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Executives

Tony Jensen - President and CEO

Stefan Wenger - Chief Financial Officer

Bill Heissenbuttel - Vice President, Corporate Development

Bill Zisch - Vice President, Operations

Bruce Kirchhoff - Vice President and General Counsel

Stanley Dempsey - Chairman

Analysts

Michael Peterson - MLV & Co.

Stephen Walker - RBC Capital Markets

Tanya Jakusconek - Scotia Bank

Shane Nagle - National Bank Financial

Royal Gold, Inc (RGLD) F1Q2013 Results Earnings Call November 1, 2012 12:00 PM ET

Operator

Good morning. My name is Loral, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Gold Fiscal 2013 First Quarter 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. Karen Gross, you may begin your conference.

Karen Gross

Thank you, operator and good morning everyone, and thank you for joining us today to discuss Royal Gold’s fiscal 2013 first quarter results. This event is being webcast live and you will be able to access a replay of the call on our website. 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 provide a financial update and then Bill Zisch will discuss our operations and review some of our producing and development properties. After management completes their opening remarks, we’ll open the line for Q&A session.

Before we begin, I 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 press release and is presented in greater detail in our filings with the SEC.

With that, I’ll turn the call over to Tony.

Tony Jensen

Good morning and thank you for joining us today. I am pleased to report strong results for our first quarter of fiscal 2013, in which we achieved record revenue and cash flow, primarily driven by increased production volume. Relative revenue increased 21% to $78 million, while operating cash flow increased 16% to $53.5 million. In addition net income was $25 million or $0.42 per share.

For the quarter just over 50% of our revenue came from three cornerstone producing properties, including Andacollo, Voisey’s Bay and Peñasquito, each of these assets reported year-over-year improvements in metal sales and revenues. Andacollo, was again our largest revenue source contributing approximately $20 million, followed by Peñasquito at $11 million and Voisey’s Bay contributed about $9 million.

Our top 12 producing assets contributed 82% of our revenue and compared to the prior year period volume expansion at nine of our top 12 assets, more than offset lower production at Cortez, Leeville and Dolores. Our percentage of revenue from precious metals was 75%. The majority of our revenue was derived from Chile, Canada and Mexico, with each country contributing in the range of 22% to 26%, while the United States operations contributed 17%.

Also during the quarter we were pleased to have an opportunity to increase our investment at Mt. Milligan in August. We will now receive 52.25% of the gold from Mt. Milligan in exchange for total preproduction commitment of $781.5 million and a payment of $435 per ounce upon delivery of the gold. We understand construction is on schedule and we look forward to production next year at this time. This is also a very interesting time in our business and we are continuing to identify new investment opportunities. To have the ability to pursue these royalty and streaming opportunities we completed an equity offering in mid-October, which Stefan will speak to in just a minute.

With that let me turn to Stefan Wenger our CFO for a brief financial report followed by a report from Bill Zisch our VP of Operations, with an update on some of our producing and development properties. Stefan?

Stefan Wenger

Thank you, Tony and good morning everyone. For the first quarter of fiscal 2013 we had revenue of $77.9 million compared to $64.5 million for the prior year period. Adjusted EBITDA totaled $71 million or 91% of revenues, record highs compared with $57.6 million or 89% of revenue for the comparable quarter. Net income was $24.8 million or $0.42 per share compared with $22.5 million or $0.41 per share for the prior year period. Cash flow from operations was $53.5 million or $0.90 per share compared with $46.2 million or $0.84 per share for the comparable quarter.

Looking at our costs and expenses G&A decreased 4% compared with the comparable quarter, while we experienced an increase of 15% of production taxes, which was directly related to higher revenue at Voisey’s Bay. DD&A increased to $21.5 million compared with $17.2 million in the prior year period. However, the DDA rate per gold equivalent ounce was $456 consistent with the $455 per ounce rate that we experienced in the prior year period. For fiscal 2013 we continue to expect DD&A of between $450 and $500 per ounce compared with the rate of $475 per ounce we had in all of fiscal ‘12.

As expected interest expense increased as a result of recording the first full quarter of expense associated with our $370 million convertible notes. For the period total interest expense was $6.1 million, which included $5.1 million of expense associated with the convertible notes. Of that $5.1 million about $2.7 million related to cash interest on the notes while the remaining $2.4 million was related to non-cash accretion of the debt discount and amortization of debt issuance costs.

Our income tax expense increased to $16.4 million or 39% for the quarter compared with $12.4 million or 32% in the prior year period. The increase in our effective tax rate was primarily a result of an increase in deferred tax expense on foreign earnings, as well as changes in estimates of uncertain tax possessions. We continue to recognize deferred tax expense in certain foreign subsidiaries due to non-operating loss utilization, without a corresponding US foreign tax credit benefit. For fiscal 2013 based upon our current forecasts, we expect our effective tax rate to be approximately 39%. Our current or cash tax rate for the quarter was approximately 34%, which is consistent with prior year periods. As we look ahead we expect that our global effective tax rate will decrease once Mt. Milligan begins production.

