Stefan L. Wenger – Chief Financial Officer
Michael Jalonen – Bank of America/Merrill Lynch
Royal Gold, Inc. (RGLD) Bank of America Merrill Lynch Global Metals, Mining & Steel Conference Call May 16, 2012 4:45 PM ET
Michael Jalonen – Bank of America/Merrill Lynch
And continuing on in the royalty environment, very happy to have Royal Gold. Joining us from Royal Gold is, like Franco-Nevada involved more in the precious metals, gold streams and royalties. Presenting from Royal Gold is Stefan Wenger, who is the CFO and he has been in this position since 2006, but was been with Royal Gold since 2003. And Stefan Wenger without further ado, I’ll past it on to yourself.
Stefan L. Wenger
Well, good afternoon and I’d like to thank the Bank of America/Merrill Lynch for having us here at the conference today. And Mike thanks for the very nice introduction. Before I start, I’d just like to note that I will be making forward-looking statements today and I’d ask that you make yourself familiar with our Safe Harbor statement.
Going to divide the talk today into three basic categories, we spend a little bit of time talking about our company performance, financial position in revenues and let’s spend quite as much time on the efficient business model, you’ve heard Franco-Nevada in several weed but we’re very similar in that regard. And I do want to mention our reserves, which we just announced with our third quarter earnings release recently.
And then I’ll move on and talk a bit about our five cornerstone assets. Looking at our financial position, while we’ve been very active in recent years and we funded part of that growth with the equity market. We still just have under 60 million shares outstanding for a $3.8 billion market cap company. And as of the end of March, we had a $183 million of cash on hand. We did fill up the cash position during the quarter with an offering, worry to recapitalize the company following two deals that we did in December of 2011.
And as we look further down our balance sheet, we do have debt outstanding of $114 million. To put that into perspective, we could almost pay that offer two quarters of our operating cash flow and the debt is at a very low cost of LIBOR plus 1.75%. So it’s a nice piece of capital to our structure. In addition to our cash, we have $225 million available under our revolving credit facility and that’s fully available today to give us nearly over $400 million of resources available to fund future acquisitions.
We do pay a dividend, we’ve paid a dividend for 12 years and we’ve have actually increased that dividend 10 over the last 11 years. Our dividend is $0.60 of share and that’s double what it was just in 2008 and we want to continue that dividend growth going forward. We finally are looking at share price performance, as you would expect from a royalty model and a premium investment. We have outperformed the GLD over this last five year period and we’ve also outperformed an average of senior producers over that same period.
Just looking ahead revenues, we’ve been growing revenues consistently and we expect that trend to continue. Keep in mind that we have a June fiscal year end, so the bar on the far right represents the first three quarters of our fiscal 2012, compared to just left about our fiscal 2011. For the nine month period, our revenue and our adjusted EBITDA were $203 million and $183 million respectively. That compares to a $157 million and a $138 million for the same period one year ago. Most of the revenue increase was attributable to price, as ramp ups in Andacollo and Peñasquito, among others were affected by throughput issues, which limited production growth attributable to our royalties.
A quick snap indicates that the adjusted EBITDA percentage increase was greater than the revenue percentage year-over-year. And in part the fact reflects the fact that our cash operating cost are not impacted by many of the factors giving rise to an inflationary cost environment in the industry. I’ll come back to this issue a bit later. From a country and operator perspective, our top four countries for revenue were Chile, Canada, Mexico and the United States and our top four operators by revenue were Teck, Vale, Goldcorp and Barrick which represent diversity, quality and those operators are really key characteristics of our portfolio.
One last note, we are heavily focused in precious metals. For the nine months, we’ve recorded 74% of our revenue from precious metals including gold and silver. And as we look forward, we expect that percentage to increase significantly in Pascua-Lama and Mt. Milligan begin production.
And whether it’s related to lower grades, higher strip ratios, rather import costs. We’ve seen cash cost increase in the industry and it’s really compressed unit cost, unit margins. Our business is a little different. As a royalty company, we have fixed cash cost if you will. And our margins for the past fiscal 2011 were 1,200 an ounce compared to the operators margins in calendar 2011 on the average of $900 an ounce. This represents the fact that we have 20 people on our company really our only costs are related to those 20 people and the cost of being a public company. And just to update you for our most recent nine months, our cash cost have come down to $85 an ounce for the most recent nine month period and $71 an ounce for the most recent three month period.
