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Royal Gold, Inc. (NASDAQ:RGLD)

Q4 2014 Earnings Conference Call

August 7, 2014 12:00 PM ET

Executives

Karli Anderson – VP, IR

Tony Jensen – President and CEO

William Zisch – VP, Operations

Stefan Wenger – CFO and Treasurer

Bill Heissenbuttel – VP, Corporate Development

Analysts

Cosmos Chiu – CIBC World Markets

Andrew Quail – Goldman Sachs

Alex Terentiew – Raymond James

Adam Graf – Cowen & Co.

Brian MacArthur – UBS

Operator

Good day and welcome to the Royal Gold Fiscal 2014 Fourth Quarter and Year End Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Karli Anderson, Vice President of Investor Relations. Please go ahead.

Karli Anderson

Thank you, operator. Good morning and welcome to our discussion of Royal Gold’s fiscal 2014 results. This event is being webcast live and you will be able to access a replay of this 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; and Bruce Kirchhoff, Vice President, General Counsel and Secretary. Tony will open with an overview of the quarter, followed by Bill with an operational review and then Stefan will discuss our financial performance. After management completes their openings remarks, we’ll open the line for Q&A session.

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.

Now I’ll turn the call over to Tony.

Tony Jensen

Good morning and thank you for taking time to join us. We are pleased to report today very strong financial results for the fourth quarter as well as the fiscal year. Our remarks will be limited to focus more time on the questions you may have. We have slides that go along with today’s discussion and I’ll begin on slide 4.

In fiscal 2014 we embarked upon our next phase of growth. Mt. Milligan, our largest investment began production. We completed several royalty and streaming transactions that will enhance our long-term growth. We increased our dividend at time with many precious metal companies were reducing their payouts and we maintained a strong balance sheet with over $1 billion still uncommitted. Our operating results reflect the higher contributions from Mt. Milligan along with increased production in Penasquito and our interest at Cortez during the second half of our fiscal year. These properties are expected decline in grades in associated gold production at El Toqui. Bill Zisch will discuss our operating results momentarily.

The gold price in fiscal 2014 was 19% lower than fiscal 2013. While earnings were only down 12% and $0.96 per share. Stronger production volume, lower G&A and a lower tax rate helped to offset the lower growth price during the quarter. Stefan will go over our financial results in more detail later in the call.

Turning to slide five, Mt. Milligan was commissioned less fall, moved steadily into production and provided us with three straight quarters of volume growth. In fact, in the June quarter, Mt. Milligan became our largest revenue generator and it only averaged about 65% of production capacity during that period.

If you look at the chart on the left hand side of the page, you’ll see the progression of ounces we’ve received from Mt. Milligan, and by the way we’re not including the 7,800 ounces we have in inventory on this chart. Looking at the chart on the right hand side of the page, we expect the mine will continue to drive our gold ounce production increases over the next several quarters. Mt. Milligan will likely be the largest single stream in the gold business once it reaches full capacity. Thompson Creek reports that the ramp up at Mt. Milligan continues to progress well. Ore grades and metal recoveries are as expected at this point in the ramp up schedule and more throughputs are steadily improving. Thompson Creek has targeted 80% of designed capacity by the end of this calendar year, but notes that normal production variances can be expected until steady state operations are achieved.

I’ll turn the call over to Bill Zisch for commentary on our operating results.

William Zisch

Thank you Tony and good morning everyone. Slide six shows a production and revenue waterfall comparing the current June 2014 quarter with the March 2014 quarter. I will focus my initial comments on operational performance differences at our principle properties, after that I will provide a brief update on development of our Phoenix Project in Red Lake and Mt. Milligan’s ramp up and I will end with a brief discussion on commissioning status of along our Long Harbour processing plant, which will process Voisey’s Bay nickel concentrate.

As you can see in the production and revenue waterfall, we were well served by our 37 producing properties. We had a handful of properties that in total realize lower production of 2,500 gold equivalent ounces that was offset by a number of properties that realized a 2,500 ounce positive variance in production. Beyond that offset in the portfolio, the growth in production and revenue was provided by Mt. Milligan’s ramp up which I will address in a moment.

Briefly, results in the portfolio included reductions in production at Andacollo related to the continued mining of lower grade material. At Canadian Malartic due to changes in the sequence of mining from our area of interest and at Holt a result of lower mining grades and lower tonnage. Production levels in the June quarter at Las Cruces and Mulatos were very close to the March quarter. Increases in production were realized at Robinson as they supplemented in-pit mining with mining from stockpiles. At Cortez where Barrick increased activities in the pipeline in gap regions that are subject to our interest and at Peñasquito as mining continued in the higher grade Phase 4 portion of the pit and mill throughput grade in recoveries realized increases when compared to the March quarter. Beyond that balanced production result was the growth in the portfolio provided by the continued ramp up at Mt. Milligan.

