management teams. We consolidated all of that to one and eliminated all the redundant cost.

And so we've got organic growth that's paid for a significant amount of cash at the balance sheet, significant cash flow cost of earning a business. That black line there is since we started to transform it to the global gold index fund and how it's performed obviously over the last few years. As it stands from the partner of these, the stock price performance of the companies that we have invested in, so on average we've done deals with companies that have outperformed compared to the rest of the gold industry. And then the third line is the average of the other streaming companies and how they've performed. And we've dramatically outperformed. The scale doesn't really show it, but the average streaming company over the last four years since we started to transform has outperformed the global gold index fund by about 150%. And that's a tremendous amount of outperformance.

And just speaking about that here, I think one misconception is that this business model is one that's just so incredibly easy that anybody can do it. So you hear this comment a lot of times. People say wouldn't that be easy. And I think what's not represented is that the three men who are standing on this stage, I won't include myself in their caliber, but I would put them up against the CEOs of any other companies in this industry. They're just very intelligent, very methodical, very experienced people. And I think a portion of that 150% difference is because of that. And I'm not saying that because of this next graph, which stands for performance, which is we have outperformed for different reasons. And the different reasons are just that we are dramatically smaller than the other companies up here and starting up in the business.

When you're a small company with $20 million market cap, every individual incremental acquisition is just not easier to add value on a per share metric. And so I think that's the reason, not the CEO and certainly not the CEO.

So this slide is just showing our geographic breakdown. It's again very Americas-focused. A vast majority of our assets are in North America or South America. We have stepped outside every now and then outside the Americas. But I think that this will be a reasonable accurate representation of the type of political risk that we'll take on forward, which is the vast majority of our portfolio we want to be in low political risk jurisdictions.

So very briefly, these are the four largest streams that we have right now. Luna Gold currently is producing 80,000 ounces a year, ramping up to about 130,000 ounces a year. It's cash flow positive. We get about 17% in that production of $400 an ounce. Things are going very, very well there. That's an asset that had just under 1 million ounce reserves when we did the original transaction. It's about 4 million ounce resource. And we think it's got tremendous ability to expand beyond that.

Second deal we did was with SilverCrest. That's on the top right there. That's a gold, silver heap leach project that they're building a mill on right now, and it's up and running in commercial production. It's making us lots of money. Brigus Gold on the bottom left-hand side, again, that's in commercial production. It's making us lot of money. We hit about 8% of their gold. They're $500 an ounce and they're just recently purchased or being purchased right now by Primero and it had lots of good exploration outside on that project.

And on the bottom right-hand side, this has been a little bit of surprise for us. So Metanor, this is an asset that if you would have asked me a year ago what would have been our highest cash cost producer, I would have said Metanor when we get it up and running. And it's just a clear commercial production, last month, we're getting about 10,000 ounces a year from this at $500 an ounce. And so we're making about $8 billion a year off the stream. Last night if you would have asked me what our highest cash cost producer, I probably still would have told you Metanor. And actually this morning, I got the quarterly report from their management team and they're all in sustaining operating cost on a per ounce basis sort of exploration, G&A all in fully loaded is $950 an ounce.

So right now, these four assets represent about 65% of our current production. All four of them are in commercial production. All four of them have average to below average all in sustained cost of production. And so we've got a couple of other assets that are currently in production, and they are also commercial production declared. And that represents all of our major or material assets. And we've got a number of other smaller royalties that are being paid to us by major mining companies, and those are obviously in commercial production as well. And here is a few of those actual streams.

But when you actually turn this into a cash flow picture, you see that very quickly over the next couple of years here at today's gold price, we should have free cash flow over $50 million a year. And all of that is just an increase in production from assets that are already in commercial production. So now that Colossus has kind of gone sideways on us and we've took it out from the portfolio and we're not investing any additional capital there and it's up for sale, everything that you see here has already been built. So we're actually right now the only streaming company or royalty company that doesn't have any longer material completion risk. So we've got very, very low risk. And my challenge right now is going into, you can see it on this slide, is how much cash we anticipate having on the balance sheet, the cash flow from operations.

That gold line there at the bottom is at any point in time, what we believe our cash balance will be if the gold price stays where it is today. The blue line is about $100 million above that gold line, because an undrawn revolving line of credit that's $100 million. So for example, you could see at the end of 2015, we're going to invest $340 million into new streams or royalties. From that perspective, our whole market cap today is only $500 million. So we've got a large challenge ahead of us. We just have to figure out how to create the growth that Tony talked about being a high growth stock. And we've got to go out there and figure out how to use our cash intelligently and smartly, methodically to create that growth profile in our company. And that's what we plan on executing over the next 24 months.

