Karen Gross – VP and Corporate Secretary
Tony Jensen – President and CEO
Andy Cophid [ph]
Victor Flores – HSBC
Imaru Casanova – BJM
Adrienne Day [ph]
Royal Gold, Inc. (RGLD) F4Q08 (Qtr End 06/30/08) Earnings Call Transcript August 14, 2008 12:00 PM ET
Good morning. My name is Jackie and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold fiscal 2008 fourth quarter yearend 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.
Thank you, operator, and hello everyone. Welcome to our fiscal fourth quarter and yearend 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 release and is presented in greater detail in our filings with the SEC.
Participating on the call today are Tony Jensen, President and CEO; 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 this morning’s release. Now, I will turn the call over to Tony.
Thanks, Karen, and good morning. We are pleased to share with you today our record financial results for both our fourth quarter and the fiscal year. Fiscal 2008 was another year of significant growth and exceptional performance for Royal Gold. We continue to execute on our plan to expand and diversify our portfolio of precious metal assets with the addition of new royalties across all stages of our portfolio.
We experienced new revenue from the producing Battle Mountain properties in the El Chanate royalty acquired in February. We also began receiving a return on our investments that we made over the past several years on our development stage projects including Taparko and Penasquito, which commenced production during the fiscal year. We also are anticipating the start of production from the Dolores property during the current quarter. No doubt it has been a great year of growth in revenues and royalty assets for the company.
Let me review some of our full year highlights. And on the financial side, we had record revenue at $69.4 million, an increase of 43% over the comparable fiscal year revenue of $48.4 million. Net income was $26.1 million or $0.69 per share after non-recurring items compared with $19.7 million or $0.79 per share for fiscal 2007.
The non-recurring items totalling $4.8 million or $0.15 per share were related to our convertible preferred offering and a non-cash adjustment related to the conversion of the preferred shares to common shares.
Free cash flow was a record at $55.8 million or 80% of revenues, compared with $37.9 million or 78% of revenues for the prior fiscal period. Working capital as of June 30 was $204 million. We ended the year with a cash balance of $192 million and we increased our annual dividend to $0.28 per share.
On the transaction side, we closed the Battle Mountain transaction in October, adding three new producing properties including El Limon, Williams, and Don Mario. And as I mentioned earlier, Dolores as a development stage property.
In December, we added a royalty on Golden Star’s Benso project in Ghana which we expect to commence production this quarter. In February, we completed the acquisition of three royalties from AngloGold, two at the El Chanate mine in Mexico operated by Capital Gold and one at the Marigold mine in Nevada operated by Goldcorp.
El Chanate made an immediate contribution to our revenues with over $1 million in royalty revenue accrued since the acquisition. And our royalty on Marigold is scheduled to begin paying in calendar year 2010.
For our fourth quarter of fiscal 2008, record revenue was $21.7 million, an increase of approximately 51% over the $14.4 million for the comparable quarter. Net income was $7.9 million or $0.24 per share compared with $5.7 million or $0.20 per share for the fourth quarter of fiscal 2007. And free cash flow was $18.3 million or 84% of revenues compared with $11.3 million or 78% of revenues for the prior year period.
Turning to the operational and development highlights, Robinson had very strong production this year due to better grade and recovery, contributing $16.6 million in total revenue for fiscal 2008.
The quarter [ph] recently increased its guidance for the calendar year by about 15% to 115,000 ounces of gold and 150 million pounds of copper.
As you know, we have been waiting for Leeville to achieve sustained production levels, and we are very pleased that the money continues to operate at full capacity, mining in process in of approximately 3,200 tons of ore per day.
Newmont reported total production of 361,000 ounces of gold for the fiscal year compared to 230,000 ounces for the prior fiscal year, an increase of approximately 57%. Their production estimate for calendar 2008 is 415,000 ounces.
The Taparko mine commenced gold production in August 2007. It has already returned $7.5 million of our $35 million investment despite startup challenges. Most areas of the Taparko mine are capable of achieving feasibility study expectations. However, mill performance has suffered throughout the year due to problems associated with the grinding mill drive-train. This has resulted in low mill availability and throughput.
While monthly mill availability of greater than 90% had been achieved, those levels have not been sustained. On average, quarterly mill availability has been closer to 60%. Several problems with the original installation were identified and corrected, but mechanical problems have persisted.
Production seized on June 11 when vibrations were detected. The entire drive-train was reevaluated and is now in the process of reassembly with the assistance of third-party mill specialists. Continuous and sustained production is dependent upon resolving the mill drive-train problems.
Now, I'd like to touch on the progress at some of our larger near-term development properties. Construction is progressing well at Penasquito. The oxide plant was commissioned and the first gold was poured on May 10. We received a royalty payment during the quarter based upon production of 1,600 ounces of gold and about 92,000 ounces of silver.
