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Royal Gold Inc. (NASDAQ:RGLD)

F1Q2011 (Qtr End 09/30/10) Earnings Conference Call

November 4, 2010 12:00 PM ET

Executives

Karen Gross – VP and Corporate Secretary

Tony Jensen – President and CEO

Bill Zisch – VP, Operations

Stefan Wenger – CFO

Bruce Kirchhoff – VP and General Counsel

Analysts

Michael Tsada – UBS

Andrew Schopick – Nutmeg Securities Ltd.

Imaru Casanova – MLV

Operator

Good afternoon. My name is Andrea, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold Fiscal 2011 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to our host, Ms. Karen Gross, Vice President, Corporate Secretary. Please begin your conference.

Karen Gross

Thank you, operator and hello everyone. Welcome to our first quarter fiscal 2011 conference call. The event is being webcast live. You will be able to access a replay of the call on our website at www.royalgold.com. Also, on the website you will find our release detailing our financial results.

As always, 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.

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

A Q&A will follow our comments. We will also be discussing the company's free cash flow, which is a non-GAAP financial measure. There is a free cash flow reconciliation in today's press release.

With that, I'll turn the call over to Tony.

Tony Jensen

Thanks, Karen and good morning everybody. We are pleased to report another quarter of robust financial performance. Fiscal first quarter results were strong as Royal Gold achieved record revenue and free cash flow.

We reported $45.3 million in royalty revenue, a 74% increase from $26.1 million in the comparable period.

Quarterly net income rose 66% to $11.8 million, or $0.22 per basic share and free cash flow was $40.8 million or 90% of total revenue. These results represent not only continued strong performance from our traditional portfolio of royalties, but also mark a fundamental shift in the source of our royalty revenue, as we begin to transition away from maturing projects to our new generation of long lived core properties.

An example of this transition is that 25% of our revenue for the quarter came from Andacollo and Voisey's Bay; two properties that were not even part of the Royal Gold portfolio 12 months ago. Andacollo has become the single largest contributor to our quarterly revenues; quite an accomplishment for all involved and our congratulations go out to the Teck and Andacollo teams.

Also during the quarter, our GSR1 royalty at Taparko reached its cap of $35 million in September. With the achievement of this milestone, the GSR1 and GSR2 royalties have been extinguished as planned and a 2% GSR3 royalty along with the 0.75% GSR milling royalty now take effect for the remainder of the mine life.

In total, we received $57.4 million from GSR1 and GSR2 royalties. This milestone is commendable and is the result of all associated parties’ ability and willingness to work through previous operational and financial challenges.

We have been discussing this revenue reduction at Taparko in a similar cap Siguiri for several quarters. We have also been updating you on our growth expectations within our company and it is gratifying to see the Andacollo and Peñasquito royalty revenues increasing at the same time to us at these reductions. And in this fiscal year, we still look forward to further growth associated with the potential resolution of labor issues at Voisey's Bay, the continued ramp up of Dolores and Las Cruces, as well as new production from the Canadian Malartic and Wolverine projects.

I will now ask Bill Zisch, our Vice President of Operations to provide an update on these and other key properties. Bill?

Bill Zisch

Thank you, Tony and good morning, everyone. I'll start with an update on Teck’s Andacollo property and add to Tony's earlier comments.

Teck declared commercial production at Andacollo beginning October 1. It described the achievement of commercial production as marking the completion of project development, commissioning and operational ramp up. The plant has been averaging 53,000 tons of ore per day or 97% of the design capacity of 55,000 tons per day. The ramp up that began in mid-February was completed by the end of September, within seven months our first ore to the mill. Payments thus, began with commencement of shipments in May.

On September 12, Goldcorp reiterated their annual guidance for gold sales of 180,000 ounces from their Peñasquito mine. At the same time they declared the project had achieved commercial production. They realized a combined 30-day average throughput rate in excess of 70,000 tons per day, including peak daily throughput as high as 105,000 tons. And last week Goldcorp announced they achieved mechanical completion of the high pressure grinding roll circuit and that commissioning of the circuit is underway.

Goldcorp reports that they are still on schedule for full production ramp up to design capacity of 130,000 tons per day in early 2011 and that concentrate sales are ramping up according to expectations.

In early October, Vale reported that contract talks with the union workers at Vale's Voisey Bay ended without settlement of the strike that began on August 1, 2009. While we are unable to speculate on possible resolution of the dispute, Royal Gold continues to receive royalty revenue from Voisey's Bay production, which is continuing with the partial workforce.