Sort of a relative valuation slide there and that's the end. So thank you very much. And I guess Cosmos will now come up.

Question-and-Answer Session

Cosmos Chiu - CIBC Capital Markets

Thanks. It's always energating in terms of the Royalty Panel. Are there any questions coming from the audience. Frank?

Unidentified Analyst


David Harquail

We actually have now gold accumulation account and our royalties (inaudible) we're taking in kind. And also on our streams that we just done with Teranga, we take that. But the main driver for us is we want to be an active company for U.S. tax investors. We don't want to be passive for investment corporation. So taking that physical goal is our key motivator right now. And yes, we the option of accumulating gold. But right now, we see lots of places in cash. And we also think the market takes a lot of comfort by seeing $900 million of cash on our balance sheet. And it'll take them an extra calculation to convert our ounces into available cash. So we think right now, the market wants to see the bigger working capital, the most cash, a rich balance sheet.

We'll start accumulating the gold when we start running out of things to buy. But right now, we need the cash to buy things.

Unidentified Analyst


David Harquail

No, we wouldn't, but I appreciate your point.

Randy Smallwood

I think we can draw from your question, if there isn't good things to do with our cash and you do share buybacks, you increase your dividend. All those things would be options that we would look at it if indeed we didn't have good things to deploy. Historically, we've been able to adding more shareholder value through acquiring new assets instead of giving it back in the dividend. Buying back shares would be something that we would look seriously at if we didn't have any other good source of the capital.

I think the perfect point is when you don't have cash flow, that it's all invested back into houses and the ground. And so our objective is to have our cash balance to zero, right, zero debt. I mean that's the perfect use. Having cash on hand, I mean we're precious metal (inaudible). And so having cash on the balance sheet, cash isn't growing for you, what you want is capacity to make new acquisitions and to keep cash back into the ground.

So I were to take cash on hand and store that in silver or gold, when all of sudden the right opportunity comes along and I fund that, when I go to deliver, I actually diversify. If I'm having to move a bunch of silver and gold into the market, especially the silver spaces, smaller than the gold space, you put negative pressure on the silver space. At the same time, you're trying to do a silver deal. It kind of works in contrast, right?

Our objective in our company isn't to have a big cash balance. If we're on capacity, we can do that through a debt revolver. My objective is to make sure we have this quality ounces in the ground. And that's sort of value in our company is ounces in the ground and not cash in the bank. And there's several different ways, that capacity to making that position. One is having cash on hand. One is having that middle ounces and to utilize that whenever you need it.

Tony Jensen

Yeah, I think it comes down to two issues. One is I think all of us here would agree that what we're trying to do for our shareholders is get the most exposure on a per share basis through quality ounces. So I think what Randy what said is you don't want to have a lot of cash flow. In turn, we want to have the ounces in the ground that can be produced. And we think that's how we add the most value to our shareholders. I think at the same time, though, I'm one of those CEOs who does believe in the long-term gold price. You're a CEO of a gold company and you believe in it. And so I do believe that gold should become money one day. And I actually think it's a lot closer than we may think. And I know that sounds completely crazy, but I actually made a bet with an investment banker last year saying that I think that individual people will only view that electronically on their iPhone.

Cosmos Chiu - CIBC Capital Markets

So one comment that I often get from investors is the fact that, Cosmos, all the royalty companies are the same. I don't know if we can do this, but could you maybe use, say, 20 words or less to describe your company and tell us how it's different, it's better and I'm sure no one will talk about his share price. But anyone?

David Harquail

We've already invested the $1.2 billion on these assets and now we need to see that revenue come the other directions. So we've already layered the next level of growth in our company.

Randy Smallwood

I actually think that's now to the point when we believe not so much that it's actually attractive and it's a benefit and it presents opportunity.

Nolan Watson

Our key differentiator compared to these companies is effectively just our size. We're the smallest by a large stretch. We're not trying to catch up in terms of size and we don't have any growth objectives in terms of we want to get to that size. Our goal is metrics on a per share basis for our shareholders. And I actually believe that our size is compared to strength is where we can do acquisitions. Franco-Nevada and other companies, they can do small acquisitions too, but those small acquisitions are very meaningful to us. And if we are smart and we make acquisitions and are selective enough, we really can have a good result in our share price.