By the end of the second quarter, Goldcorp spent $801 million and committed another $341 million for a total of about $1.1 billion spent and committed for the construction of the mine. As you can see, they are well advanced in the construction as this number compares to the total capital cost estimate of about $1.5 billion. Goldcorp reported their construction remains on schedule and is estimating production of approximately 67,000 ounces of gold and 2.3 million ounces of silver in calendar 2008.
Minefinders recently reported that its initial production at Dolores has been delayed due to a blockade that was established in May by a group of protesters. However, they expect production at the mine to commence yet this quarter. Minefinders also say that they will provide an update for 2008 production in the near future. Their previous production estimate for the year was 40,000 ounces of gold and 1 million ounces of silver.
We are obviously excited to see Penasquito coming into production and we look forward to the revenue from Dolores in the very near future. Both of these properties are expected to provide substantial and long-term royalty revenue for Royal Gold.
Now, I'd like to highlight our latest transaction. Just two weeks ago, we signed a definitive agreement to acquire a portfolio of royalties from Barrick for a net cash consideration of $150 million and a restructuring of our royalty positions at the Cortez mine in Nevada. The portfolio we acquired consists of royalties on 77 properties including eight producing properties and over 75% of the portfolio consists of precious metal royalties.
We are very excited about the unique opportunity to acquire such a sizable package of royalties in a single transaction. This acquisition has three key benefits for Royal Gold. First, it's accretive in all financial – key financial measures and provides immediate cash flow with the eight royalties now on production. This will grow our number of producing royalty properties to 20 in total. Second and equally important, we expect this transaction to provide the catalyst to develop the Crossroads deposit at Cortez.
Our GSR 2 royalty have largely been a dormant asset in our portfolio that we always believe to have significant value. This agreement monetizes some of that value through the restructuring of our Cortez royalties and we have retained upside by keeping 5% royalty on Crossroads at today's metal prices.
We are very encouraged by Barrick's comments that they expect to acquire reserves this year at Crossroads and that they are working hard on engineering and exploration activities.
Third, this deal expands and diversifies our royalty portfolio. While we've made great progress in drawing our portfolio over the past several years, this transaction advances that goal. We now have good critical mass in producing and developing projects at excellent option value leverage in exploration stage projects.
Clearly, we are excited about the significant financial and asset growth achieved in fiscal 2008, and I'd like to just step offline and say that I very much would like to recognize the valuable contributions of our employees for their efforts during the course of this year. There is no doubt that these record results were a testament to their very hard work.
Going forward, our fundamentals remained strong with robust cash flows and a strong line of credit to fund future acquisitions. We believe Royal Gold is well positioned to continue its progress and look forward to sustaining our growth and revenue diversification plan into fiscal 2009.
Operator, that concludes our prepared remarks. We'd be happy to answer any questions if there were some.
(Operator instructions) First question comes from Andy Cophid [ph]. Your line is open.
The first thing I wanted to ask, Tony, is how the company goes about calculating returns on deals such as the pending Barrick deal and what types of returns it typically looks to achieve? For example, last year these properties generated $12 million in royalties, it's going to cost you $150 million to acquire. It’s like on the surface about an 8% return. But I really would like to know a little bit more about how you go through the process of evaluating something like this transaction?
Fair enough, Andy. What we usually do when look at value in royalties is we'll take a good look at the production profile and use our assumptions for gold and a discount rate that might be single-digit when it goes into the initial calculation. But the differentiation for us is that we are engineers and geologists and the like, and we very much take a position on the long-term value of properties. And so, we’ll look into resources as well and have an expectation of what we think will come about there. Well, I won't go into detail as to exactly what our hurdle rates are and the like. I will say that we're always looking for double-digit returns in every investment that we make.
Okay. Secondly, I just wanted to ask if the company has any strong preference going forward between gross smelter return, revenue base royalties, and say profit base royalties, what are the advantages and disadvantages from those two basic approaches?
We always – wherever we can, Andy, we want to be at the gross smelter return line. We want to be as high in the cash flow stream as possible. And that just leaves us less exposed than any operating cost inflation or anything like that. When you look at the profits base then all of a sudden you're kind of tied to the inflation that there might be in the business. So, we like to stay up on the highest level that we can. Whenever we write our own royalty agreements, that's where we want to be.
Now, you do realize that many of the royalties that we do have on our portfolio were written by other folks. And so, at times, we do get exposed to a net smelter or a profits base royalty. But the vast majority of our royalties are GSR, the least of the vast majority of value-driven royalties or GSR.
At this time, Victor Flores, please press star one for asking a question.
Are you there, Victor?
One moment please. Mr. Flores, your line is open.
Can you hear us, Victor? Victor, can you hear us? Operator, maybe we can go on to the next call and see if Victor can come back in.
Victor Flores, your line is open.
Victor Flores – HSBC
Thank you. Sorry, I've delayed the proceedings here. Hopefully you can hear me now.
Loud and clear, Victor, thank you.
