Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold Fiscal 2012 Fourth Quarter and Year End 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. Karen Gross, Vice President and Corporate Secretary you may begin your conference.
Thank you, operator and hello everyone. Welcome to our fiscal fourth quarter and yearend conference call. This event is being webcast live. You will be able to access a replay of this call on our website, where you will also find our release detailing our financing results.
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; Bruce Kirchhoff, Vice President and General Counsel; and Stanley Dempsey, Chairman.
Tony will open with an overview of the quarter followed by Stefan who will give the financial highlights and then Bill Zisch will give an operations review. After management completes their remarks, we’ll open the line for a Q&A session. We will also be discussing the company’s adjusted EBITDA, which is a non-GAAP financial measure and there is a reconciliation in today’s press release.
Before we begin, I also want to remind everyone that 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 release and is presented in greater detail in our filings with the SEC.
Now, I’ll turn the call over to Tony.
Good morning and thank you for joining us today. I’d like to focus at the beginning of this call on our annual and quarterly results, but I hope you also saw Mulligan transaction this morning. We will discuss that investment after Stefan and Bill had given you financial and operational updates.
Royal Gold stood apart from general gold equities during the fiscal year due to our royalty business plan and financial results. Our investments in projects are fixed and are not subject to rising capital and operating costs. We are not responsible for the operations at mines, which keep our expenses in check. This business plan coupled with growth from previous investments and solid performance from our large portfolio of 39 producing assets, resulted in another record year of financial results for Royal Gold.
Fiscal 2012 marks the 11th consecutive year of achieving record revenue and cash flow. In addition to higher average metal prices, our revenue increase in fiscal 2012 was driven by production growth at Andacollo, Peñasquito, Voisey’s Bay, Holt, Canadian Malartic and Wolverine. Our three producing cornerstone properties, Peñasquito, Andacollo and Voisey’s Bay, contributed $129 million or 49% of total revenue for fiscal 2012, compared with $98 million or 45% of the previous year’s revenue.
Precious metals accounted for 77% of our fourth quarter revenue and 75% of our annual revenue. And approximately 92% of our revenue for both quarter and the year were derived from assets located in the U.S., Canada, Chile, Mexico and Australia, all very geopolitically stable countries.
During fiscal 2012 we added three new business interests. In early December, we extended our interest in Mount Milligan with an additional commitment of $270 million, which increased our interest in the gold production from 25% to 40%. In mid-December, we acquired an initial interest in 12.5% of the gold production and 22.5% of the silver production on the development stage Tulsequah Chief project also located in British Columbia for a total commitment to $60 million. And in May, we acquired a 3% net smelter return royalty on Barrick’s operating Ruby Hill mine in Nevada for $38 million.
Once again we saw reserves grow in fiscal 2012. Net gold reserves attributable to Royal Gold increased 25% versus the prior year, which includes the benefit of the December Mount Milligan transaction. On a gold equivalent basis using a ratio of approximately 50 to 1, silver to gold, precious metal reserves attributable to Royal Gold increased from 5.2 million to 6.2 million ounces as of December 31, 2011, a 19% increase. And it’s important to remember when comparing our attributable reserves to other companies that our ounces are cost free and that we don’t have to pay for the extraction costs as a royalty company.
We are uniquely positioned to enter into additional business opportunities. Gold companies are anxious to develop properties are looking for alternatives to equity and debt financings. Given that gold equities are trading at historically low values companies are not interested in financings associated with excessive equity dilution. It is also becoming limited and expensive for many.
Given these trends over the last year, we repositioned our balance sheet during fiscal 2012 to take advantage of potential future opportunities. Our fourth quarter revenue was about the 11% less than our average quarterly rate, we had been experiencing for the first three quarters of the fiscal 2012. This was due to lower metal prices during the June quarter, lower production from certain assets and a large swing in the timing of concentrate shipments at Voisey’s Bay.
I will now have Stefan Wenger, our CFO to review the financial highlights for the year and the quarter, and after Stefan, Bill Zisch, our Vice President of Operations will provide an update on certain producing and development properties. Stefan?