We just released a reserve update with our third quarter results two weeks ago. When we release those, we saw our gold reserves increase to 84 million ounces in the portfolio and those are the outputs that are subject to our royalty interest on all the royalty properties that we have around the world. Most interestingly you see one of the great attributes about a royalty company is that over the past six years, we’ve experienced reserve additions that are in excess of our reserve consumptions on those properties during that same period. So as those operators have produced 27 million ounces of gold and paid Royal Gold, we’ve had cost free ounces of 30 million added to our portfolio and we’ve also added 63 million royalty ounces through acquisition.
A better way to look at our royalty ounces is by looking at on the gold equivalent, royalty ounce basis. And that’s the chart on the left, the why we do that is take our royalty ounces in reserve by taking all those 84 million ounces times our royalty interest and adjust for cost associated with an MPI or cost associated with the stream to get our net equity interest. And as of the end of 2011, we had 6.2 million gold equivalent ounces in reserve to our account for just gold and silver and 7.4 million ounces if you include all metals.
One thing I’d like to highlight about those ounces however those are cost free ounces for Royal Gold. We don’t experience any of the operating costs, capital costs or environmental or other issues that the operators must face to bring their reserve that’s the ground.
Now I’d like to give you a status update on our portfolio and a few key properties. We have a global portfolio. We have 192 assets with royalty interest around the world. Frankly that could be pretty tough to get your arms around, so we really focused on 38 producing assets, a 25 development assets and I would like to give you quite a bit of information about our five cornerstone assets in the portfolio.
If you look at the operator status here for these top five assets, these operators together operate over 80 mines around the world and they have an aggregate market capitalization of over $200 billion. I think it’s also important to note the importance of each of these assets to the operator, whether it’s a single mine company, or an important part of an overall operating portfolio, we don’t have many assets that are immaterial to the operators that we rely on.
Our most important producing asset continues to be Andacollo. Andacollo generated $50 million in revenue for us during the nine month period ended March 30, with production of just under 40,000 ounces of gold. As this is being discussed by Teck, Teck has taken numerous steps to achieve its full mill design, capacity of 55,000 tonnes per day, including modification to the blossom design, the pre-crushing of ore using other, using the crusher from the supergene project and the installation of a permanent two-stage crushing circuit increase tonnage by 20,000 tonnes per day. The later of which is still on the commission stage.
Current throughput rates are approximately 45,000 tonnes per day. In total Teck has invested about a $130 million in various sustaining and projects improvement projects over the last two calendar years. An ongoing expansion study is underway, but optimization is probably the best way to describe the current focus at the site. We are pleased to see our reserves increase from 1.6 million ounces to 1.8 million ounces. We also note the signing of a 45 months labor agreement by Teck that covers the period through September 2015.
At Peñasquito, the commissioning of the HBGR occurred during the March quarter, relative to the nameplate capacity of a 130,000 tonnes per day. Peñasquito averaged a 110,000 tonnes for the last week of March, 123,000 tonnes per day for a period in early April and hit a 143,000 tonnes per day on one day of operation last quarter. The mine produced 69,000 ounces of gold in the quarter, but they reiterated their 2012 production target guidance of 425,000 ounces of gold for the full-year. The trust represents a sizeable step up compared to last year’s production levels.
Low grade reserves will be classified in to resources in 2011 at Peñasquito. Well, when you look at our investment in Peñasquito, we still have 16.5 million ounce of gold subject to our royalty. We’ve already received 50% of our original investment in royalty revenue. We still have a reserve that is 65% higher in that that existed at the time we purchased the mine, the royalty, and a mine here in excess of 20 years, and just a great investment for Royal Gold and we’ll continue to get better.
At Voisey’s Bay, our most recent quarterly revenues benefited from high nickel production and by the operation during the fourth quarter of 2011 and the operations decisions to sell nickel concentrate to third parties rather than process it at Sudbury. The effect of which was to shorten the time between shipment and earned royalty revenue for Royal Gold.
Production on which royalties have been paid for both nickel and copper were up 39% and 67% for the nine month period to March 31, 2012, relative to the same period last year. These production increases more than offset metal price declines and contributed to a 40% increase in nine month revenues of $30 million.
