Royal Gold (NASDAQ:RGLD)
BoaML 18th Annual Canada Mining Conference
September 06, 2012 08:50 AM ET
Bill Heissenbuttel - VP, Corporate Development
Okay, moving on to our last royalty streaming company, certainly not the least. Pleased to have Bill Heissenbuttel from Royal Gold. Bill is Vice President of Corporate Development and like the other two royalty streaming companies, Royal Gold has also been in the acquisition game lately on Mt. Milligan so maybe I'll turn it over to yourself. Update us on the company please.
Good afternoon ladies and gentlemen. I'd like to thank Bank of America Merrill Lynch for the opportunity to present this afternoon. I will be making forward-looking statements so I must ask you to familiarize yourself for the safe harbor statement. And as this is our really our first investor presentation after our June fiscal year end, I'd like to give you a summary both of financial results and some of the other events that marked our year.
Our revenues were up 21% as higher gold prices and greater contributions from Andacollo, Penasquito and Holt offset lower base metal prices and production declines at Cortez and Leeville. Our adjusted EBITDA which is just EBITDA adjusted for non-cash stock compensation was $238 million for 25% increase. And as a royalty company, we've been able to maintain our attractive high margin business model with over 90% of revenue reporting as adjusted EBITDA. From a geographical perspective, our revenues will drive from safe political jurisdictions such as Canada, Chile and the US. We saw an increase in reserves subject to our royalty interest even though higher cost has started to impact reserve calculations in the industry.
During the year we completed two capital markets transactions and equity placement and a convertible note both of which allowed us to position the company well from a liquidity perspective to continue to find new investments. And in keeping with our history over the past decade, we again increased our dividend. And our current calendar year dividend payout is up over 100% relative to what it was in Calendar 2008.
Now one of the struggles many gold companies have had over the past few years in the inability to outperform the gold price for the ETF. It does us real good to talk about the fact that ETF buyers do not receive dividends and do not benefit from reserve expanses if in fact the share price cannot outperform the gold price. So if we look back from our last fiscal year end, the total return on Royal Gold shares has outperformed the gold price over the last one, three and five year periods.
Now a few of the issues to consider when assessing the quality of our royalty portfolio really tied to operators. Ideally what one wants in a royalty asset, we'd like to see operators that are highly experienced, with sufficient capital to meet construction and operating issues that eventually arise.
Two, we want the assets on which the royalties apply to actually be important to the operators themselves. And three, we want the assets to be low cost producers or at least able to withstand sustained production at a lower commodity price environment.
Now Teck, Gold Corp. and Barrick, we have operators with a combined market capitalization of $180 billion and considerable experience in building and operating mines. These four account for almost 60% of our revenue and they operate 10 of our revenue generators. And although we cannot characterize all of the assets operated by these companies as court east portfolio, the important contributors to our business like Andacollo, Penasquito, Voisey’s Bay are meaningful to each of the operators. And in the case of Alamos and St. Andrew, the underlying properties are really core revenue generators for each of them. And Mulatos is actually one of the lower cost gold producers in the industry.
Also during our fiscal year, gold accounted for 68% of our revenue and total precious metal revenue was 74% and of the non-precious metal revenue Voisey’s Bay accounted for more than half of that figure. Our gold will always be to increase precious metal base revenue and with the revenue expected to be generated by Pascua and Mt. Milligan over the next few years. We should see gold price revenue continue to move up.
I mentioned the political jurisdictions from which we generate revenue, Chile and Canada account for almost half of our revenue with Mexico in the US accounting for another 38%. And if we adding Pascua and Mt. Milligan to the total, this will also increase the contribution from our top two host countries and further enhance the political risk profile of our revenue stream.
The industry wide we're hearing about cost pressures both from an operating and a capital perspective, you’ve seen it in our own portfolio at Pascua and Mt. Milligan and then at a recent (inaudible) presentation showed that almost 85% of what they called mega projects have seen cost overruns of some scope.
Now we don't have direct exposure to these over runs in terms of the investment returns obviously except with respect to delays, nor do we need to allocate resources to address these issues. In fact, one might say investing in a royalty or streaming company can offer a hedge against higher capital cost and since the cost over runs can create an opportunity for us to invest.
We have consistently maintained a low overhead and our business model is one that allows for leveraging that low cost base. We don't need to increase expenses in order to accommodate new project investments.