Last month we announced 5.25 million share common stock offering resulting in proceeds of $472.5 million. We look to use the proceeds from a royalty or streaming interests. Our current liquidity position includes approximately $750 million in cash and $350 million in availability under our revolving line of credit. We are studying our fiscal 2013 with the strongest liquidity position in history of the Company, giving us the financial strength to pursue future growth.

Now I’d like to turn the call over to Bill Zisch.

Bill Zisch

Thank you Stefan, and good morning everyone. I will start my review of our producing properties by comparing our current quarter production and revenue with the June 30, 2012 quarter. This analysis provides an alternative to our year-over-year financial comparisons and helps to evaluate production trends and factors in the ramp up stats at a number of our properties. Our portfolio of producing properties continues to deliver favorable results with a record gold equivalent production during the quarter, as our three cornerstone producing properties Andacollo, Peñasquito, and Voisey’s Bay exceeded the preceding quarter’s level of production.

Major producers like Leeville, Goldstrike, Holt and Las Cruces also continue to perform well with increases that more than offset short falls at other properties within the portfolio. Realization of our record quarterly revenue was the product of a 3% quarter-over-quarter increase in gold price and a 25% increase in gold equivalent production.

At Teck’s Andacollo mine insulation of the 20,000 tonne per day crushing circuit was completed, allowing throughput to increase by 10% to an average of 49,000 tonnes per day for the quarter. In September production average 54,000 tonnes per day close to the design capacity of 55,000 tonnes per day. Gold rates that were 13% above the preceding quarter also contributed to mines favorable results. Teck expects to achieve design capacity by continuing to debottleneck and optimize plant performance while evaluating potential resource expansions and possible production increases.

At Peñasquito Goldcorp reported record production of gold and other metals despite the continued impact of water shortages that have affected mill throughput. Increased gold and silver production was driven by strong grades. Additionally the timing of concentrate shipments resulted in payments to our account that were higher than the previous quarter.

Goldcorp stated that work continues on drilling of additional wells in the pit dewatering area and the (inaudible) basin in well field. A water and tailing study to address potential longer term water constraints and optimize tailing operations is under way and expected to be completed in the first half of calendar 2013. Goldcorp expects that water availability will be sufficient to achieve their guidance of between 370 and 390,000 ounces of gold for calendar 2012.

At Vale, Voisey’s Bay mine production was more than 20% above Q4 fiscal 2012, as sales from seasonal shipments of copper concentrates reported to our account at favorable levels. Additionally nickel concentrates previously shipped for processing in Europe reported to our account during the quarter. Seasonally strong copper concentrate shipments are anticipated to continue during the December quarter.

Production from these three producing cornerstone properties provided almost three quarters of the increase over the preceding period ended June 30. Six other properties, which include four located in Nevada accounted for almost all of the remaining increase. These Nevada properties include Leeville, Goldstrike and Robinson, where production levels increased over the preceding quarter by 90%, 40% and 10% respectively, while Marigold had a twofold increase in production from our area of interest.

At St Andrew Goldfields Holt mine production increased about 12% over the preceding period. Production was sustained at design levels for the entire quarter, our royalty rate was 21.5% benefiting from the 3% increase in gold price.

Inmet’s, Las Cruces mine also improved from the previous period where they reached record levels of production by establishing solid operating conditions in the plant. These results associated with sustained recovery and throughput improvements led to higher capital sales in September and contributed to the quarter’s 19% production increase. With commissioning of the second cone crusher and record monthly throughput and production reported in July

Osisko’s, Canadian Malartic mine began an outstanding quarter that ended with record production of over 103,000 ounces of gold. They also reported another month of record mill throughput of over 43,000 tonnes per calendar day in August and a record one-day mill throughput in September of over 53,000 tonnes. With mill throughput in the first eight days of October averaging over 50,000 tonnes per day. Osisko continues to move the operation closer to design rates of 55,000 tonnes per day.

At Yukon Zinc’s, Wolverine precious metal grades and recoveries increased from the preceding quarter with average mine production of 1,300 tonnes per day. Wolverine is continuing a ramp up towards our design capacity of 1,700 tonnes per day. Their September quarter production to our account increased by about 65% over the preceding quarter. In August Yukon Zinc stated that work continues on integrating new mining equipment, increasing mill cluster, grade and recoveries, and completing current construction of the Tailings dam to reach its ultimate height.

With regard to our development properties, this morning Barrick provided an update for their Pascua-Lama project and stated that since the report in July they have been working with [floor] on a more comprehensive top to bottom review. The expected review will be completed by the time they discussed their 2012 year-end results. However, Barrick did report that work-to-date suggests capital cost will be closer to $8 billion to $8.5 billion with first production in the second half of 2014.