Victor Flores – HSBC
Okay, good. I can hear you all along. I'm not sure what I did wrong. Tony, my question, and I know I sound like a bit of a broken record on this, but could you walk us through your understanding of what's happening at Taparko? High River has provided some indications of what the issues are, but it seems that you have slightly more detailed information at your fingertips?
Well, first of all, we don't have any more detailed information at our fingertips. We really rely on the operator to manage the property. We do have a very collaborative effort going between the two companies. So, we were contributing talent and knowledge wherever we can. It's safe to say that we are all frustrated with the mechanical problems that we're suffering particularly at the present time because we're trying to chase down exactly where that vibration is coming from and I think there is an effort onsite right now that has pinpointed the potential problem. And there is a new part that's being installed into the system and they are going back with the entire drive-train with the mill experts that I mentioned with the hopes of making sure everything is in order. Having said that, we're going to have to wait for that work to be done and the mill to be energized to see whether the vibration indeed has been corrected. So I'm not able to really go beyond that. Victor, that is about as much as we know.
Victor Flores – HSBC
So, if I understand correctly, the mill was brought offline on the 11th of June, and it has still not resumed operation and we’re now in mid-August.
Yes, but what I can tell you is that there has been several corrections that have been made, several problems that have been identified during that period of time. And the mill has been reenergized during that period of time to see whether the problem has been resolved and we still have that same mechanical problem. So, it's not as if no work has been done. I can tell you that there has been an extreme amount of effort put into the work since June 11. We are pleased with the effort that has been put forth by High River and we're just all trying to work together to find the problem.
Victor Flores – HSBC
Now, a follow-up, the company had indicated that they also needed to replace some of the cyclone pumps, because I guess they were a bit undersized. Is that work being done concurrently or is there going to be a future stoppage again to replace those pumps?
Victor, I don’t have any knowledge of that. It's not really on my radar screen at this point.
Victor Flores – HSBC
Okay, and then finally, is there the possibility or potential that at some point in time, they just need to say “Listen, it’s probably more trouble to fix this mill. Let's just go buy a new one.”
It's not really the mill. Again, it’s the drive-train between the motor and the mill. And so, there may come a time where there needs to be a modification made. I don’t think we're there yet. I don’t know that it would be so costly in dollars to make some modifications there. But it might be costly in time. So, at the present time, I think the focus is very much on, “Let's keep what we have working properly” rather than “Let's go ahead and start over from ground zero.”
Victor Flores – HSBC
Fair enough. Thank you so much.
All the best.
Your next question comes from Imaru Casanova. Your line is open.
Imaru Casanova – BJM
Hi, everyone. Congratulations on what was a strong quarter and a strong financial year. I just wanted to touch on future transactions and I know you can't tell us a whole lot, but Tony, you were quoted in the media saying that a transaction similar to the one you just did with Barrick is not unlikely in the near future. And I’m mostly wondering if you would expect such transactions to be (inaudible) and a little bit about whether it would be gold, precious metals, and maybe geography. I know you – the reason I asked about financing obviously is because you have used a lot of your cash in the Barrick transaction. You had $190 million and you've used up about $150 million. So by now, I'm estimating maybe about $40 million in cash, so to do a bigger transaction obviously would require additional funds.
Thanks, Ima, for the questions. Good question. I just like to clarify what I think I said on the interview and that was that the future transactions of the size of the Barrick transaction could be certainly possible in the near term. In particular, what we're thinking about there is royalty financing for us to get involved in any kind of meaningful way. These things can be from $52 million to $200 million kind of dollars. But I don’t think there's going to be other transactions like the Barrick portfolio. That was a very, very unique opportunity to acquire all those royalties in one piece. So having said that, let me address you a real question – What are you going to do next with regards to financing the company? And I think we’ll always leave our options open when that need particularly arises. We feel very comfortable. We don’t feel pressured. Don’t have to do any kind of capital raising right now. We are in the position where we have a very good, strong credit line and I think our cash balance will probably be a little bit higher than what you are estimating when the transaction goes through with Barrick. Excellent cash flow coming in and of course the Barrick properties are going to help to start to contributing cash flow again in our 2Q. So I think we’re in pretty good shape to do another sizable deal if one presents itself.
Imaru Casanova – BJM
Okay, thank you. I did – I guess as far as precious metals, those transactions being gold or precious metals, I guess you have stated that you would remain with the focus rather than going to base metal type of asset, is that correct?
That's a very strong business point for us. We very much want to stay heavyweight in precious metals. And when we say heavyweight, we like to stay somewhere around 70% and above. So, that's very much on our minds all the time.
Imaru Casanova – BJM
Well, thank you.
Next question comes from Adrienne Day [ph]. Your line is open.
Good morning. I'm sorry but the last question was my question. Thank you. Sorry.
Okay, Adrienne, thank you. Are there any other questions, operator?
No more questions in queue.
Well, with that then, we just thank you very much for joining us today. We certainly appreciate your interest and continued support of Royal Gold. We look forward to continuing updating you on our progress in the next quarterly call. Thanks very much.
That concludes today's conference call. You may now disconnect.