As reported by Minefinders, gold and silver production at the Dolores mine decreased in the second and third calendar quarters due to lower average ore grade stack to leach pad and a remediation work on a tear in the Phase I leach pad that was discovered towards the end of June. Heavy rains hampered the repair work and prompted the removal and placement of a large portion of unleached ore to the Phase II path.

While Minefinders has not released revised annual guidance, they have indicated their production is likely to be deferred. The company did report they hope to make a decision on a high grade mill late this year.

At Inmet's Las Cruces mine in Spain, plant reliability has improved significantly and no substantial mechanical downturn was experienced in the third quarter. They are now in the process of ramping up throughput in production. Inmet reports have maintained an optimal recovery while increasing feed into the plant is the next step for achieving full production. They have revised their annual copper production objective for 2010 at Las Cruces to 28,000 tons, about 63 million pounds of copper cathode to reflect the slower ramp up.

At Alamos's Mulatos mine, production year-to-date has lagged their plan by roughly 11%. However, Alamos expects to reverse this shortfall by the end of the year and has maintained their production guidance.

Two factors affected output during the quarter. While closing the crushing circuit to reduce the size of material delivered to the heap will ultimately provide for increased recoveries, the average time required for solution to percolate through the heap has increased, thus deferring production. The second factor was uncharacteristically long and intense raining season causing dilution on the heap leach pad.

Production in the fourth quarter is expected to increase with the stacking of ore directly on the liner of the North Mulatos Heap increased gold recovery plant capacity from the addition of a second train of carbon columns and the commissioning of a new screening plant capable of increasing crusher throughput by 13% to 20%.

In summary, our portfolio of 34 producing properties is performing well. It continues to accommodate the positive and negative variances that we inevitably see on a quarter-to-quarter basis.

I'll now talk on project development front.

Osisko reports that constructions at the Canadian Malartic mine and mill facilities continues to advance. From June to September, the mining fleet started pre-production mine activities. Currently 67% of the project costs have been spent and 89% have been committed. Construction of community infrastructure is nearing competition and residential relocation is 100% complete. Osisko remains on track towards their scheduled startup in the second quarter of 2011.

At Barrick's Pascua-Lama project detailed engineering and procurement is nearly 90% complete and the project is on track to begin production in the first quarter of 2013. Over 40% of the pre-production capital estimate of $3 billion is committed at this time. Earthworks have commenced with major work for the mill and Merrill Crowe platforms are expected to be completed this month.

At Wolverine, Yukon Zinc is feeding stockpiled low grade ore to the plant as they finished commissioning of the mill. All three concentrate circuits are operational and current plans are to feed ore from the underground mine in December.

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

Tony Jensen

Thanks for the update, Bill. I'd like to highlight a couple of developments that occurred after the quarter closed. In mid-October, we announced the completion of the Mt. Milligan gold stream transaction, where we acquired their right to 25% of the payable gold produced from its copper-gold project located in British Columbia.

The total consideration of the transaction was $226.5 million paid in conjunction with the closing of Thompson Creek's acquisition of Terrane Metals, with an additional $85 million to be paid over the construction period.

In addition, we will pay Thompson Creek a cash payment equal to the lesser of $400 or the prevailing market price for each payable ounce of gold until 550,000 ounces have been delivered to Royal Gold, in the lesser of $450 or the prevailing market price for each additional ounce thereafter.

On Monday of this week, the Canadian federal government reported that they granted Thompson Creek authorization to proceed at Mt. Milligan. Initial construction has commenced and production is expected to begin in 2013. We are extremely pleased to have closed this deal bringing yet another high quality long-life addition to our royalty portfolio.

Also in October, we completed the deferred portion of the transactions to acquire an additional NSR sliding-scale gold royalty on the Pascua-Lama project in Chile.

With the completion of this final payment, our total royalty interest is now a 5.23% NSR, at gold prices at or above $800 per ounce. The transactions also included a 0.2% fixed-rate copper royalty which takes effect after January 1, 2017, increasing our total royalty on the copper interest to 1.05%.

In closing, we have worked hard over the past several years to grow our producing and development portfolios through the addition of high quality long-lived assets. These efforts are now beginning to pay off and we anticipate further growth of our key financial metrics, as additional projects ramp up to full production and several of our key development properties come online in the coming quarters.