Barrick also reported that today approximately $3.7 billion has been spent on the project. The tunnel is approximately 60% complete and 90% of the required material and equipment for the process plant has been committed. In Barrick’s release today they explained the reasons for the capital cost increase in the Chilean production. Pascua-Lama is expected to be one of the world’s largest lowest cost mines and once in production is expected to contribute significant free cash flow to the Company for many years to come.

As of the end of September, Thompson Creek reported that progress on Mt. Milligan reflected that engineering and procurement are essentially complete, construction is 65% complete and that the overall project is 79% complete. Owner mining of waste being used in the construction of the tailings storage facility embankment, previously mined by contractors began in August with the commissioning of electric shovel and the rest of the mobile fleet. A key objective of having the concentrator building enclosed prior to winter is essentially complete and will allow for efficient project execution during the upcoming months.

Thompson Creek also reiterated that Mt. Milligan remains on schedule with commencement of commercial production of copper and gold expected in the fourth quarter of 2013. Actual project spending as of June 30, 2012 stands at $757 million Canadian or 52% of the anticipated totaling, with commitments including these actual expenditures totaling $1.2 billion or 83% of the total.

With that I will turn the call back over to Tony.

Tony Jensen

Thanks for the update Bill. So in summary this was a very solid quarter of operational and financial results. We achieved record financial performance even though several operations are not yet at design production capacities. We look forward to the continued ramp-up from Andacollo, Peñasquito, Canadian Malartic, Wolverine and Mulatos. As these project worked towards achieving full production capacity. And with over $1 billion of liquidity we are now well positioned to take advantage of new business opportunities.

And with that operator, we’d be happy to take some questions, if there were some.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Michael Peterson - MLV & Co. you’re line is open.

Michael Peterson - MLV & Co.

Good morning, folks. I had a question on the A&D market, in light of the news form Barack, this morning and I think more broadly cost pressure by the operators. Any perspective you might be able to share on how this industry circumstance might be improving or decreasing your relative negotiating powers you go and look for new additions to the portfolio?

Tony Jensen

So Mike, let me just make sure I understand your question, your question revolves around if there is some expanding capital costs, is there opportunity in those situations for us, is that the nature of your question.

Michael Peterson - MLV & Co.

Yes, the basis of the question is as there are cost pressures and likely corresponding pressures to the balance sheet of operators, they maybe in a position - uniquely this point in the cycle to seek incremental capital in a way that they might otherwise not be motivated to, to consider a royalty stream?

Tony Jensen

You’ve made the point very clearly and succinct and we would echo with that. That these are some very interesting times, for Royal Gold and we are seeing a tremendous amount of deal flow and there’s a really was the premise for us to strengthen our balance sheet that Stefan spoke to and so now we stand with a $1 billion in liquidity and very much interested in doing business, as you mentioned with folks that otherwise may not be motivated to - to look for Royalty financing otherwise.

Michael Peterson - MLV & Co.

In terms of being, I agree with your very well positioned in terms of opportunities that may unfold. In terms of framing our expectations, should we think about that on a multi-quarter basis, should it - certainly I think, by year-end this is kind of - off the table, but should be think of it in terms of a handful of quarters, or more on a rolling 12 months in terms of how you positioned yourselves opportunistically.

Tony Jensen

Like, I just - I can’t simply comment on those details that we may be looking forward to our projector - predict our handicap, that success we might have in corporate activity. So please be patient with us, we do have that liquidity there for a reason and we’re surely looking for a good accretive returns for our shareholders with that.

Michael Peterson - MLV & Co.

Understood, it was worth a try. Thank you for your perspective.

Tony Jensen

Thanks for your question Mike.

Operator

Your next question comes from the line of Stephen Walker with RBC Capital Markets. Your line is open.

Stephen Walker - RBC Capital Markets

Thank you very much, operator. Good morning, everybody. Just wanted to follow up on a couple of things, and I apologize if I missed this in the first five minutes of the call. But the lower tax rate associated with Mt. Milligan. My understanding is that streaming agreement will be structured through an offshore arrangement in Switzerland - if I’m not mistaken, at lower tax rate. If you could remind us again, first of all, what that tax rate is likely going to be on that offshore structure and the secondly just, if you could give us a sense on what the - is that a common tax structure I guess this is what my question is given that similar structures, in Canada are being questioned there by the Canadian tax authorities.

Tony Jensen

Sure, Stephen, thanks for the question, I’ll just turn to Stefan Wenger to answer it directly.

