Royal Gold Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 8 speakers on the call.

Operator

Hello, and welcome to today's Royal Gold's 2023 Third Quarter Conference Call. My name is Bailey, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'd now like to pass the conference over to Alastair Baker, Vice President, Investor Relations and Business Development. Alastair, please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's Q3 2023 results. This event is being webcast live, and you will be able to access a replay of this call on our website. Speaking on the call today are Bill Heisenbuttel, President and CEO Martin Rothfeld, Vice President of Operations and Paul Livner, CFO and Treasurer Randy Sheffman, General Counsel And Dan Breeze, Vice President, Corporate Development of RG AG are also available for questions. During today's call, we will make forward looking statements, including statements about our projections and expectations for the future.

Speaker 1

These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties are discussed in yesterday's press release and our filings with the SEC. We will also refer to certain non GAAP financial measures, Including adjusted net income and adjusted net income per share. Reconciliations of adjusted net income and adjusted net income per share The most directly comparable GAAP measures are available in yesterday's press release, which can be found on our website. Bill will start with a preview of the quarter, Martin will give some commentary on the portfolio, and Paul will provide a financial summary.

Speaker 1

After the formal remarks, we'll open the lines for a Q and A session. Now I'll turn the call over to Bill.

Speaker 2

Good morning, and thank you for joining the call. I'll begin on Slide 4. Our Q3 was quiet and steady. We turned in good financial results with revenue, operating cash flow and earnings all up compared to the same quarter of last year, and we maintained our strong margins. Revenue was $139,000,000 for the quarter and operating cash flow was $98,000,000 Earnings were $49,000,000 or $0.75 Per share, after a minor adjustment, adjusted earnings were $0.76 per share.

Speaker 2

We made a dividend payment of $0.375 per share for the quarter. We also continued our focus on the balance sheet and repaid a further $75,000,000 of the outstanding balance on the revolver, And we increased our available liquidity at the end of the quarter to about $770,000,000 So far in 2023, we have repaid $250,000,000 of the outstanding balance on the revolver. If you recall, we drew $200,000,000 at the end of December last year to Help fund the second of 2 royalty acquisitions on the Cortez complex. We have now fully repaid that draw, and we've added a cash flowing asset with multi While interest costs have risen recently, we believe that paying debt service costs for a short period There's a worthy trade off for full exposure to long life assets. Barring further business development investments in the short term, we will continue to allocate free cash flow to further reduce the outstanding debt balance.

Speaker 2

Our capital allocation strategy of using non dilutive financing to acquire high quality assets has been effective over the long term, and our commitment to that strategy helps explain why we have the lowest share count in the GDX index. I'll now turn the call over to Martin to provide some comments on the portfolio.

Speaker 3

Thanks, Bill. Turning to Slide 5, I'll give some comments on 3rd quarter revenue. Overall revenue for the quarter was $139,000,000 With volume of 72,000 gold equivalent ounces or GEOs. Our royalty segment contributed revenue of $40,000,000 A 21% increase over the prior year quarter. The positive variance was driven by higher quarter over quarter metal prices And higher revenue from the Cortez legacy zone.

Speaker 3

Also new revenue from both the Cortez CC zone and King of the Hills royalties. This was partially offset by Penasquito, where we recognized no royalty revenue in the quarter due to the production suspension that started in early June. Penasquito is one of our principal properties and is generally an important revenue driver. So we are pleased that the strike has been settled And operations are ramping up, and we look forward to seeing royalty contributions restart before the end of the year. Revenue from our Stream segment was flat compared to last year at $99,000,000 The largest variances were due to higher revenue from I'll turn to Slide 6 and give some comments on notable developments at operations.

Speaker 3

At Mount Milligan, Centerra reported that production in the quarter was impacted by mine sequencing with the mining of some residual oil waste transition material As well as lower recoveries because of elevated pyrite to chalcopyrite ratios from blending low grade gold, High grade copper ore mined in Phase 9 with high grade gold, low grade copper ore mined in Phase 7. As a result, Centerra has lowered 2023 gold production guidance to 150,000 to 160,000 ounces And expects copper production to come in at the low end of the £60,000,000 to £70,000,000 guidance range. Centerra is expecting medium term recoveries for gold and copper to be similar to those seen in 2023 And is undertaking metallurgical reviews to increase recoveries. For 2024, Centerra expects higher levels of gold and similar levels of Also at Mount Milligan, Centerra has launched an asset optimization review to assess Productivity and cost efficiency opportunities alongside mine plan optimization and their goal is to drive incremental operational improvements. We expect the review to be completed in 2024.