Under the growth, within the cornerstone assets, Barrick continues to advance construction at Pascua, 70% of the capital is committed and progress that’s being made in the critical areas of earthworks and erection of steel. The project has seen inflationary costs pressures and Barrick is undertaking a cost and schedule review this quarter. At this point, first production is scheduled for mid 2013 at a rate of 800,000 to 850,000 ounces per year. Certainly the initial production comes from the Chilean side, which is what our royalty covers, this will translate into about 42,000 royalty ounces to our account each year and if you take that by $1,600 an ounce that $67 million a year and additional revenue for Royal Gold. At that level Pascua drive Andacollo is our largest revenue source.
The following closely behind Pascua-Lama is Mt. Milligan, which we think will become our largest revenue stores when it begins production. We’ve already invested $410 million of our $581.5 million investments and our gold stream will be 40% of the payable gold at a cost of $435 an ounce. Thompson Creek expects to produce 262,500 ounces of gold on an annual basis for the first six years of operation that translates into 105,000 ounces to our account. And after accounting for the$435000 an ounces that equal to $120 million of additional revenue to Royal Gold at gold price of $1,600 an ounce. So when you take that together with additional revenue from Pascua, nearly $200 million of additional revenue coming into the company towards the end of calendar ‘13 and into calendar ‘14.
That Mt. Milligan engineering and procurement are 95% complete and construction is 44% complete. From a cost certainty perspective, 70% of cost has been spent committed or subject to a lump sum agreement, 300 million remains uncommitted, and the remaining contingency represents 46% of that uncommitted figure. The funding from Mt. Milligan has also been enhanced by Thompson Creek, both through the additional $270 million of commitment that we made in December 2011 to the project and with the $420 million financing that was announced last week by Thompson Creek.
So well, those are the top five cornerstone assets. I’d like to give you a brief update on some other assets within the portfolio that are notable further growth in the coming quarters. At Mulatos, Alamos completed commissioning of the new gravity mill, which is expected to add 67,000 ounces of production and take 2012 estimated production to 200,000 to 220,000 ounces and that’s up from 150,000 ounces in 2011. This royalty is cap at 2 million ounces that we’re not even halfway there. They produced about 850,000 ounces to our account so far.
The story of Dolores last quarter was more on a corporate level and at a mine side level. Pan American Silver acquired Minefinders at the end of March and we’re pleased to have another quality operator coming into our portfolio, Pan American has extensive operating experience in Mexico, a strong balance sheet and longstanding country experience in Mexico. Dolores is expected to add about 12% to Pan American Silver production profile but it adds 75% to their gold production profile and it also lowers the company’s consolidated cash costs, so the operation we believe will remain important to Pan American despite now been part of a larger portfolio. Pan American is undertaking a review of the mill project that was initiated by Minefinders and we look forward to the results of that study and the possible economic benefits of higher recoveries for both gold and silver.
At Holt, St Andrew produced a 11,000 ounces of gold from 68,000 tonnes of ore for the most recent quarter. Recoveries whereas expected in 94%, development of Zone 4 on two levels progressed to the point that increased production rates are expected in the second and third calendar quarters. St Andrew is also reported encouraging exploration results, dip down of Zone 4. As you know the royalty rate at Holt is a function of the gold price and last quarter was at 1,690 gold price, our royalty rate was just below 22%, most of which does not actually burden the property or the operator.
Wolverine continued its ramp up process in 2011 as well, the Minefind increased mine production rates to the development of the main access ramp and stokes in additional levels, while the mill continues to optimize the processing circuit to increase grade and recovery.
Moving on to Malartic, Osisko’s ramp up at the Malartic property will obviously be affected by the recent fire in the mill and we will await further information from the operator on its impact after the current forecast of 2 to 3 week plant shutdown. We are extremely thankful to hear that there were no injuries sustained as a result of the fire. The operation had a quarterly high production of 90,000 ounces in March, showed an 11% positive variance in reserve reconciliation and experienced higher than expected recovery rates. Mills reported 350,700 tonnes per day was impacted by the installation of the first unit of the secondary crushing circuit. With the second unit expected onsite in the third calendar quarter of this year much like Andacollo additional throughput optimization measures may be required.
And at Las Cruces, Inmet has made very good progress with the mines ramp up, with an expectation that the operation will achieve 90% of design capacity this year. In the March quarter 13,000 tonnage of copper cathode was produced with results in March impacted by a scheduled maintenance shutdown, which is the last scheduled shutdown of the year. In April, design capacity was raised with the production just over 6000 tonnes copper. Finally, we tend to provide investors and analysts with updates on many of the same projects through the materiality measures, (inaudible) we get close with a flash round of updates on a few projects that we might not always cover.