Now during this second calendar quarter of this year, we also gave the market an update on the reserve subject to our royalty interest. We saw an increase in gold reserves subject to our interest of 5% after accounting for reserve depletion over the course of 2011 up to 84 million ounces, as increases at Marigold and Anata offset depletion of 3.5 million ounces and a reserve classification at Penasquito.
Now one of the gratifying things about our royalty company is the cost free reserve replacement that comes with continued exploration work of our operators. Since 2005, the total reserve consumed have been offset by reserve additions. Almost one-third of the ounces that have been added to our total royalty interest since 2005 have been cost free while the rest have been added through acquisition.
In order to give you a better sense of our true interest in these reserves, we apply the royalty rates at all properties to the underlying reserves making adjustments for net profits interest which really don't have any or stream cost. At the end of calendar 2011, as adjusted for our most recent deal at Mt. Milligan, our royalty ounces in reserve were 6.4 million gold equivalent ounces including gold and silver only and 7.7 million gold equivalent ounces including all metals. That's interesting to note, that all three of the major royalty and streaming companies now provide this information to the market and on a per thousand share basis, Royal Gold's reserve per thousand shares is over 100 times which we believe to be an excess of our peers.
I'd like to give you a status update on our portfolio in a few of our key properties. We have a golden portfolio, over 200 properties that would be awfully hard to get your arms around if you wanted to do a full asset review. And so for this reason, we highlight the properties that are in production and development that we consider to be cornerstone properties. The first three cornerstone properties are in production and accounted for just under 50% of our revenue during the last fiscal year.
Our most important producing asset remains Andacollo generated $64 million in revenue for the year on production of just over 51,000 ounces of gold. Teck continues to undertake numerous steps to achieve its mill design capacity of 55,000 tons a day including modifications to the blasting design, the pre-crushing of ore using the crusher from the supergene project and the installation of a permanent two staged crushing circuit that we expect to ramp up during the quarter.
Throughput rates were approximately 45,000 tons per day in the most recent quarter. There is an ongoing expansion study at the mine but I really think that you should characterize this as a more optimization study and they are going to use the results of this 20,000 ton per day pre-crushing plant in the expansion analysis.
One of the other things to note about Andacollo, we were very excited to see an increase in reserves subject to our interest from 1.6 million ounces to 1.8 million ounces and Teck continues to test for additional reserve resource potential at the site. At Penasquito, drought conditions and lower than expected water production from the Chile, Colorado pit the water and program resulted in lower water availability for the mill and limited throughput for the June quarter to about 105,000 per day. Gold Corp. is in the process of drilling additional wells but water restrictions are expected to limit production through the rest of the year, but between 98,000 and 107,000 tons per day versus the nameplate capacity of 130,000 tons per day. As a result, the company has reduced its forecast gold production for calendar 2012 from 425,000 ounces to 370,000 to 390,000 but we still have 16.5 million ounces in reserve subject to our royalty and we've received almost 60% of our original investment back in royalty and we still have a reserve that is 65% higher than existed at the time we made the purchase.
Voisey’s Bay experienced a seasonally low period of nickel and copper shipments in the most recent quarter and I have tried to provide you with some idea how metal sales and shipments move from quarter to quarter depending on the shipping season for nickel and copper concentrates.
Now the processing of the nickel ore will undergo a change in the next 12 to 24 months with the long harbor hydromet plant. That facility is 69% complete in terms of physical progress and Valley has spent 2.3 billion of the total $3.6 billion budget and that facility is expected to be operational during the second half of calendar 2013.
Moving on to our development properties. At Mt. Milligan, we recently had an opportunity to increase our investment by $200 million and increase our interest in payable gold production from 40% to 52.25%. Since the commencement of the construction of the project, a number of issues have impacted Thomson Creek's original financing plan including higher capital, the exploration of out of the money warrants, lower money prices and a slower ramp up at the company's (inaudible) expansion. As a result, our original $311.5 million investment will now be $781.5 million and the original gold stream of 25% is now over 50%.
One important project milestone that has not moved lately is estimated start to production which is the second half of calendar 2013. One of the things to note in the six year forecasted provided to the right is the relative size of this project to our revenue stream. Our largest source of revenue in fiscal 2012 at Andacollo produced about 38,000 ounces of gold to our account. This project over the first six years will produce around 140,000 royalty ounces before deducting the $435 an ounce that we pay and if you deduct that on a net basis, it would be somewhere around 100,000 ounces depending on the gold price used.
