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Executives

Karen Gross – Vice President and Corporate Secretary

Tony Jensen – President and CEO

Stefan Wenger – CFO and Treasurer

Analysts

John Doody – Gold Stock Analysts

Imaru Casanova – BJM

Victor Flores – HSBC

Ross DeMont – Midwood Capital

Royal Gold, Inc. (RGLD) Q3 2008 Earnings Call Transcript May 1, 2008 12:00 PM ET

Operator

Good afternoon. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal 2008 third 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. Ms. Gross, you may begin your conference.

Karen Gross

Thank you, Christy, and hello everyone. Welcome to our fiscal third quarter 2008 conference call that is being webcast live. You will be able to access a replay of the call on our web site at www.royalgold.com. Also on the web site, 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; Stanley Dempsey, Executive Chairman; Stefan Wenger, Chief Financial Officer and Treasurer; Bill Heissenbuttel, Vice President Corporate Development; and Bruce Kirchhoff, Vice President and General Counsel. A Q&A will follow our comments.

Let me also mention that the call will include a discussion of the company's free cash flow, which is a non-GAAP financial measure. For your reference, there is a free cash flow reconciliation in today's press release. Now, I will turn the call over to Tony.

Tony Jensen

Thanks, Karen, and good morning. We are pleased to share our record financial results with you today. Our core royalties continued to generate a strong revenue base for our third fiscal quarter. In addition, the maturing pipeline of development properties, along with the producing properties we acquired from Battle Mountain, are making significant contributions to our revenue stream. Our quarter's financial highlights include record revenue of $19.5 million, an increase of approximately 74% over the comparable quarter. In addition to this being a record revenue for the third quarter, it was also a record revenue for any quarter in the company's history. In fact, if we look back less than five years ago, our total revenue for all of fiscal 2003 was $15.8 million. I think this illustrates how robust the quarterly performance was and how far our company has come.

Net income was $7.4 million or $0.12 per share, after non-recurring items which I will speak to in just a moment, compared with $3.4 million or $0.14 per share for the third quarter of fiscal 2007. Free cash flow was a record at $16.3 million or 83% of revenues, compared with $8.3 million or 74% of revenues for the prior year period. Working capital as of December 31 was approximately $190 million and we ended the quarter with a cash balance of approximately $184 million.

For the nine-month period, revenue was $47.7 million. Net income was $18.2 million or $0.45 per share, after non-recurring items. And free cash flow was $37.5 million or 79% of revenues. As we announced on March 6, earnings per share during the quarter were impacted due to non-recurring adjustments associated with preferred dividends and a non-cash adjustment related to the conversion of preferred shares to common shares. These charges totaled $3.6 million or approximately $0.12 per share on an EPS basis. In other words, our earnings per share would have been $0.24 absent these adjustments. Going forward, there will be no additional financial adjustments related to the preferred shares.

Over the past two years, we've invested approximately $265 million, building a platform for future revenue growth. As you can see from our current financials, this investment is beginning to pay off in terms of increased revenue and cash flow.

Turning to the revenue side of the business, the Robinson, Cortez, Goldstrike, and Leeville mines all recorded solid production and contributed about 70% to total revenues for the quarter. Robinson in particular performed well, producing $4.2 million in royalty revenue this quarter, compared with $2.7 million for the prior period. You can see we are extremely pleased with this royalty. Since we acquired it in 2006, we've received a total of $25.9 million compared to our acquisition price of $17.8 million.

Leeville is well underway in achieving their designed mine capacity of 3,200 tons per day, reporting production of 114,000 ounces for the quarter compared with 86,000 ounces for the quarter that ended last December.

We also had good contribution from our newer revenue generating properties. Taparko gold production increased significantly during the quarter to 14,000 ounces, but still fell short of the operator's projections as misalignment of the mill drive train caused lower mill availability. All components within the drive train were realigned during the period and the mill is now approaching design capacity and availability.