David Harquail

No one likes to think that you're doing things for lower radar screens, but there's never going to royalty I didn't like, and I've done deals, small, $125,000, because royalty once you buy it, there's really no maintenance cost. It's a free option forever on a piece of land. And our fundamental philosophy is that the most wealth created in this industry has not been timing the commodity strikes or believing commodity prices are going to go up and it's not from financial engineering, it's from exploration, having interest in land if someone is making a major discovery afterwards. And that's where we made our big dollars in gold strike, and that went from nothing to 50 million ounce deposit. It's exposing yourself to those opportunities, where we want to have as many royalties as possible and as much land as possible on the best trends possible in the world, because we want to expose ourselves the exploration for free.

Cosmos Chiu - CIBC Capital Markets

Thanks, David. Not that I'm counting, but that was slightly more than 20 words. Maybe this question is directed to Tony, Randy and also David. Not calling you guys old, but it's pretty clear that you've had more years than Nolan in the mining industry and also the royalty industry. So what kind of advice would you give to Nolan in terms of the royalty business?

David Harquail

From our side, this business is just a business of patience, because I think the biggest advantage that we have as a royalty company is we have permanent capital to make investments in projects. And I'm telling all these private equity guys that come into the business and they're going to monetize their funds in seven years and make something in return. Most mines don't even get off the ground from the discovery in seven years. And the true wealth is created by having that interest right in that mine. And then when that mine goes to subsequent expansions and growth and finds these additional ounces, you can be there for the lifecycle of the mine and can make a lot of money.

So if you have a portfolio, you have to be very patient and then be very discriminating on the deals, because the biggest temptation is to get caught up in this bull cycles and you want to show that big, big growth compounded number, you don't need a lot of growth. All we got to do is better than the gold price.

Randy Smallwood

I was part of the team that hired Nolan into Silver Wheaton back when he joined, and I think it was 2005. We needed someone to come in there, start taking track of all the finances on Silver Wheaton side. And so Nolan knows exactly what my advice is and he knows where I come from, and it's all about the resources, it's all about, I hate to say it, but we invest in management group assets. We want good strong partners, but we want assets that can withstand bad management too. And it all comes down to the resources, the technical side, making sure that you've got good foundation. Everything builds up from the ground.

Tony Jensen

First of all, Sandstorm has done a fabulous job. You've taken something from zero on to what you've grown to today. And I don't think Nolan needs a whole lot of advice from any other CEOs. He knows his way around. I would echo what Randy said just from the standpoint of fundamental, technical evaluation. My background is mining engineering and we look at the asset quality first. And if you've got that, then you can withstand these different things over time. And I think there's plenty of assets out there. You have to be patient. You have to be selective. And that's what we're doing everyday.

Cosmos Chiu - CIBC Capital Markets

Would you like to respond, Nolan?

Nolan Watson

It sounds like good advice for me.

Cosmos Chiu - CIBC Capital Markets


Unidentified Analyst


Tony Jensen

I'd like to take this. I think royalty companies, and I mean this sincerely, trade at discounts to go to mining companies. If you look at true finance evaluation methodology, it's present value to keep this kind of cash flows, the businesses only work where the cash free generate in cash. And if you actually look at those true metrics, adjusting for the unknowns that are not in your spreadsheet, royalty companies trade at a discount at risk-adjusted cash compared to money.

So a good example, one of our partners is a company called [ph] Winner Gold. And last week, it announced that they shut down the mine for 48 hours. They only shut down for two days. But in that days, they didn't purchase any gold, so didn't get the buyers' 17%, but our cost for those two days was zero. Their cost, they had to run the full cost of running the mine for those two days and their margin is actually fairly thin. So for half of the month, their total profit was zero because of those two days.

And if you look at a mine, people always value mines on a spreadsheet. And everything works perfectly for this period of time, this is what it's worth. I can promise you one thing, that spreadsheet is wrong and that's not what's going to happen. There're going to be many unforeseen one-day events or two-day events, a pump fails or there's a flood, there's a rain, there's a fire, your mill went down for a day or two because of electrical issue, and those one-time issues have tremendous impacts on the actual free cash flows that these mines generate, whereas they don't have the same impacts of the royalty companies or the streaming companies. And so if you're evaluating one spreadsheet versus another spreadsheet, you're doing the wrong analysis and not taking into account the facts of those unknown things that are going to go wrong and how they impact a mining company and not the royalty company.

So I think that when you take those things in and you understand how they impact the cash flow of the mining companies, the royalty companies up here are trading at a discount to them.

David Harquail

I'd say the answer is actually even simpler is that the gold companies have had no ability to deliver higher gold prices to the bottomline. And as a result, the markets realize that their correlation out of gold is very low. And if you actually plot it for the last five years we actually showed in our investment presentations down to something like 16%, because the gold companies have lost more quality ounces and all these cuts in resource and they've been hit on every front.