Speaker 3

At Pueblo Viejo, equipment designed efficiencies impacted ramp up of the Expansion project during the quarter and gold production was impacted by lower ore grade process due to the mine sequencing As well as lower mill throughput and recovery associated with the commissioning of the mill, Barrick is working to address these issues. Approximately 81,000 ounces of silver were deferred during the quarter, and the total deferred amount was 6 8,000 ounces at the end of September. We don't expect any material deliveries of deferred ounces for the remainder of the year Well, the expansion is commissioned and ramps up to full production levels, and we expect it will take several quarters to deliver the entire At Cortez, Barrick released the results of a conceptual preliminary economic assessment On the Fourmile project, which indicates a potential gold production profile of 300,000 to 400,000 ounces per year In addition to the Cortez complex production profile of 950,000 ounces to 1,200,000 ounces per year over 10 years, Barrick has stated that ongoing drilling demonstrates the potential to increase the grades and size of the project, And work is underway to assess an underground exploration decline to support a pre feasibility study. Both of the royalty acquisitions we completed last year on Cortez Complex provide exposure to this project, and we're pleased to see the And finally, we are pleased to see continued positive developments at smaller assets in the portfolio, including Significant reserves and resource growth at the King of the Hills mine in Western Australia, first gold produced last week The Bellevue Gold Project in Australia, construction progress at Cote in Ontario with first production expected in early 2024, First production expected at Mariorosa in Brazil in the first half of twenty twenty four and strong quarterly production at Rainy River in Ontario And progress towards first oil production in the second half of twenty twenty four for the new underground main zone.

Speaker 3

I'll now turn the call over to Paul for a review of our financial results.

Speaker 4

Thanks, Martin. I'll now turn to Slide 7 and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended September 30, 2023 to the prior year quarter. Revenue was up 5.5 percent to $139,000,000 for the quarter. As Martin mentioned in his remarks, contributions from the new Cortez royalties And the ramp up at Khoemacau were large drivers to our increased revenue this quarter.

Speaker 4

Metal prices also contributed to the increase in our revenue this quarter as the price of gold was up 12%. Silver was up 23% and copper was up 8%. Gold remains the dominant revenue source making up 78% of our total revenue for the quarter, Followed by silver at 11% and copper at 10%. At 78%, Royal Gold has the highest gold revenue percentage compared to major peers in the royalty and streaming sector. Turning to Slide 8, I'll provide a bit more detail on specific line items.

Speaker 4

G and A expense increased to $10,000,000 and was due to higher corporate costs And higher employee related costs, which include non cash stock compensation expense. While we are not directly exposed to inflationary pressures that have impacted operating costs In the mining sector, we have seen some inflation impact on our cash G and A. Although we did see an increase over the prior year, our margins remain high. And with a small employee count and a focus on cost control, our cash G and A costs remain low at about 5% of total revenue. Our DDA expense increased to $40,000,000 from $38,000,000 in the prior year.

Speaker 4

On a unit basis, this expense was $5.58 per GEO for the quarter compared to $4.97 per GEO in the prior year. The higher overall D and A per GEO this quarter was a result of revenue mix. Specifically, we had higher overall revenue contributions from our Cortez royalties in the current quarter, which royalties carry a higher average depletion rate. In addition, we had no revenue from Penasquito, which has one of our lowest depletion rates in the portfolio. These two factors resulted in the higher DD and A per GEO for As there were no other significant changes to our depletion rates during the period.

Speaker 4

Provided that Penasquito can return to full capacity by the end of the 4th quarter, We are currently forecasting that our DD and A per GEO will be near the upper end of our previously provided guidance range of $4.90 to $5.40 per GEO for the Q4. Interest expense decreased to $7,300,000 for the quarter from $8,800,000 in the prior period. The decrease was due to our continued focus on debt servicing during the quarter as we had lower average amounts outstanding under our revolving credit facility when compared to the prior year. The all in interest rate for borrowings under our credit facility was 6.7% at the end of the 3rd quarter. Tax expense for the quarter was $11,000,000 resulting in an effective tax rate of 17.8%.