High River is increasing its spare parts inventory and is working through production ramp up issues in an effort to obtain continuous and sustained production. Revenue was also impacted due to a buildup of dori [ph] inventory on site during the quarter. As we stated before, at full capacity and current gold prices, we expect to see quarterly royalty payments of over $5 million from Taparko.

Also during the period, we received our first full quarter of royalty revenue from our Battle Mountain producing properties. Collectively we received approximately $1.1 million from the Williams, Don Mario, and El Limon mines. In late February, we completed the transaction of three royalties from AngloGold, two at El Chanate mine in Mexico operated by Capital Gold and one at the Marigold mine in Nevada operated by Goldcorp. And we began receiving revenue from our 2% NSR royalty at El Chanate during the quarter. We are focused on building a portfolio of high-quality precious metal royalties. For the quarter, we received about 77% of our revenue from gold, 3% from silver, and 20% from base metals. For the nine-month period, these amounts were very similar at 76%, 3%, and 21%, respectively.

Royal Gold's portfolio also consists of royalties in six development-stage properties, three of which will be in production by the end of this calendar year. Construction is progressing well at Penasquito and Goldcorp appears to be on track for initial production from the oxide circuit in the second half of this year. Goldcorp is estimating production of approximately 67,000 ounces of gold and 2.3 million ounces of silver in calendar 2008. The Dolores property is now in the late stage of construction. Mine operations are underway, and Minefinders expects to commence production during this calendar quarter. They estimate production this year at 40,000 ounces of gold and 1 million ounces of silver.

At the Benso property in Ghana, Golden Star expects ore haulage to begin in the third quarter of this calendar year, resulting in production of 25,000 ounces of gold. It is great to see these properties so close to producing revenue. Both Penasquito and Dolores are expected to provide substantial and long-term royalty revenue for Royal Gold.

Just yesterday, we announced updated reserves, additional mineralization and production estimates for calendar 2008. We are very pleased to report that as of December 31, 2007, precious metal reserves subject to our royalty interests totaled 50 million ounces of gold and 1 billion ounces of silver. This reflects an 18% increase in gold reserves and a 71% increase in silver reserves over the prior calendar year estimates. Our acquisition success over the past several years has clearly driven a portion of this growth, along with the successes of our royalty operators in converting resources into reserves.

We are obviously quite excited about the growth and diversification Royal Gold has achieved. We now have a portfolio of 19 royalty properties with reserves, 13 of our royalty assets are in production today and three of our six development royalties are scheduled to be in production by the end of this calendar year. Our financial strength has never been better, with nearly $270 million in liquidity, giving us ample resources for continued growth.

In conclusion, we had another great quarter, with record revenue and record free cash flow. Going forward, we anticipate increased production levels from Taparko and the commencement of revenue at Dolores, Penasquito and Benso in the second half of this calendar year. Combined, we expect that this will result in a strong fourth quarter and a great kick-off for fiscal 2009.

Operator, that concludes my prepared remarks and we'd be happy to entertain any questions that there might be at this time.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from John Doody, with Gold Stock Analysts.

John Doody – Gold Stock Analysts

Congratulations on a great quarter. A couple of questions. On the preferred, wasn't there some kind of a tie to, when you raised the $100 million, wasn't there some kind of deal tied to that, that you had to do $100 million in asset purchases before they could convert or something, maybe you can refresh my memory on that aspect?

Tony Jensen

I would be pleased to do that, John. The $100 million trigger that you are thinking of was associated with our option to redeem the preferred shares. As we discussed before, we entered into the preferred shares with the possibility of doing a major transaction and if we did not complete a transaction at least the size of $100 million, then we had the right to redeem. We decided, as we said before, not to move forward with that transaction and as such, we looked at our capital structure again and thought it wise to redeem the press.

John Doody – Gold Stock Analysts

Okay. Well, by redeem, you mean convert?

Tony Jensen

Yes, you're right.

John Doody – Gold Stock Analysts

So that deal you are looking at has gone away or somebody else did it?

Tony Jensen

No, that deal is no longer available to Royal Gold.