Thank you, Tony and good morning, everyone. For the fiscal year, we had record revenue of approximately $263 million, an increase of 22% over revenue, $217 million in the fiscal 2011. Net income increase 30% to $93 million or a $1.61 per basic share, compared with $71 million or a $1.69 per basic share for fiscal 2011.
Adjusted EBITDA was a record of $238 million, or 90% of revenue, this compares with $190 million or 88% of revenue for fiscal 2011. Working capital as of June 30 was $430 million, including cash on the balance sheet totaling $375 million. We also have additional liquidity and undrawn credit facility on future Growth.
For fiscal 2012, our total cash operating expenses, net of production taxes and non-cash compensation expense were approximately $13.9 million, compared with $14.6 million in the prior year. The decrease in cash expenses was associated with more corporate accounting for cash fees during the year. Our average DD&A rate for the year, on a gold equivalent ounce basis was $477 per ounce compared with $426 per ounce this prior fiscal year.
For fiscal 2013, we expect DD&A expense to again be in the range of $450 to $500 per gold equivalent ounce. In June, we completed a convertible senior notes offering, net proceeds from the offering were approximately $359 million after deducting underwriting discounts and operating expenses. We used a portion of the proceeds to repay the term loan facility, which had an outstanding balance of $110.6 million. The remaining proceeds have been reserved for general corporate purposes, including funding of that investment and future acquisitions of royalty interests.
For accounting purposes, the $370 million convertible notes were reported in two separate components on our balance sheet. We recorded $293 million of debt, the value of which will be accreted to the full $370 million principle amount by the maturity gain in 2019. This component represents the fair value of the debt for this year. We reported the remaining $77 million net of deferred taxes as a component of stockholders equity representing the conversion feature which is embedded in the convertible bonds.
In addition we incurred about an $11 million additional costs which has been allocated to debt and equity components on a relative basis. In May we also expanded and extended our credit facility resulting in an enhanced liquidity and financial flexibility. The new credit facility has a maturity of May 2017 and a maximum availability of $315 million. The facility currently has an undrawn commitment fee of 50 basis points and an interest costs of LIBOR plus 1.875% undrawn amounts.
Moving on to the fiscal fourth quarter, we had quarterly revenue of $60 million, compared to $59 million for the comparable quarter, and as Tony mentioned, this has lowered our average run rate for the first three quarters.
Net income was $20.6 million, or 35% per share compared with $21.7 million or $0.39 per share for the prior year period. Adjusted EBITDA for the quarter totaled $54.3 million, or 90% of revenues compared with $51.6 million or 87% of revenues for the prior year period.
In summary, we had another very successful year of financial growth, and record performance. We are beginning fiscal 2013 with a strong balance sheet. The flexibility within our balance sheet, combined with our growing cash flows, positions us well for the future.
Now, I’ll turn the call over to Bill Zisch. Bill?
Thank you, Stefan, and good morning, everyone. I’ll start my review with our producing properties. At this time last year, we were anticipating increased production from six key growth assets Andacollo, Peñasquito, Holt, Canadian Malartic, Wolverine, and Las Cruces.
Today, I’m pleased to report on the contributions these properties make to our 12% growth in gold equivalent production, which is reflected in this year’s record financial results. At Teck’s Andacollo mine, the addition of temporary crushing capacity boosted their gold production by 25% over the prior year. Teck also constructed additional permanent crushing capacity during the year, and they now expect to achieve design capacity of 55,000 tons per day by the end of calendar 2012. They ended our fiscal year with average throughput of about 44,000 tons per day. So an increase in throughput the design levels has the potential to increase the production by about 25%.
Peñasquito operated by Gold Corp, our fiscal 2012 gold equivalent production was 29% higher than fiscal 2011. Gold Corp successfully commissioned a new high pressure grinding roll line during the March and June quarter’s, but throughput was limited due to reduced water supply in June. Gold Corp’s revised guidance predicated in limitations associated with process water, expect production to rebound to design capacity of 130,000 tons per day by the end of calendar 2013. Sustaining this design capacity would add additional 20% to expected production.