Now many have commented about the size of the investment. They say a significant raising concentration issues and I thought it might be good to just point out a few of the things that we see in the project both when we did the original due diligence and quite frankly during the some recent site visits. From our construction perspective, this schedule appears achievable and there is a little under $300 million of the $1.5 billion project remains uncommitted or not subject to lump sum contracts. Engineering is now 99% compete, procurement is 97% complete.
From an operating perspective, the project benefits from low power cost, low strip ratio and has good metallurgy and will produce a copper concentrate that is free of impurities. These factors allow for higher allocation of the byproduct gold to stream. Now if I used Thomson Creek's information, it is estimated that copper cash cost of production in the initial years will be about negative $0.15 a pound, about $6.20 gold. And if you include Thomson Creek's plus or minus 10% potential variance around that cost figure, that number might be a positive $0.15 a pound on the high end and both of these figures would put Mt. Milligan at the lower end of the cost curve.
Moving on to Pascua, re-assement of the cost and progress of the project caused Barrick to revise both its estimated time to completion and the cost to construct. The total project cost is now estimated to be in the range of $7.5 to $8 billion to complete with approximately $3 billion spent today. The time to initial production was extended to 2013 to mid-2014 and the schedule delays are attributable to the camps the tunnel and the processing plant. Barrick is also expediting the purchase of key equipment and supplies in order to try to prevent further scheduling and cost delays.
Now I have used Barrick's 2011 technical report to show you what our attributable royalty ounces might be for the first five years of production and you can see the potential for around 50,000 total royalty ounces as the project ramps up to its peak gold production years.
Now those are our five cornerstone assets. I'd like to give you a brief update on a few other notable properties in the portfolio. That Holt, St. Andrew produced 11,000 ounce of gold from 74,000 tons of ore at a greater 4.71 grams per ton for the most recent quarter achieving the highest quarterly throughput since the restart of the operation. The Holt material represented about 32% of the total ore fed to the Holt mill. St. Andrews reported encouraging exploration results down (inaudible) which represents about half the current reserve at the mine. Additional upside may exist. Total resources at Holt are 10.6 million tons at 5.82 grams per ton compared to reserves of 2.4 million tons at 5.36 grams per ton at the end of 2011 with reserves being included in that resource figure.
As you know the royalty rate at Holt is a function of the gold price and in an average price of $1674 an ounce during our last fiscal year, our effective royalty rate was just under 22% for the period.
At Mulatos the first full quarter of contribution from the gravity mill and a 12% increase in crusher throughput resulted in an increasing quarterly production from 36,000 ounces to 48,000 ounces. The mill material has seen some tonnage in great variances relative to the black model that they continue to investigate and recoveries from mill were 65% compared to an overall recovery ratio for the material that's estimated at 90%.
Now the company has guided to the low end of 200,000 to 220,000 ounces of gold production for 2012, but that still represents a significant increase from the 153,000 ounces produced in 2011.
In the second quarter, Cisco reported its highest ever throughput, announced production of 92,000 ounces despite a fire in the mill that affected production for a period. For the quarter, throughput was 38,000 tons per day versus a nameplate capacity of 55,000 tons per day as the company worked through the installation of the first cone crusher.
Since quarter end, the company has announced the installation of the second cone crusher and throughput rates that average 42,000 tons per day for the month of July and almost 47,000 tons for the last five days of that month and they just today issued updates for the month of August that showed ever higher rates.
During the most recent fiscal year, we closed three transactions and we adjusted since the end of our fiscal year. Two of those deals were related to Mt. Milligan where we increased our investment by $270 million in December of 2011 for an additional 15% of payable gold and again by $200 million in August of 2012 for an additional 12.25% of payable gold.
Other transactions, we also purchased a 3% NSR and Barricks, Ruby Hill mine for $38 million. This represents our ninth paying royalty in the state of Nevada, the place that our royalty business was originally founded. Ruby Hill had reserves at the end of 2011 of almost a million ounces and had another 2.2 million ounces in resource and measured an indicated category including the lower grade Bull-whacker discovery. And to also to achieve project we agreed to $60 million stream investment on the portion of both the gold and the silver by product production from this high grade polymetallic project in British Columbia.