Speaker 4

This compares to a similar tax expense of $11,000,000 and an effective tax rate of 19.3% in the prior year period. We continue to expect our effective tax rate, absent discrete tax items, to be in the range of 17% to 22% for the Q4 full year. Net income for the quarter was up over the prior year to $49,000,000 or $0.75 per share. After adjusting for a small change in the fair value of equity securities, our adjusted net income was $50,000,000 or $0.76 per share, Which is 5.5% higher than our adjusted net income in the prior year quarter, up $47,000,000 or $0.71 per share. Our operating cash flow was strong again this quarter at $98,000,000 compared to $95,000,000 in the prior year.

Speaker 4

The The increase during the quarter was a result of higher royalty revenue, primarily from the additional Cortez interest we acquired in 2022. I will now turn to Slide 9 and provide a summary of our financial position at the end of the quarter. During the quarter, we repaid $75,000,000 on our revolving credit facility And we reduced the amount drawn to $325,000,000 As Bill mentioned, we have repaid $250,000,000 of our revolver balance so far this year. And in keeping with our approach to capital allocation, we expect to repay the remaining $325,000,000 before the end of 2024, Absent significant business development activity and its cash flow allows, the $675,000,000 undrawn revolver capacity, Combined with $93,000,000 of working capital provided us total available liquidity of just under $770,000,000 at the end of the quarter. That concludes my comments on our financial performance for the quarter.

Speaker 4

And I will now turn the call back to Bill for closing comments.

Speaker 2

Thanks, Paul. We had a solid quarter and our portfolio generally performed well. However, we did see short term production delays and interruptions at a small number of our larger assets. As a result, we expect that total sales for 2023 may come in The low end of or slightly below our initial April sales guidance of 320,000 to 345,000 GEOs. The main drivers for this are well known, and they are: 1, the slower than anticipated ramp up of the planned expansion of Pueblo Viejo And to the 4.5 months suspension of operations at Penasquito.

Speaker 2

We hope that these issues are behind us now, and we are pleased that Newmont has restarted operations at Penasquito, And we feel confident that Barrick is working to address production levels at Pueblo Viejo. Finally, I want to comment briefly on the metal and jurisdictional mix of our portfolio, both of which are important differentiators for Royal Gold. Gold has remained strong this year with strong central bank demand And it's performed well despite steady increases in interest rates. As Paul highlighted, 78% of our revenue Came from gold this quarter, which is the highest among our large cap peers. And jurisdictionally, the 2 most significant revenue sources for this quarter were Canada and the U.

Speaker 2

S, which combined provided about 53% of our revenue. We seek to acquire precious metal assets in safe jurisdictions operated by high quality counter And we believe the transactions we've completed over the past couple of years will continue to enhance our shareholders' exposure to gold revenue in low risk jurisdictions. Operator, that concludes our prepared remarks. I'll now open the line for questions.

Operator

Thank you. Our first question today comes from the line of Jackie Prabowski from BMO Capital Markets. Please go ahead. Your line is now open.

Speaker 5

Thanks very much for taking my questions. I have a couple. So maybe I'll start with a quick one just to get out of the way. On Penasquito, you mentioned that the mines restarted after the strikes. Can you just remind us what, if any, of the lag you expect to see between the mine restart and Sales or production to your credit?

Speaker 2

Yes, Jackie, this is Bill. The Penasquito royalty, we get paid on provisional and final settlement. So if either of Those occur in the Q4, we should receive revenue. There isn't a delay that we have in some of the streams. What I can't tell you, and Martin can interject if he disagrees, is how fast they're going to start up.

Speaker 2

That's just an unknown for us.

Speaker 5

Yes. That's fair. But no, I appreciate that. I guess, it's the difference between a royalty and a stream in kind where you're accepting delivery, right? This is A little quicker.

Speaker 2

It is quicker, but I would say the delays in the streams are unique to 2 contracts.

Speaker 5

Thank you. If I can ask, I think this is probably the first opportunity I had to ask you about the press release you put out in September about the ACG Transaction. I've read through the disclosures that ACG had on its website as well as your disclosure. And Maybe I'm not enough of a legal expert, but if you can maybe just simplify it a little bit. Is that opportunity Completely off the table for you now or is there still like I know it's obviously delayed from the original timeline, but is there still an opportunity At some point that could rematerialize?

Speaker 2

Well, the original transaction has terminated. Our involvement Based on the satisfaction of certain conditions precedent, those conditions were not satisfied. The assets still remain with the seller. To say it could have come back yet, it might come back, but we're not going to know that for a period of time.

Speaker 5

Okay. No, that's helpful. The disclosures that ACG had on its website, It sounded like they were sort of still working on it, but I was I don't know. It's just my poor reading of the text, I think.