Now on slide seven. Thompson Creek reports that a number of mining and milling adjustments were made in April and May after which they achieved an average daily throughput of about 48,000 tonnes per day for the month of June with the record daily note throughput of 63,970 tonnes, roughly equivalent to design capacity on June 16th. While these operational results are significant milestones for them at this stage of the ramp up, Thompson Creek reports, they continue to expect variability in mill throughput until they consistently achieve about 80% of designed capacity, which is expected by the end of this year.

Thompson Creek also updated their calendar 2014 projections for the mine increasing their production range by 20,000 ounces to 185,000 to 195,000 ounces of gold and reducing their byproduct cash cost range to $1 to $1.50 per pound of copper. Midpoint of this range would place the project in the second quartile of worldwide production cost.

On the development front, Rubicon Metals has continued to progress the Phoenix project in the Red Lake district in Ontario. As of the end of June, they were about a third of the way through the development of the project, which has a mid-2015 start-up target. Development of underground infrastructure related to ventilation and ore transport systems is well underway. They’ve mobilized two diamond drills for underground in-fill and definition drilling. Construction of the mill facility is on schedule and the tailings management facility is well advanced towards completion.

At Voisey’s Bay, we saw expected seasonal reductions in corporate shipments in the June quarter. Currently, Vale is commissioning it’s new Long Harbour processing plant and they intent to begin introducing nickel concentrates from Voisey’s Bay in the coming quarters. Vale will transition the processing that Voisey’s Bay nickel concentrates from their Siberian Thompson Smelters to Long Harbour. We are discussing with Vale how the nickel royalty will be calculated going forward. We have pending litigation with Vale concerning calculations of royalty and if we cannot reach agreement on the proper calculation going forward, we will pursue our legal remedies to enforce the terms of our royalty through this litigation.

Turning to slide 8. We’ve provided a comparison of the operator’s full year guidance versus actual production to-date. Some of the operations notably Andacollo, Peñasquito, Malartic and Las Cruces have had strong performance in the first half of calendar 2014. You will note that, both Cortez and Mt. Milligan are forecasting a strong second half of calendar 2014.

Now I’ll turn the call over to Stefan to discuss the financial results.

Stefan Wenger

Thank you Bill and good morning everyone. Moving to slide 9, I’ll briefly go over our fiscal year financial highlights. We generated $237 million in revenue, compared with $289 million in fiscal 2013. Net income totaled $62.6 million or $0.96 per share, compared with $69.2 million or $1.09 per share for fiscal 2013. We had a couple of one-time items hit our fourth quarter results, including a non-cash loss on marketable securities of $4.5 million or $0.07 per share, while income tax expense benefited from the decrease of $5.9 million or $0.09 per share for a non-cash reduction of our uncertain tax positions.

Our Adjusted EBITDA was $202.1 million, representing 85% of revenue, compared with adjusted EBITDA of $260.5 million or 90% of revenue for fiscal 2013. Adjusted EBITDA as a percentage of revenue was lower in fiscal 2014, due to the inclusion of ongoing stream payments to Mt. Milligan of $435 per ounce, which are recorded as a cost of sales. For fiscal 2015, as Mt. Milligan continues to increase its contribution to our revenue, we expect adjusted EBITDA to be about 80% of our revenue.

During our fiscal year, we paid out $53 million in dividends, which is a payout ratio of about 36% of our operating cash flow of $147 million. After accounting for the one-time items discussed a moment ago, our reported effective tax rate for fiscal 2014 was 23.5%. However, if you were to normalize our results for the year, our tax rate would have been about 31%.

Looking forward to fiscal 2015, we expect that our effective tax rate will be between 28% and 32%. For fiscal 2014, we’ve recorded DD&A expense of $91 million or just under $500 per gold equivalent ounce. For fiscal 2015, we expect to record DD&A of between $400 and $450 per gold equivalent ounce, with the reduction coming from increase in contribution from Mt. Milligan which has a DD&A rate per ounce of only $370.

Slide 10 shows our strong balance sheet with working capital of $714 million, our expanded available credit line of $450 million and about $150 million of operating cash flow over the past 12 months. We have just three commitments on our capital that currently total about $100 million from $1 billion remains uncommitted.

Now I’ll turn the call back over to Tony.