If you look at the royalty companies, our stock is traded at 86% correlation to gold in the last five years. And so we're a real gold investment, because we deliver net on the bottomline. And gold always trades at a premium, because it's the only commodity that trades with a negative correlation to the rest of the market, it's the only commodity that has a positive [ph] contango going forward. And so we see it as a unique asset and there's going to be a demand for it.

I think it's temporarily right now. We think the operators have lost that premium. They're trading down at base company valuations right now. I think as soon as they can start mining like-for-like ounces and stop that erosion and get that correlation back to gold in terms of moving it to the bottomline, they'll get the premium back. So it's going to come.

Randy Smallwood

Building on both of those comments, even as the bull rises in the tide, we would expect it to rise even higher and keep that delta in premium. The other thing it's very much a scarcity factor, there isn't very many of those. You must have about 98% of the market capitalization sitting on the stage right now and it's royalty and streaming. But I think the bigger issue is a bit where Nolan is going it's the lack of risk in the business model. And remember, in our business school we always talk about risk and reward. As investor takes more risk, he anticipates hitting a better reward for that. And here you can get all the rewards in the marketplace as an operator, which you don't have to take the risk profile in that sense to give us the premium in this space.

Cosmos Chiu - CIBC Capital Markets

So how about margins?

David Harquail

High-grade waste becomes low-grade ore in most operations, right. And so your margins on a gold company trend on deposit. Every deposit is different, right, but most deposits, as prices go up, high-grade waste becomes low-grade ore and there's sort of a designed margin there that doesn't change with a higher gold price. It does with us. Our cost is $4-and-change per ounce. No matter silver is at $15 an ounce or $45 an ounce. And so that's all delivered directly back. And so it's margins that you're investing into. And I think there was a misconception over the last couple of years, a lot of people invested in the mining space when they saw gold going up. They said, wow, all that extra value is going to come back.

The value of the company isn't how many ounces it produces. It's the margin that it makes when it produces those ounces. And that's what's so beautiful about the streaming and I guess to the royalty side is the fact those costs in the streaming are predictable and a $5 increase means $5 in profit on a per ounce basis. I agree we're undervalued.

Randy Smallwood

And the other measure too is what's been the biggest growth area in the gold investment industry, so gold ETFs. What they're trading isn't in multiples. You're paying 40 basis points, you're never going to get any growth for your holding. You're only making that investment, because you're counting on gold going up. So our hurdle is we just got to do a bit better than the gold price, we're adding value. And I think we're doing a lot better than that.

Cosmos Chiu - CIBC Capital Markets

Mike, do you have a question?

Unidentified Analyst


Tony Jensen

There's two questions in there. One is diversification and the other is a deal that's too big for your portfolio. Well, let me just take a stab at that first. We were very much focused in precious metals, gold in primary. We have about 7% of our revenue coming from gold. And that's what we know best. We would not mine taking on a little bit of other commodities that we understand, but we're not going to get too crazy and maybe at least having 70% precious metals. It's a threshold that we think is quite important. So that's the answer to the first question.

Second question is it's something we're very much focused on as far as too much concentration on a particular asset. And I think we're about where we want to be on Mount Milligan. That's nearly $800 million in one asset. If we got north of $500 million or certainly up around $1 billion on one asset, we might look to syndicate something along those lines. Banks indicate things all the time. There is no reason why we shouldn't consider doing that in this sector as well.

Randy Smallwood

Yeah. So it'll stay precious metal focused. The foundation behind streaming and why we created this company in the first place was I used to work for a gold company that had much of silver buried in it. And as a silver company, we're creating a higher market multiples. That's where the whole business concept came from was our marking that value. But that value was even stronger in the base metal sector. And so that's part of the value creation that this helped, so we can drill into the company. It doesn't work the other way. I like to buy a byproduct, not to say we won't do it. Certain projects have the capacity to handle that. But I much prefer to buy a byproduct. So there's more incentive that way. And so somebody will say precious metal commodity focused in that space.

In terms of scale, we did a transaction last year with Vale at $1.9 billion. So it's sort of a new top-end mark. I don't think there's many opportunities are much bigger than that. There're a few that fall into that scale, but there's not much in that space. It's the fact that we have the capacity for that and we can manage those things. We've done $3 billion in acquisitions in September 2009 without issuing a single share, right? It gives us that capacity to take on some of the larger-scale opportunities like that.