Stefan Wenger

Sure, Stephen, happy to discuss that. I think we’ve stated in the past that the streaming structure that we use for Mt. Milligan, is more tax-efficient to Royal Gold and we’ve structured that through a Swiss holding company, and essentially it’s more than just a Swiss, offshore benefit, it’s really the active nature of - streaming transaction where we’re purchasing and selling [physical] metal under that transaction, effectively that will give us an effective tax rate on that transaction or the income from that transaction, 9% in Switzerland. And we intend to keep those funds domiciled in Switzerland and reinvest it from Switzerland as opposed to bringing those back to the US. Which should drive down our overall effective global tax rate.

This is not an unusual structure for a US company. We’re very similarly structured as a lot of high-tech companies, you see, such as Apple and Google and others. So we’re not unique in this structure, which I think was the second part of your question.

Stephen Walker - RBC Capital Markets

Perfect. And just as a follow-up and again, I know this has been discussed in the past, but this is kind of more to refresh my understanding, should there be a credit or claim on Mt. Milligan, how does - the streaming agreement that Royal Gold has fit within sort of the creditor claim and the status of financial creditor claim should it kind of deteriorate to that level?

Tony Jensen

We have security on the assets and the property of Mt. Milligan, and we are allowing a subordination of that security to a maximum of $350 million for a third party debt that might come in to the project. There is a very very small bit that’s actually drawn, I think - I’m looking at Bill Heissenbuttel, maybe it’s $50 million - even less than that. He says that’s drawn that would stand in front of our security interest on the project. So we’re very well protected there.

Stephen Walker - RBC Capital Markets

Okay. Thank you for that, Tony, and thank you, Stefan.

Tony Jensen

Thank you, for questions.

Operator

Your next question comes from the line of Tanya Jakusconek with Scotia Bank. Your line is open.

Tanya Jakusconek - Scotia Bank

Great, good afternoon, everybody and [Karen]. Just have a question for Stefan and again, I apologize I think I got on this call late. And I was listening to you talk about the effective tax rate for fiscal 2013. And I think you mentioned a 39% effective tax rate is that correct?

Stefan Wenger

That’s correct, Tanya.

Tanya Jakusconek - Scotia Bank

Okay. And would we be staying in that sort of rate Stefan until Mt. Milligan comes in and with that 9% blend obviously they’re not coming down.

Stefan Wenger

We expect that will continue through fiscal 2014 and then as Mt. Milligan production becomes a large, a component of our income stream that effective tax rate would go down.

Tanya Jakusconek - Scotia Bank

Okay.

Stefan Wenger

And that’s the accounting tax rate, our cash tax rate is currently at 34%. We continue to see that tax rate at that level through Mt. Milligan and that the cash taxes also go down once that begins.

Unidentified Analyst

Then just maybe on the M&A front. I just wanted to ask if the focus Tony for you is still gold or precious metals or are you looking at other commodities?

Tony Jensen

Very much focused on gold, Tanya that’s the, that’s where we spend all our time. We have seen some other things, we really haven’t shown a lot of interest in that. Silver would be of interest to us, if there is a good gold strongly associated with it. We are very much dedicating our resources to gold.

Tanya Jakusconek - Scotia Bank

Okay, and would diamonds not be a venture?

Tony Jensen

I just think there is too many good opportunities in the precious metal particularly in the gold sector too, to really stray very far from what we know best.

Tanya Jakusconek - Scotia Bank

Okay, great thank you.

Tony Jensen

Thanks, Tanya.

Operator

Your next question comes from the line of Shane Nagle with National Bank Financial, your line is open.

Shane Nagle - National Bank Financial

Just a quick question obviously you guys have made a strong position financial, just looking at your dividend and divided policy going forward, obviously you have steadily increased here in the past few years. Just wondering what you’d be targeting kind of internally obviously as this cash flow increases with Milligan and Pascua-Lama coming online. The free cash flow is set to jump quite substantially in the next couple of years. We are just wondering internally what your guys target rate is?

Tony Jensen

Thanks for the question Shane and historically you would note that we take that up at our November Board meeting and this November we’ll look at that again with our Board. So we’ll have to differ until they have got a chance to consider that issue, but we are in a growth position. We very much see good things in front of us, we are not into a maturation part of our Company cycle where we expect significantly high dividend spend, nonetheless we are very proud of how we have been able to step that dividend out there every year since 2001. So gives us a few more weeks here and then we’ll certainly make that known.

Shane Nagle - National Bank Financial

Will do. That’s all from me guys. All the rest of my questions have been answered thanks.

Tony Jensen

Thank you, Shane.

Operator

Since we have no further questions at this time, I’ll turn the call back over to Mr. Tony Jensen.

Tony Jensen

Well, thank you very much for joining us today. We are very, very pleased with the quarter obviously and we look forward to updating you, hopefully in a very strong quarter in just a few more months ahead. We appreciate your interest and your support of Royal Gold. Bye for now.

Operator

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

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