Tony Jensen

Thank you Stefan and I’ll wrap up with just a few closing comments. This quarter was really about Mt. Milligan. We have been talking about the expected impact this project will have on Royal Gold for some time and it is impressive to see the magnitude of growth now coming through and its contributions to our financials. The quality of the project, its location and the management team are critically important to our investment process. Mt. Milligan met all those criteria for us and we use that same line to evaluate new opportunities. We spend the time and effort to find the project with strong potential, using our own data to make investment decisions and getting to know the deposits from the management team’s carefully before we invest.

We continued to be encouraged by the amount of deal flow in the business and by the current market environment, royalty and stream products offer a compelling cost of capital for operators. But we will remain selective in our investments to those opportunities that we believe will provide strong shareholders return.

Operator, that concludes our prepared remarks and we’ll be happy to take any questions if there were some.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Cosmos Chiu of CIBC. Please go ahead.

Cosmos Chiu – CIBC World Markets

Thanks Tony, Bill, Stefan and Karli and team. Congrats on a good quarter. Just have a few questions here. Maybe first of on Cortez. Thanks for putting up the comparison of full year versus what’s been done so far. Can you remind us again why the uptick in the second half of calendar 2014, I guess in parts due to some of the ore go through the roster at gold strike, but what else is there that we can take a look at?

Tony Jensen

Thanks for the question Cosmos. Good to speak with you this morning. This is Tony and with regard to Cortez, you know that, a lot of the efforts have been focused over on Cortez Hills which is an area where we do not have a royalty interest over the last several years and now they have moved equipment back over to the South pipeline complex including gap and all of those deposits we do have a very strong royalty interest on. And so, we just expect that, there will be more production from the gap pipeline, South pipeline in the second half of this year.

Cosmos Chiu – CIBC World Markets

Okay. So, it’s kind of one-off Tony, since they have moved the equipment back to pipelines we’re expecting this higher production that’s attributable back to Royal Gold to last a while?

Tony Jensen

It will certainly fluctuate back and forth like any good miner, the Barrick folks are looking for the higher grade to maximize NPV. And so, there are areas even in the pipeline complex where we don’t royalty interest. So, I hesitate to give you a guidance that it’s going to be this strong in the next couple of quarters, but as we look forward several years, I’ll remind that we do have the crossroads deposit which I think, Bill Zisch, I think we are somewhere in the about 3 million ounces in reserve at crossroads that are subject to our royalty interest.

William Zisch

Correct.

Tony Jensen

So that is a very powerful piece of our future at Cortez.

Cosmos Chiu – CIBC World Markets

Okay. Is there any new timing on crossroads because I know a few years back we had talked about crossroads and those are high royalty on it. So, it might have delayed some of the production from crossroads, but since then you know the royalty had been restructured. What’s the current timing on it?

Tony Jensen

Yeah. You do have a very good memory and I think the best way to answer that question is crossroads is probably one of the lower priority targets that they have on the sites. So, they are going to pursuing some of the other reserves before they get to the cross roads deposit. I think that’s something that will get a whole lot more clearance, more vision in the coming year or two. We will get a good idea when they are going to put that back into the schedule.

Cosmos Chiu – CIBC World Markets

Great. And maybe if I can ask about Andacollo. Certainly, grades were a bit lower in the current quarter as expected as per the mine plant. Is there you know any kind of clarity in terms of if they are ever going to get back to like the higher production? For example, year same quarter Royal Gold’s stock was 15,000 ounces of gold contribution. Is that royalty ever again capable of going back to that type of production?

Tony Jensen

I don’t think we’re going to see those grades that we saw in the first couple of years of product in Andacollo as we go forward given the reserves we know now, but we do expect stronger grades next year than we have this year.

Cosmos Chiu – CIBC World Markets

Okay.

Tony Jensen

So there should be some better benefit as this the lay-back stage, back and forth as you see in many other operations. We’re just going through a lower grade section, excuse me, a section of the pit present time Cosmos and we expect that to rebound slightly next year.

Cosmos Chiu – CIBC World Markets

Great. And maybe if I can switch gears again. In terms of you know the development stage projects. I know you have an agreement with Chieftain Metals. Can you remind me if you have extended that $45 million cash payment yet? And you know you talk about, it’s still subject to satisfaction of certain conditions. Given the accident that has happen in the Province of BC two days ago with Imperial Metals, has that changed your thinking in terms of your investment or possible investment in Chieftain Metals?