With that, operator, we are happy to take any questions that the audience might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Imaru Casanova with MLV.

Imaru Casanova – MLV

I have several questions. The first one I'll start with Voisey's Bay and I'm just trying to understand a little bit more what the parameters are there. I guess I was hoping you guys could clarify for me what the actual design capacity of Voisey's Bay is, how that compares to the current status on where the mine is operating now; then, thirdly, how that full capacity compares to the provincial limits on the operation up until 2013. If you could clarify that, that would be great.

Tony Jensen

Let me turn to Bill Zisch. I think he has pretty good knowledge on those figures.

Bill Zisch

As far as their design capacity, as you mentioned, they're constrained ultimately by the provincial limits that they have, and until that point they're operating at 84 million pounds of nickel annually, that's their rate. Their current status function of the strike and all is somewhere between 50% to 70% of that rate and that's fluctuating as they start to ramp up and I don't have the specifics of exactly where they are at on that production curve, but they are ramping that up.

Imaru Casanova – MLV

How does that 84 million pounds, which is the limit by the province compare to the design capacity of the plant, Bill, if you know that?

Bill Zisch

Obviously their throughput is a function of whatever grade they can put in, but historically they have run at rates that were significantly meaning 20% to 30% over that historically. That's a function though of not just throughput, but grade and I'm not familiar right now with what their grade profile is, what their design and their historical operation was.

Imaru Casanova – MLV

I want to know that because I guess eventually after 2013 that’s ultimately the level that they are going to be able to achieve. So, provided all the labor issues resolve, and I want

Bill Zisch

I think what we do is when they get their labor issues resolved whenever that occurs, they'll put out a plan and we'll be able to have a better idea of exactly what that production profile capacity is as they'll be revising their plan (inaudible) certain to the point in time at which they kind of restart everything back to normal operation.

Imaru Casanova – MLV

The other question I had, if you can just comment quickly, I looked at Goldcorp's report and the Peñasquito production, not the commercial, but the total production which I understood is what you guys were getting paid on for the quarter that they've reported is different and I think lower than what Royal Gold reported in the report today. Can you explain why that is?

Stefan Wenger

I presume that's probably a difference between sales and production. We get paid on sales (inaudible) and that might have been the difference.

Imaru Casanova – MLV

That makes sense, that is probably – on the reported sales and productions for the commercial part, but in the text they did talk about total production, but they didn't specify sales or maybe that's the difference, okay?

Quickly, can you make any comments on what we should expect going forward at pipeline at Cortez? I mean there is 5.2 million ounces of reserve subject to your royalty still at Cortez. Should we assume going forward levels similar to where we're at now? Should we assume that that's going to decline next year on going forward? Can you give us any indication of what we should be forecasting there?

Tony Jensen

I think the production forecast they gave us this year, I'm looking at Bill, is 241,000 ounces at our property. I don't think there's any reason to believe it would be any greater than that, see that there is going to be continued heap leaching on the South pipeline and the pipeline side of deposit. So we expect to have additional royalty revenue there, but we don't look at for it to pick up from that level, I don't think it will drop significantly from that level, a bit of downward (inaudible) in their potential. But I look for them to focus over at Cortez sales for the next five years or so and then put the other crossroads in the South pipeline back on the higher entry (ph) on the line.

Imaru Casanova – MLV

Then my last question will be, Tony, I know you're very familiar with Chile and the environment there. Can you make any comments as to this new law that aims to protect glaciers and your views and thoughts on it as it affects Pascua-Lama?

Tony Jensen

First of all, Royal Gold supports responsible legislation there to protect glaciers. We think surely we can have a responsible legislation and responsible mining that co-exist. And as we understand the bill that passed by Argentina Congress and was signed by the President; that is a bill that will still allow the development of Pascua-Lama on the Argentina side. Of course, you know our royalty interest is only on the Chilean side, but nonetheless we very much would like to see the entire project move ahead without any kind of incident.

We understand the bill that's in front of that's – it has already been approved by the President does that, but there has been some constitutional challenges by the local province there, and we'll just have to see how that plays out. Apparently, there is concern who has the actual responsibility to govern those resources in province and that's an issue that goes well beyond Royal Gold and we'll just have to let that play out.

Imaru Casanova – MLV

I understand Barrick hasn't necessarily been approached by the government regarding any impact by this law, that's correct, right?

Tony Jensen

I don't quite understand the question, but what I'm understanding is Barrick feels they can move ahead with the new law.