At the Tulsequah Chief project in British Columbia, achieved and received its Special Use Permit for the road, a key infrastructure component of that project. And it is now in the process of mending that permit to reflect a new route for the road that received the support from the First Nations in the area. And another of our royalties at penicillin Nevada and Edna just announced the mine design and reserve ore for its underground operation is underway with the 43-101 report due shortly.
A mining contractor is onsite and offsite ore processing will likely occur at Barrick and Newmont facilities. They’re projecting 12,000 to 14,000 ounces of initial production for 2012. At the same time the company is undergoing early stages of planning for potential open-pit restart which would require additional permitting. We held various royalty interests over the property including almost 6% NSR on the underground.
In Australia, Reed Resources has raised just over $60 million to the put the Meekatharra gold project back into production. Reed just completed a feasibility study, announced reserves and resources of 750,000 ounces and 3.3 million ounces respectively and expects to commission 100,000 ounce per year operation in the fourth quarter of 2012. Initial stage of production will be for a couple of years with numerous open-pit and underground options available for Stage 2. We have various royalty interests that cover much of Meekatharra and we acquired that project through the Barrick and IRC deal.
So with that, I hope I provide you with a sense for the efficiency of the royal model. We really have a great model, low overhead, no environmental costs, numerous sources of revenue, cost free reserve replacement and a return on your investment in the form of a dividend. Specifically, with respect to Royal Gold I hope you take away the idea of our financial strength and quality.
I’m happy to take questions that you might have today and it sounds like we might have some time for that Mike although we’ve got up to you.
Michael Jalonen – Bank of America/Merrill Lynch
We have some time for questions. I think I could start if off by asking the (inaudible) question that Inmet said off last week in corporate panel, a billon dollars of precious metal streams I would assume the interest of Royal Gold?
Stefan L. Wenger
We’re aware of Inmet’s press release about their desire to stream. I will make any, any comments on these specific transactions that may be in the market. I will say however that we continue to see business opportunities. I think we have a strong balance sheet. We have a very strong cash flows coming into the company that will allow us to look in new deals as we go forward. Okay.
Thank you. Just a question on the quality of future deals obviously the Inmet deal is probably want to be a good deal but I guess there is some concerns that I have that (inaudible) from buying royalties from the Supermajors into project financing smaller companies. Could you just talk us through how you guys think about that in your portfolio?
Stefan L. Wenger
Sure, I would be happy to. With respect to quality of the projects certainly we’re always seeking to add high quality projects to our portfolio. We do realize that the likes of Barrick and Goldcorp and Newmont don’t necessarily need our capital, but we are seeing opportunities with high quality operators in the mid tier. We’re also very focused on the assured number of copper opportunities that have a gold stream. We think there is a lot of opportunities where we maybe able to take a percentage of a by-product stream as a opposed to a straight gold royalties, you’re going to see that as well.
I just make a comment that business activity is strong right now, with the equity markets closed to a lot of the mining companies and financial, just the financial markets as they are. We’re seeing (inaudible) in both ways. So it’s a good environment for deal as it was for us back in 2008, particularly since we continue to have good access to the markets in a strong balance sheet and cash flow as we go forward. Question to the left, yes.
Given the current interest environment, what is the optimal capital structure for such a diversified portfolio of assets, given where interest rate chart doesn’t make sense to tend to increase the gearing for the company?
Stefan L. Wenger
Yeah, thank you for the question. Traditionally, we’ve been an equity funded company. We are also, as a management team and a Board of Directors are all shareholders of the company. So we are very much like to hold our shares tight and not have to do additional equity financing. With respect to our portfolio there is five cornerstone assets that I pointed out, all have mine life in excess of 20 years. We have a tremendous base level of cash flow. So to get back to your question, I think in a company with our diversification and our size now it would make sense to add a reasonable level of debt into that company. And that’s something we’re certainly open to particularly if we can drive accretion on a per share basis to our shareholders with using those funds for acquisitions.
Michael Jalonen – Bank of America/Merrill Lynch
Well, there is no more questions. So join me to thank Stefan Wenger for Royal Gold presentation.