At St. Andrew Goldfields Holt mine production is ramped up design levels of 1000 tons per day and had sustained that level. Production in fiscal 2012 increased threefold over the prior partial year production ending the year at an annualized rate of about 80,000 ounces per year. With the gold price of over $1,600 per ounce, our royalty interest amounted to over 20% of this production.
Osisko focused on commission their Canadian Malartic during fiscal 2012, ramping up from the declaration of commercial production during the second calendar quarter to 2011 to a throughput of about 35,000 ounces per day during the June quarter. Osisko determine that it would be necessary to install additional crushing capacity at Canadian Malartic to achieve the design capacity of 55,000 tons per day, and completed the installation of one secondary cone crusher during the fiscal year, and the second crusher was just commissioned in July.
Osisko expects the installation of the secondary crushers to allow for more than a 50% increase in throughput to achieve the design mill capacity. The operation was also hampered during the June quarter with fire that broke out in the mill in May. We compliment Osisko in the management of the situation and their quick response to reestablish normal operations less than two weeks after the fire. Even with these challenges production to our account increased more than seven times over the prior fiscal year and for July our fiscal recently announced record monthly production and throughput.
And Yukon Zinc’s Wolverine mine, another precious metals growth assets got equivalent production to our account increased fourfold from fiscal 2011 to fiscal 2012. They continue to ramp up towards their designed capacity of 1,700 tons per day of note through put and work to improve precious metals recovery.
The final growth asset in this group is Las Cruces mine in Spain. Having overcome technical and operating process issues during the last year, Las Cruces production exceeded design capacity in the June quarter. As a result production in our recently completed fiscal year was 60% above fiscal 2011.
While not identified as a growth asset for fiscal 2012, we did realize significant increases at Voisey’s Bay as production returned to meet or exceed historical levels following the extended strike during calendar 2010.
While seasonal shipping constraints created quarterly variability that was seen throughout the year, annual nickel production was up 25% and copper production was up by more than 80% in fiscal 2011. Assets that did not report increased production for fiscal 2012 included Barrick’s Cortez and Goldstrike mines along with Newmont’s goldmine. Mining sequence called from less production from our areas of interest and in previous year resulting in decreased production at these properties.
Also at our department security operations we did not see production growth at these two royalties both reached their caps in fiscal 2011 with department converting from a 25% royalty to a perpetual 2% tail royalty.
For the fiscal year, these reductions were more than offset by growth in the assets I reviewed earlier and the addition of production from Merry Gold as mining extend on the ground that included our area of interest. The acquisition of an interest in Barrick’s Ruby Hill Mine that immediately became a paying contributor, as well as production increases at Gwalia Deeps, King of the Hills, Mulatos and Dolores.
Revenue was about $9 million lower in the fourth fiscal quarter versus the third quarter, while consolidated gold production associated with our royalty interest was up slightly in the fourth quarter. The average price of gold was lower, accounting for about 20% of the revenue decline, at Voisey’s Bay, where mine production was slightly higher than the prior quarter, we saw a reduction in the concentrate shipments and payments, which was just the opposite of the March quarter when the nickel concentrate shipments were significantly greater than mine production.
This reduced concentrate shipping at Voisey’s Bay coupled with a 13% decrease in nickel prices, accounted for more than half of our revenue decrease over the preceding quarter. The final portion of the revenue decrease relates to lower silver production at Peñasquito associated with their drought conditions and a 10% decline in silver price which had an impact at both Peñasquito and Dolores.
With regard to our development properties, on July 26, Barrick announced that due to lower than expected productivity and persistent inflationary and other cost pressures, they initiate a detailed review of possible on schedule and cost estimate in the second quarter of calendar 2012. Barrick indicated that initial gold production is now expected in mid-2014, with an approximate 50% to 60% increase in capital costs from the top end of the previously announced estimate of $4.7 billion to $5 billion suggesting capital of $7.5 billion to $8 billion. I should remind you that as a royalty company we’re not required to contribute Pascua-Lama capital.