John Doody – Gold Stock Analysts

Okay, all right. So you've got quite a war chest now to go forward and wondering what kind of deal flow you are looking at. I know you are not going to commit on any details, but there's opportunities out there to spend it, are there?

Tony Jensen

Surely are and in fact, as said I think in the last conference call and happy to say it again here that, we've never seen our deal flow any stronger than what it's been in the last year and we surely see deals that are of all sizes of magnitude and some quite large.

John Doody – Gold Stock Analysts

Are these trending more towards giving capital to help get into production as opposed to buying an existing royalty stream?

Tony Jensen

I think it really spans all of our royalty products, from buying existing royalties to doing royalty financing. I just see lots of opportunities in several different areas there.

John Doody – Gold Stock Analysts

Okay, and one last question about Pipeline. How do you see the winding down of the production pipeline which is, of course, what you got the royalty on?

Tony Jensen

Right. We came out with a press release on production and reserves just yesterday, as I mentioned, and I don't remember exactly off the top of my mind what the reserves are at Pipeline. But it is a maturing asset and they are scheduled to produce about 367,000 ounces of gold this year and so there's a few years of life yet out in front of the project. But, these are one of those large metalogenic systems that adding additional reserves around the periphery I think is certainly a possibility. But what we really talked about our upside on that project is the Crossroads property. That's just the next deposit to the south of South Pipeline and there's about 3 million ounces resource and conversion of some of that into reserves would be very beneficial to Royal Gold because we have a 9% royalty on that property. So I think that's really where our upside lies on Pipeline, John.

John Doody – Gold Stock Analysts

Okay, and are you getting some sense of their putting Crossroads into the mine plan, before they go over to Cortez Hills?

Tony Jensen

I can't comment on the specifics of that. I know they are working on trying to bring those resources into reserves, but where they might be scheduled in the mine plan, I don't have that information.

John Doody – Gold Stock Analysts

Okay, great. Great success, again, for the quarter, and looking forward for the rest of the calendar year.

Tony Jensen

Thanks, John, for your interest.

Operator

Your next question comes from the line of Imaru Casanova with BJM.

Imaru Casanova – BJM

Hi, this is Ima from BJM. I had a question first on just more of an accounting issue, could you explain a little bit how your depreciation, depletion, and amortization expense for the quarter gets figured out? It just seems a lot higher than last quarter and I'm wondering if there's anything that went into that, that I'm missing.

Tony Jensen

I'll ask Stefan to comment on that.

Stefan Wenger

Ima, good morning.

Imaru Casanova – BJM

Good morning.

Stefan Wenger

This is Stefan. I would be happy to comment on it. I'm not going to go into specifics of each property. But, in general, our depreciation, depletion and amortization is calculated based on units of production basis. So we amortize the cost basis of each of our properties over the life of the mine based on ounces produced. The reason for the increase in our depletion is based on the fact that we are starting to see some of our newer recently acquired properties come into production and we are starting to see our acquisition price for those properties come into that DD&A rate. The newer properties have higher DD&A rates relatively compared to our more mature properties, such as Pipeline. Pipeline has almost no carrying costs and therefore, is very low DD&A rate. So as we go forward, you're going to see the $260 million that we've invested over the last 18 months, start to come off the balance sheet over a very long period of time. But that, in general, increased compared to our past history.

Imaru Casanova – BJM

Okay. I just wanted to clarify that it wasn't based on unit costs, which is what I'm doing. So I'll just have to look at the carrying balances on those assets.

Stefan Wenger

Yes, and if you have specific questions, I would be happy to get on the phone with you online and just answer any specific questions.

Imaru Casanova – BJM

Excellent. And then I just have another question and this is regarding upcoming acquisitions. We saw that 8-K filing on the intentions to acquire a couple royalties from MinEx in South Africa in some platinum mines and I was wondering if you could comment on that.