Tony Jensen

Let me take the later question first and then Bill Heissenbuttel can talk to the prior question. But I think it’s very too early for us to make any assessment about what maybe the future of permitting in British Columbia with regard to the accident that happened this week. But, we are going to look at each investment very, very critically and a number of other things will come into our thinking weather we decide to move forward with any project, anywhere in the world. But regard specifically to Chieftain, Bill do you want to comment on that?

Bill Heissenbuttel

Sure. Cosmos, if you mean have we advanced the $45 million, have we made the payment? No, we have not.

Cosmos Chiu – CIBC World Markets

Okay.

Bill Heissenbuttel

We still only have $10 million invested there. You are correct it’s subject to conditions of President, which includes full financing for the project and in the latest restructuring. I think you might recall in the original deal, we had the ability to recall that $10 million at the end of this year and in the restructuring we retain that right. So, we will have another look at the project later this year.

Cosmos Chiu – CIBC World Markets

Okay. And maybe I know that as part of the new restructuring, you know there is new terms agreements, maybe we can you know, Bill since you was on phone, talk about how you came about some of those new terms and what factors did you considered and agree to essentially the new newer revised agreement?

William Zisch

Yeah. Chieftain has not I don’t think has been specific about what they are now looking at in terms of a new feasibility studies. I might be a little limited to what I can say.

Cosmos Chiu – CIBC World Markets

Of course.

William Zisch

But they are considering something that would have lower capital, lower throughput, higher grades, new transport options and we were able to sort consider some conceptual ideas in looking at that at that new transaction.

Cosmos Chiu – CIBC World Markets

Great. Thanks Tony and team and congrats again.

Tony Jensen

Thanks for the questions, Cosmos.

Operator

Our next question comes from Andrew Quail of Goldman Sachs. Please go ahead.

Andrew Quail – Goldman Sachs

Hi. Good afternoon guys. Congratulations on a strong quarter and it looks like Mt. Milligan were on schedule. A question on Voisey’s Bay. Is the transition going to affect to next couple of quarters production there and if so what sort of impact will you have? And I suppose any sort of color you can put around the discussion with Vale would be helpful too.

Tony Jensen

Yeah. Thanks, Andrew. Tony here. Now we anticipate that some of the ore start moving through the Long Harbour process may be late this year and more aggressively next year and probably turning all away over to Long Harbour next year. So, we don’t expect any kind of change in procedures at our any kind of financials until next year if at all. And let me just say with regard to the comments that Bill Zisch made in his discussion about Voisey’s Bay, if I have to say, we have been in discussions with Vale, we have tabled some proposal on how we think the royalty should be calculated and Vale’s done the same and we still have negotiations to happen before we ever see some common ground there. So, I just wanted to give you a good sense that these discussions were going on and we can’t predict at this point the outcome of those discussions. But, beyond that, I think I should probably keep my remarks to those words.

Andrew Quail – Goldman Sachs

That’s fair. Question on Mt. Milligan. I mean, obviously, you probably can’t give your guidance in 2015? When do you actually see you guys will be providing it to the market and so in grade the recovery is pretty much going to be consistent?

Tony Jensen

Sorry. I didn’t understand that question.

Andrew Quail – Goldman Sachs

So, the guidance for next year, what would you guys, if you had two steady state, do you think something grade recovery is pretty consistent from where we are at?

Tony Jensen

So, let me touch the reality a bit and then Bill Zisch might have a little more color on the details. But remember, that at Mt. Milligan we anticipate the first six years at elevated copper and gold grade of course. We are only concerned from a payment standpoint on the gold side of it. And the average production when we think about all years there is about 260,000 ounces a year. So, the guidance that have been just modified by Mt. Milligan is still well below that 260. But, yet again, we’re talking about the full year of production in this last fiscal year and we have significant ramp up. So, we would probably expect to see elevated grades in the first part of the year, but with regard to year-to-year, Bill do you have any guidance that?

William Zisch

Year-to-year is rather similar and in their continuing ramp up, we’re going to see them continue to optimize around recovery on copper and gold and they are making some modifications to the plant to help optimize that. So, we would expect that they would continue to move up to design recoveries through 2015.

Andrew Quail – Goldman Sachs

That’s great guys.

Tony Jensen

Andrew, thanks for the questions.

Operator

Our next question is from Alex Terentiew of Raymond James. Please go ahead.

Alex Terentiew – Raymond James

Hi. Good day guys. I just wanted to follow up on one of the Andrew’s questions and I understand you can’t say too much on Voisey’s Bay, discussions are ongoing. But, is it fair to say that the current deductions and the current playability that you are getting will be worse case outcome where the possibility of higher payments? I mean, just trying to gauge where the discussions maybe going and I can’t imagine there will be any worse, but I just wanted to hear from you guys what your thoughts are?