Operator

(Operator Instructions) Your next question comes from the line of Andy Schopick with Nutmeg Securities.

Andrew Schopick – Nutmeg Securities

I wonder if you feel like you are juggler some times. You have got a lot of things going on here. In the other category, I would like to ask how many producing royalty properties comprised that category in the current quarter.

Tony Jensen

That's a very good question, Andy and yes, we do have a very large portfolio of different royalties; 34 in total, producing revenue for us now, and Stefan is actively look that number up, doing the math and looking across at his paper and see the number is 23.

Stefan Wenger

I think we have 34 producing properties.

Andrew Schopick – Nutmeg Securities

Eleven are specified?

Stefan Wenger

There is 23 other properties contributing to the other and none of those are what we would consider our principle properties. They all generate nice revenue stream for us, but none of those are significant enough individually to report separately.

Andrew Schopick – Nutmeg Securities

I have a follow-up question kind of related to that. On your balance sheet, you've got $1.5 billion that's tied up in royalty properties. I really wonder whether or not you have any desire, plans to possibly monetize some of the non-producing exploration type properties that you're now carrying on the balance sheet because that has both potential benefits and risks associated with it. And related to that question is plans for debt reduction in the year ahead?

Tony Jensen

We value all those royalties. We think there's a lot of option value in that exploration portfolio and the valuation portfolio, that comprise about 130 assets. We have one individual that's dedicated to looking at that, monitoring that portfolio, and trying to find value there, whether it comes in using those properties as a potential currency to do other things with or maybe there's an opportunity we can actually add to our interest by providing financing to one of those developers. We're interested in doing that. If sales are part of that as long as it adds to the overall vision of Royal Gold, I don't think there's a problem with that. But generally, we're looking to acquire assets rather than to sell those, typically for debt reduction.

Andrew Schopick – Nutmeg Securities

I certainly understand, but my point here is I think most of your investors and people who do follow the company look at this for its royalty producing properties and the cash flows that are associated with it, to the extent to which you have made a lot of acquisitions over the past few years and do have these various properties that are certainly non-producing and may not be for quite some time. Whether that's really something that you would desire to hold as a significant asset remaining on the balance sheet, that's basically not producing any royalty?

Tony Jensen

We look at those as our future. We're going to continue to acquire royalties as we go into the future as well, but certainly there'll be a few of those that pop out of that portfolio and become very important to Royal Gold going forward. So, again we may be selective in that, but we don't look at it as a major revenue source for a debt reduction. Instead, I think our focus on debt reduction is to maintain strong cash flow and attack the credit line first and then turn to the term later on. But very good cost to capital on both of those. So, we are quite pleased with those debt pieces.

Operator

(Operator Instructions) Your next question comes from the line of Michael Tsada with UBS.

Michael Tsada – UBS

Hi, guys. Michael Tsada filling in for Brian MacArthur today. I was just wondering if you guys could quickly discuss a Holt, maybe a quick status update on the Holt's property going into 2011?

Tony Jensen

Sure, just asking Bruce, Kirchhoff, our General Counsel to speak to that.

Bruce Kirchhoff

Just within the last two weeks or so, we finally got it scheduled from the Appeals Court for briefing the appeal and having for argument. So, Newmont's brief is due to the court by December 18. Briefing materials from St. Andrew and Royal Gold are due by January 31 and we've got a one-day argument scheduled on March 1.

Michael Tsada – UBS

Maybe just a quick discussion on some of, I guess you guys were talking about it, but some of the smaller royalties, are there any particularly promising royalties in your portfolio that currently are producing that you see a kind of the ramp up going forward into 2011 or 2012?

Tony Jensen

What we talk about the ramp up, it's really the Dolores reaching full production. We still haven't seen that yet. It looks Las Cruces has made some good strides there. We look forward to them continuing to go forward and reach their full capacity. And then we've got of course the Wolverine project that's going to be coming on in 2011 fiscal, I am talking about 2011, and as well as the Canadian Malartic project. So there's a lot right in the portfolio that already has bought and paid for, that's coming on in a very near term according to the operator's projections.

Operator

There are no further questions in the queue. I turn the call back over to Mr. Jensen for closing remarks.

Tony Jensen

Thank you operator, and thank you all for joining us today. We certainly appreciate the opportunity to update you on Royal Gold. We appreciate your support and look forward to the chance to update you in the coming quarter. Thanks everybody.

Operator

This concludes today's teleconference. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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