Tony Jensen

We're 20% non-precious metals. I think sometimes, some of the investors last year challenged me on it, but then I think they were very happy in the third quarter when our oil and platinum palladium compensated for the decline in gold prices, real diversity. We're really essentially like fund managers. We would like to have no asset that will be more than 5% or 10% of NAV on our revenues and our cash flow we want to have. So no one is too worried about any one asset.

So right now, $6 billion to $7 billion, maximum $600 million, $700 million is just right. But if you're confident you're keep going the company or rightsize it down the road, you might temporarily do a larger one and then rightsize it down the road. So I think the sweet spot ideal are $300 million deals that are 5% of the portfolio and then just keep expanding the portfolios till you can do bigger ones. And our securities are really, really small ones.

Nolan Watson

Yeah, from our perspective, the diversity is important and it's an important differentiator of our business model for the people on the stage here compared to a lot of the mining companies is because it doesn't take as long as David says to operate them. We can become more diverse than the mining companies can. You see the mining companies, they have to sell assets when they get to a certain size. We don't. So political risk diversity, mined asset diversity, these are things that are important to us. So we won't ever carry too much of the portfolio.

Cosmos Chiu - CIBC Capital Markets

Maybe I can end the panel discussion with one of my questions here. Earlier today, we heard from Barrick that they're using another $1,100 an ounce gold for their mine planning and also reserve calculation. Is that $1,100 an ounce number also relevant, do you believe, for the royalty and streaming business? I'm trying to get to, I guess, what would you use in terms of pricing your deals?

Randy Smallwood

We won't answer that question. I can tell you we wouldn't reference Barrick's reserve.

Randy Smallwood

Watching the precious metals market as a whole, long-term mining price are the biggest variable in terms of how assets are valued and transactions are invested in. And the success is of course we're in a unique situation right now where an ounce is at or higher than the slot price. I worked all the way through the 90s in the gold industry when an ounce was always higher than the spot price. So I don't really put a lot of weight in that, but it is obviously something that the market uses to go forward.

So we come to a number that sort of reflects some of the risk in terms of going in and expecting a reasonable rate of return based on essential range of commodity pricing going forward. But one thing I will tell you is that there's no one in this room or this conference or I think in this panel that can actually predict commodity prices on a very good basis. There's one thing that the time is in industry has shown that the experts are very good at that.

David Harquail

We have to give the analysts some credit. If you go back to the beginning of last year, the consensus was about $1,500 or saw gold dropping longer term to about $1,300. You just got there a little faster here. To make deals happen, both sides have to sort of agree on an outlook for gold prices. And generally, the analysts consensus, what does the market think, the seller is going to realize they're going to be judged on that deal. And ourselves, we know the analysts are going to sort of put it in their black box and generate was that accretive deal or not. So both sides usually talk in that metric.

And in our own board discussions, we generally have an analysts' consensus view of how that deal is going to be regarded, and we're using a spot price just absolutely flat, because it actually is very size for our directors to understand when we're looking at the various cases. And what we really try to do is price their deals on that simple metric. We do our own engineering like the other folks do, what's the most likely outcome. And then what we're really trying to do is then what's the optionality that we're getting for free on top of that on the properties. So it's just simple as that.

We're not trying to make any bet on the commodity prices going forward. What we believe is the gold price was down. The biggest negative could be it might take a lot longer for those ounces to come out. We might have to wait for another cycle, but ultimately those ounces will be produced and we'll get our money back.

Tony Jensen

Sometimes it's better to listen than to speak. We would do the same thing. We'd probably add a couple of more price tags in there. We don't look at anything at just one price tag. We'll put as many as four price tags and we might even trigger ourselves to a [ph] contango case that we want to know what does it take for this deposit, if you take a certain size or a certain return, and we won't just simply look for gold price, we'll look to the resource expansion potential that we think is inherent in the deposit. In a stressed case, we want to know where should we be concerned about, how long could the gold price go before we get impacted.

Sorry, we're not going to answer that one directly. But there's a bit of a cloud of investment value there.

Nolan Watson

Yeah, I think we would actually echo that. So we sort of moved away from picking the gold price and we have funded into something that Randy said earlier, which is you build on the base, which is the asset, and that asset can change in various gold price environments. So we'll actually run scenario analyses, scenario one, two, three, four, five, and then how do each of those scenarios change in various gold price ounces. And then look at it and come to sort of a holistic way of where we think we would make money on the probability of weighted average basis for shareholders if we bought it around there. So there is no one gold price that sort of drives that.

Cosmos Chiu - CIBC Capital Markets

It's great. I think that's all the time we have. Thanks for all the great answers and we look for to 2014.

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