Tony Jensen

Alex, let just take a bit of step back and say that, with the current litigation one of the issues in that litigation is contesting the current deductions in royalty. And obviously, I don’t want to get into the details, but we are very, very carefully monitoring what we think is appropriate there and we’re going to make sure that, we pursue all of the discussions that are available to us to try to find common ground on this. But just give us a chance over the next couple of quarters and we will continue to provide guidance to you as more certainty comes about on this.

Alex Terentiew – Raymond James

Is there any specific timeline when you expect to have resolution or just, I mean, let me just going to the motions as you said?

Tony Jensen

No. I don’t think I can give you a timeline other than I would tell you that it’s a priority for Royal Gold. So, we will act accordingly and I know we will be talking about it at the next conference call, and so we’re certainly be continuing to provide you what we know.

Alex Terentiew – Raymond James

Okay, great. Thank you.

Tony Jensen

Thanks, Alex.

Operator

Our next question is from Adam Graf of Cowen. Please go ahead.

Adam Graf – Cowen & Co.

Thanks guys. Just a quick question, follow-up maybe on Cosmos’s question about Mount Polly incident. Have you guys been looking at your existing exposure with existing royalties and if any of those properties have a zero discharge tailing designs in wet climates that could possibly be an issue down the line?

Tony Jensen

Adam, we are looking at those things and every due diligence separately we do. And so, it is not necessary the Mount Polly issue that would bring that to our mind and once in a while basis we look at that frequently as we do all our due diligences. And then I might also add that, those who leads team that goes around and I hesitate to use work audit because it’s a much more friendly process and we go and make sure we understand the mind plans at a major operating partners. And in those times we’re talking about all number of things and generally what we see is intact, at a majority of times we see very high quality work done by all of our business partners. But it’s going to be difficult for us to get into the details of exact design of each facility although I do wanted to know that we do consider that as we do our due diligence efforts.

Adam Graf – Cowen & Co.

Just as a follow up to that Tony. Just on Mt. Milligan specifically or Thompson Creek specifically, could you comment on the tailings design at Mt. Milligan? And then importantly, Thompson Creeks other assets because obviously an issue there could impact Thompson Creek’s corporate viability?

Tony Jensen

Exactly. Well, look I mentioned just a few things and I’ll direct your question directly to Thompson Creek to ask those questions more in more detail. I am sure they will be able to answer that better than I would ever be able to do. But this is a very young facility so far at Mt. Milligan. It’s been engineered for closure from day one.

I’m impressed with design all the way around, as you know there is very little extra waste on this deposit and so they covered the waste dearly and use it for the construction activities around the tailing facility and I can tell you that they have QAQC activities that go on a daily and on a frequent basis not only internal to the company but also by external oversight. So, beyond that, I am not able to comment in any detail given the events of this week and then I to talk directly to Thompson Creek if there is any concerns you might have.

Adam Graf – Cowen & Co.

Thanks for the color, Tony, I appreciate it.

Tony Jensen

Thanks, Adam.

Operator

Our next question is from Brian MacArthur of UBS. Please go ahead.

Brian MacArthur – UBS

Hi. Good morning. I was wondering if you could just give me some guidance. You’ve given tax guidance for next year, but actually the deferred versus current portion, because I noticed in the fourth quarter, it looks like it’s reversed on the deferred tax. I am just trying to figure out as you ramp up where the cash part goes over the next little while?

Tony Jensen

Stefan?

Stefan Wenger

Yeah. Sure, Brian. Thanks for the question. Our cash taxes this year were just above 30%. For next year really the cash taxes should follow that guidance that I’ve given you and within that range of guidance that I’ve given, more production we see from Mt. Milligan relative to our other revenue. We pushed that guidance to the lower end of the range compared to the upper end of the range. So, that’s what I would tell you as far as the cash taxes. This year we did have a number of deferred items that you will note that impacted our taxes, long-term there was cash reductions of some cash positions and other items. So, next year it should be a bit cleaner on that front.

Brian MacArthur – UBS

Great. Thank you very much.

Tony Jensen

Thanks, Brian.

Operator

And this concludes our question-and-answer session I’d like to turn the conference back over to Tony Jensen for any closing remarks.

Tony Jensen

Well, thank you very much for your questions and for taking time to join us today. We very much appreciate your interest and continued support for Royal Gold and we look forward to updating you on our progress during our next quarterly call. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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