Speaker 2

I was having a hard time understanding

Speaker 5

exactly what they're

Speaker 2

Yes. As we sit here today, what I would say is just assume there is no transaction there.

Speaker 5

Okay. That's helpful. Thanks. And maybe just on like a bigger picture on that point, Bill. What is your outlook for new royalty or stream transactions right now?

Speaker 5

Is there a lot sort of In the pipeline, is there a lot that you guys are kind of working on? Or how optimistic are you at the moment?

Speaker 2

I'm always optimistic. We're always busy from a business development perspective, but maybe if I can get Dan to chime in here And give you his perspective as Head of our Business Development team.

Speaker 6

Sure, Bill. Hi, Jack. I hope you're doing well. Thanks for the question there. Yes.

Speaker 6

I agree with Bill. It's been quite busy for us, Jackie. And I think where we're seeing a lot of the activity right now is in, Let's call

Speaker 2

it the

Speaker 6

sub $100,000,000 range, so more in the royalty side. And I think that's just a function of Where the equity markets are right now, as you know, it's really difficult for smaller companies to raise equity. And so they're talking to groups like ours. Maybe that will change with goal to 2,000 here or so, and maybe that But right now, they're very interested to talk to a group like ours. So we're quite active on that side.

Speaker 6

We're looking at geology. We're looking at the land packages. Our geologists are quite busy, and we're just trying to look for good investments with interesting upside. So that's really where a lot of the focus is right now. And If you look at what Martin talked about in the comments there and the various Royalties that are just starting to produce, we've had good success with these smaller royalties.

Speaker 6

So we'd happily add more of those in the portfolio. But we always talk, Jackie, about this $100,000,000 to $300,000,000 range. That's still very much intact. And so we do see opportunities in that range. It's more development type project financing that we're seeing and more on the gold side as well.

Speaker 6

So overall, quite busy for us right now.

Speaker 5

That's great. I mean, it helps yes, absolutely. It's totally understandable in light of the relatively high cost of other sort of project financings that yours would be fairly attractive, but Also, if equity and debt are unavailable, it makes it difficult to do those bigger streams. So I appreciate that. That's helpful color.

Speaker 5

Thanks, Dan, and thanks, Bill.

Operator

Our next question today comes from the line of Brian MacArthur from Raymond James. Please go ahead, Brian. Your line is now open. Good morning. My question has to do with the deferred Silverstream at PV.

Operator

And can you just

Speaker 7

remind me, when we finally get this up and running, how this trigger works? Do you get back I mean once they get the fixed rate 70% and it works, you're entitled to 75% Of the silvers, I understand it. But to catch up, do you go right and get 100% of the silver when the trigger works? Or is there a Gale, in function, because you made the comment it would take a number of quarters going forward. I mean, any details you could give us on that would be helpful.

Speaker 2

Yes, Brian. Well, the thing that sticks in my mind is I believe and someone on the team can correct me. So recovery goes above somewhere around 52.5%. We start to recoup the silver. So it is Gradual, we don't jump to a given number.

Speaker 2

The reason there's deferred silver is we could not demand from Barrick More than 100 percent of their share of the silver. So it's not as though we can go beyond that. But that's really to me, that's the number I'm looking for. If the recovery gets above that 52.5, We'll start to see it. And I think at that point, we can probably do a better job of helping you figure out when it might come in.

Speaker 7

Okay. But you do get like technically, doesn't stream right, you get 75 You can't go over 100, but the minute you get the trigger, then you can go and take you can basically sweep all the silver that comes out any quarter theoretically. Is that fair?

Speaker 2

Theoretically, their share.

Speaker 7

Okay. Right, their share. Okay. I think I've got that. It's just I've always because I noticed last year you did get some you did catch up some and then it went the other way.

Speaker 7

So I was just trying to figure out exactly because it is starting to Build up to be a significant amount right now. So I was just trying to figure out how fast that would come out going forward. Great. Thanks very much, Bill. That was my questions.

Speaker 1

Thanks, Brian.

Operator

Thank you. There are no additional questions waiting at this time. So I'd like to pass the call back over to Bill Heissenbuffel for any closing remarks.

Speaker 2

Well, thank you very much for taking the time to join us Today, we certainly appreciate your interest in Royal Gold, and we look forward to updating you on our progress during our next quarterly call. Take care.

Operator

This concludes today's conference call. Thank you all for your participation. You may now

Powered by Quartr
Earnings Conference Call
Royal Gold Q3 2023
00:00 / 00:00