Chieftain has been undergoing feasibility study work on the project while also advancing amendment to its special use permit in connection with a more favorable route for its concentrate transport road to be constructed between the site in Atna. Generally speaking, we still see a very good investment environment for our company, both the equity and the debt markets are either restricted or unavailable to many companies and I think it's interesting to note that if you go back to 2008, I'd say the royalty and the streaming companies have been the most consistent source of capital for the industry compared to any of the other markets.
We spent a lot of time when we're talking about development, we talk about Pascua and we talk about Mt. Milligan, I just thought it would be interesting to give you a sense for some of the things that are going on in the portfolio. None of these (inaudible) are really can be expected to be principal, but they can certainly help cover our low cost of operation. So at Gold Hill the satellite deposits around mountain, the joint venture partners indicate production should commence during this calendar year.
At Pinson, at of at least 43101 report in May, 2012, which are reserves of 1.7 million tons grading 0.369 ounces per ton, and a gold production forecast of 548,000 ounces a six year mine life. Atna is now test processing material at offsite facilities and expects modest production in 2012. Now we hold a variety of royalty percentages on this ground and much of the underground resources are an effective 5.9% NSR.
At Mara Rosa and Amarillo Gold released a prefeasibility study in November 2011 and expects to complete a feasibility study in 2013, total reserves 945,000 ounces and the PFS envisioned a production of 124,000 ounces of gold per year over a seven year mine life. Capital costs were estimated to be a $184 million and we hold a 1% NSR royalty on Mara Rosa.
In Australia, resources are $63 million to put the Meekatharra gold project back into production. Reed's 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 this year. The initial stage of production will be for a couple of years with numerous open-pit and underground options available for a Stage 2. Much like Pinson we have a variety royalty interest here that cover pretty much all of the resources at the project when we acquired through our Barrick and IRC deals.
And finally in Argentina, Minera IRL is targeting a 3.6 year initial mine life for the Don Nicolas project in the Santa Cruz province of Argentina. Positive feasibility study has been completed on a 350,000 ton per annum operation that will produce 50,000 ounces of gold and 56,000 ounces of silver per year.
The company has initiated the fermenting process in Argentina with the submission of its EIA and we hold a 2% royalty on Don Nicolas. I could continue, but I think that gives you a sufficient sense for some of the activity levels that are always going on in royalty companies portfolio. I thank you for your time and happy to answer any questions you may have.
Just discuss a bit how you managed risk in your portfolio, exposures to individual projects?
Yes, how we managed the risks. Well, it certainly all starts with the due diligence process. As a royalty company there are so many things that are out of your control, you are a passive investor you can't control the gold or the silver price. So really it starts with due diligence. We have a very technical focus. Our CEO is a mining engineering, ex-Placer, we have a VP of Operations, ex-Newmont. These folks know what they are looking at when they go to a mine site. So it all starts there and I can say that when we make an investment, the project has been fully vetted from a technical perspective, permitting perspective, a legal perspective. Ongoing, we have a royalty monitoring team consisting of both engineers and accountants going out to the sites particularly the major sites making sure we understand that we're getting paid for the ounces that are due to us. Beyond that, it really comes down to, I was talking about concentrations as having a diverse portfolio, because as we've seen over the past fiscal year, we have a number of operations with higher productions, we also had a number of operations with lower production. So again, due diligence monitoring and having as diverse support fully as possible is how we try to deal with that risk.
Your two royalty peers ahead of you, both said they are ready for further acquisitions of Worcester (ph) I guess with lines of credit and cash on hand of over a $1 billion. So was just wondering what your view is any how well positioned you guys are financially.
I think we are well positioned, I think one of the slides I had $375 million in cash, $350 million undrawn on a revolving credit. Now I will say, if you go back to June 30th with our commitment at Mt. Milligan, they were about 307 million of that was committed to Mt. Milligan and then in the last fiscal year we did about $160 million in net operating cash flow. So, very well positioned in terms of new investments. We have never been a company to have a lot of cash lying around. We have tended to do acquisitions and come then come to the market and say, this is what we did and we'd like to raise more money. So I don't think, you’d probably would never see us with hundreds of millions of dollars just for sitting on our balance sheet but very comfortable from where we are from a liquidity perspective.
Okay, I think we're out of time. If you could all join me and thank and Bill and Royal Gold for the presentation.