We are disappointed that the construction schedule has been extended, but we continue to believe the Pascua-Lama is a world-class gold project and expect that upon completion of mine construction, Pascua-Lama will become one of our cornerstone producing assets in the next couple of decades.
Annual gold production in the first 25 years – of the 25 year mine life is expected to average 800,000 to 850,000 ounces. At our other cornerstone development project Mt. Milligan, we just announced an additional investment.
Tony will discuss the details of the transaction just a moment, but I’ll give you an update on their construction progress. As of end of June, Thompson Creek reported that progress on Mt. Milligan reflected engineering that was 99% complete, procurement 94% complete, construction at 51% completion and that overall progress was 69% complete.
Thompson Creek also reiterated that Mt. Milligan remains on schedule. We start up schedule for the third quarter of calendar 2013 and commencement of commercial production of copper and gold expected in the fourth quarter of 2013. At Mt. Milligan as part of our asset monitoring program we use the services of an independent project engineer who periodically visits the site and provides us with regular updates.
Our most recent report in early June, indicates that Thompson Creek scheduled in completion timeframe is still achievable.
With that I’ll turn the call back over to the Tony.
Thanks for the update, Bill. I also wanted to give you a few more details on Ruby Hill royalty that we acquired in May. Ruby Hill is a producing mine located in Nevada and operated by Barrick. Barrick reported proven and probable reserves as of December 31, 2011, of 16.8 million tons lower at an average trade of 0.058 ounces per ton, containing approximately 1 million ounces of gold.
In addition to reserves, additional mineralization is estimated by Barrick to be 108 million tons at an average rate of 0.02 ounces per ton. We now have royalty interest on nine operating mines in Nevada and are always eager to build our portfolio in the state where we started our royalty business.
Turning to Mt. Milligan transaction, we’re interested in increasing our interest in the property and that opportunity came up when Thompson Creek decided to increase liquidity to ensure project completion following a challenging operating quarter for them. Today, we announced a $200 million increase in our investment at Mt. Milligan in exchange for an additional 12.25% of the payable gold.
Combined with our prior transactions, we now are entitled to 52.25% of the payable gold for a total investment of $781.5 million plus the per ounce payment for $435. To date, we paid about $455 million to Thompson Creek, and we will pay them $75 million following the closing of the new transaction. And the remaining $252 million in five scheduled quarterly payments commencing on September 1, 2012, and ending on September 1, 2013.
Our investment thesis remains the same as our first investment in Mt. Milligan in June 2010. We view this as a quality asset with attractive cash costs due to a low strip ratio and low power costs, located in safe property and jurisdiction with a long life and exploration upside. We have analyzed the impact of our investment – our investment we’ll have on the operation and we believe cash costs will remain in the third quartile worldwide copper production, even after deducting the gold revenue dedicated to us.
As Bill reported, the Mt. Milligan project is in the advanced stage of construction, which reduces some of the risk in this additional investment. Since early 2011, Thompson Creek has maintained guidance of commercial production commencing in late calendar 2013. The recent Mt. Milligan technical report states that proven and probable reserves contain 2.1 billion pounds of copper and 6 million ounces of gold. Our interest is only on the gold production, which is estimated to be approximately 262,000 ounces of gold annually during the first six years of operation and 194,000 ounces of gold annually over the life of the mine.
From a project potential standpoint, at an average production level for the first six years and assuming current gold prices, Mt. Milligan would provide over $150 million in revenue annually to Royal Gold. Combined with Pascua-Lama, which we expect would initially contribute about $70 million annually and production schedule and current gold prices, you can see why we are eager for these projects to advance into operations.
In closing, 2012 was another year of excellent growth from Royal Gold. We expanded our portfolio, strengthened our balance sheet, and saw major growth in many of our key assets. As we look ahead to fiscal 2013, we expect to see further growth from Andacollo, Peñasquito, Canadian Malartic, Wolverine and Las Cruces as those projects work towards achieving full production capacity. And we look forward to significant construction progress in Mt. Milligan and Pascua-Lama.