Tony Jensen

I would be happy to, Ima. Tony here again. We've signed a letter of agreement with MinEx to acquire couple of royalties on the Messina Mine in South Africa. But, it's subject to some very thorough due diligence. Normally, we wouldn't come public with a letter agreement but, under South African law, that seemed to be a binding agreement. So we did release it, but we've got quite a bit of work to do, to determine whether we are going to move forward with that transaction. So we are working on the due diligence efforts, as we speak. I think it will be another couple of months before we get it all vetted down and decided which way we are going to go on that.

Imaru Casanova – BJM

Thank you.

Tony Jensen

Thanks, Ima.

Operator

Your next question comes from the line of Victor Flores with HSBC.

Victor Flores

Thank you. Good morning, Tony. You are probably tired of hearing me ask this, but High River Gold recently put out an update on Taparko, and I suppose there's good news in the sense that repairs to the mill seem to have been successful and they are getting on with it. But, if you look at their revised guidance for the year, 91,000 ounces, that implies much, much better performance from the plant throughout the rest of the year. And as they noted, getting higher grades through the plant also means reduced throughput. You put lower grade, you get higher throughput but you are not going to get the production. So, I was just wondering if you could comment to the best of your knowledge how it is that they get to where they say they're going to get.

Tony Jensen

Let me first talk about some positives. We have watched and participated with High River in the realignment of the mill and we are quite pleased with how the mill is running right now. Every indication from vibrations and temperature, it seems like the drive train is functioning very good at this point. So we've seen very good stable production for the last couple of months and one has to be careful extrapolating that forward. We still want to see that this is sustainable over the coming quarters. So we are going to be a little bit conservative and play it quarter by quarter, but we sure see some good trends there.

Victor Flores

Okay, great. Thanks, Tony.

Tony Jensen

Thank you.

Operator

(Operator instructions) You do have a question from the line of John Clergene [ph], Private

Tony Jensen

John, are you there? Hello, John?

Operator

He has withdrawn his question. You do have a question from Ross DeMont with Midwood Capital.

Ross DeMont – Midwood Capital

Hi guys, congratulations on a good quarter. Quick question, I think someone asked this earlier, but I'm not sure I totally understood the answer. Is there a date at which production at Pipeline is scheduled to sort of meaningfully decrease? I mean I think when I was more on top of the story a few years ago, I thought at some point, like 2010, production was expected to go down meaningfully. Is that still the schedule, for lack of a better term?

Tony Jensen

Ross, I apologize. I do not have our reserve release in front of me right now. But, if you were to take a look at the reserves – I just got it presented to me. We've 1.9 million ounces of reserves at Pipeline that are subject to our royalty interest and again, they are producing about 367,000 ounces a year. I think that if you divide those two and allow something for recovery, you can kind of get a feel that there's a few more years of production out there, but I would anticipate that the 367,000 would start to tail off towards the end of the mine life and then there would be some residual leach production. So I don't look for any cliffs, so to speak, but I would look for a decay of production over time.

Ross DeMont – Midwood Capital

Okay. So it's not quite as simple as saying 367,000 a year, 1.9 million, and therefore there's – I guess that would be sort of 5.5 years left or something like that. I guess we should just expect the pipe to sort of start declining at some point here and decline for a number of years?

Tony Jensen

Yes – let me just caution you. The 367,000 is recovered ounces and then you probably have to use about an 85% recovery rate to mark that back up to gross ounces.

Ross DeMont – Midwood Capital

Right.

Tony Jensen

And then divide that number into your reserves to get a figure. But I think we are probably – most mines are usually higher in the early years than the latter years, so I would suspect that that would be the case here at Pipeline as well.

Ross DeMont – Midwood Capital

Okay, very good. Thanks for taking my question.

Tony Jensen

Thanks, Ross.

Operator

(Operator instructions) At this time, there are no further questions.

Tony Jensen

Thank you, operator. I just wanted to express my appreciation for everybody joining us on the call today and for your interest and support in Royal Gold. We very much look forward to a good fourth quarter and updating you in about three months time. Thank you, operator.

Operator

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

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