We are pleased with the strong inherent growth in our portfolio and we’ll continue to enhance the portfolio as opportunities become available.
Operator that concludes our prepared remarks, we would be happy to take any questions at this time.
(Operator Instructions) And your first question comes from the line of Tom Murray with Advent Capital. Your line is open.
Tom Murray – Advent Capital
Hi, good morning.
Tom Murray – Advent Capital
You have an extremely strong balance sheet Thompson Creek concrete clearly does not – Thompson Creek bonds are trading in mid to high 70s for a yield of 13% and spread over treasuries of over 1,200 basis points. So the market telling you that Thompson Creek there is a material risk of bankruptcy with this name. Can you just kind of address putting in additional money into them and it seems like your assuming role of lender of last resort for Thompson Creek, so how much further you’re willing to go and how much do you monitor the overall financial health of the corporation beyond the project integrity.
Yeah, thanks Tom. Let me first start by saying we start look to the asset and we continue to believe that the asset is the quality assets as I mentioned in my prepared remarks. And we think the asset will continue to produce in all reasonable price levels. So that’s the first thing, but we also took a good strong look at where Thompson Creek is as an entity before we made this investment we are comfortable with that – with the additional financing that they have on our credit facility of $300 million that should get them well over the required capital spend at Mt. Milligan, and we’ve also looked at the serviceability on the other end of this debt and we feel comfortable in the first years after production (inaudible) to be able to service that. So, we do take a look at it. We have some clauses in our agreements. And, we will continue to monitor that rather closely.
Tom Murray – Advent Capital
Yeah, I didn’t get a chance to listen at Thompson Creek call. They’re kind of (inaudible) are going to be reduced as a result of this?
Say again, Tom?
Tom Murray – Advent Capital
I didn’t get a chance to listen to the Thompson Creek call. Is their credit facility going to be reduced?
No, we don’t believe it will be.
Tom Murray – Advent Capital
What are the amendments that they need to achieve with lenders?
We have been knowledgeable about that. That is really an agreement between Thompson Creek and their lenders – not very much....
Tom Murray – Advent Capital
So, your claim on the Mt. Milligan gold production, what is that – where is that priority claim within the Thompson Creek capital structure?
Let me turn to Bill Heissenbuttel for that question.
Yeah, we have a – we do have a security interest, if that security interest for the most part is subordinated, but it is subordinated solely to the existing banks. So at this point..
Tom Murray – Advent Capital
Is it senior to the 12.5% bonds?
Yeah, those bonds are unsecured. They have a guarantee from the entity that owns Mt. Milligan, but that is an unsecured guarantee, and ranks behind us.
We installed the cap at any additional debt that might come to Mt. Milligan cannot exceed 350 millions.
Tom Murray – Advent Capital
Which we would subordinate to, but we won’t subordinate anything more than that.
Tom Murray – Advent Capital
Okay, great. Thanks a lot.
Thank you, Tom.
(Operator Instructions) And your next question comes from the line of Shane Nagle with National Bank Finance. Your line is open.
Shane Nagle – National Bank Finance
Thanks, operator. Just wondering on the payment schedule of that remaining 252 million, is that going to be equal installments here. Previously I’d guess it ratcheted down a bit with the construction schedule, but is that been revised to equal, five equal payments.
Good morning, Shane. Let me turn to the end of Bill Zisch for that question.
No, unfortunately it’s a little all over the place. I can give it you, $75 million when the amendment is effective, which I would expect would probably be next week. $45 million on September 1, $95 million on December 1, $62 million on March 1, $37 million of June 1, and $12.9 million on September 1 of next year.
Shane Nagle – National Bank Finance
Okay, that’s great. Thanks. Just – that’s all I had to confirm. Thank you.
Thank you, Shane.
And there are no further questions at this time. I’ll turn the call back over to the presenters.
Thank you for joining us today. We appreciate your interest in Royal Gold and your continued support. We look forward to updating you on our progress during the next quarterly call. Thanks very much.
And this concludes today’s conference call. You may now disconnect.
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