Denver Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Royal Gold Inc earnings conference call or presentation Thursday, August 6, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Karli Anderson Royal Gold, Inc. - VP, IR * Tony Jensen Royal Gold, Inc. - President and CEO * Bill Heissenbuttel Royal Gold, Inc. - VP, Corporate Development and Operations * Stefan Wenger Royal Gold, Inc. - Treasurer and CFO ================================================================================ Conference Call Participants ================================================================================ * Andrew Quail Goldman Sachs - Analyst * John Tumazos John Tumazos Independent Research - Analyst * Cosmos Chiu CIBC World Markets - Analyst * Tanya Jakusconek Scotia Capital - Analyst * John Doody Gold Stock Analyst - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to Royal Gold's fiscal 2015 fourth quarter earnings conference call. All participants will be in the listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Karli Anderson, Vice President of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Karli Anderson, Royal Gold, Inc. - VP, IR [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, and welcome to our discussion of Royal Gold's fiscal 2015 -- fourth quarter 2015 results. This event is being webcast live, and you will be able to access a replay of this 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 and Operations, and Bruce Kirchhoff, Vice President, General Counsel and Secretary. Tony will open with an overview of the quarter, followed by Bill Heissenbuttel with a corporate development and operational update, and then Stefan Wenger will provide a financial update. After Management completes their opening remarks, we'll open the line for a Q&A session. 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. Now I will turn the call over to Tony. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [3] -------------------------------------------------------------------------------- Good morning, and thank you for taking time to join us. We're pleased to update you this morning our activities over the last few months, which have been very busy at Royal Gold, and just last night, we issued three press releases associated with our financial and operations results, a significant new piece of business at the Pueblo Viejo mine and the addition of Jamie Sokalsky as a new Director of Royal Gold. I'll begin to discuss all of those issues on slide 4. We had another solid quarter and a record fiscal year of operational and financial results. Our operation -- our record operating cash flow of $192 million in fiscal 2015 caps five years of strong performance. As you can see, this was accomplished during a deteriorating gold price due to the volume expansion we experienced on the back of strong performance from Mount Milligan and Penasquito. On slide 5, we've shown you our growth and volume to date. Fiscal 2015 net gold equivalent ounces, or GEOs, for approximately 200,000 ounces is a new record for Royal Gold and represents and 8% compounded annual growth rate since fiscal 2010. Bill Heissenbuttel will discuss operating performance in more detail in a moment. Turning to new business on slide 6, in the last few months, we've added four new streams to our portfolio, which are expected to have a meaningful impact on our future production profile. These include streams out of Pueblo Viejo, Rainy River and Andacollo mines, as well as a stream over all the Golden Star Resources properties in the Ashanti Belt in Ghana. You have likely heard me say on several occasions that we have never been busier, and now you can see why. The strategy surrounding these acquisitions was put in place years ago. In 2012, we positioned the Company financially to take advantage of opportunities. When the downturn in the gold price occurred in late 2012 and early 2013, we entered into that new price environment with financial strength. Weaker opportunities came to us early in the lower gold price environment, which required us to be patient. As this price environment persisted, higher quality and cash flowing or near cash flowing opportunities started to appear. This coupled with what we believe to be the right entry point in the commodity cycle has resulted in our decision to reinvest in our business. On slide 7, I'd like to highlight the strategic rationale for the new investments we've made over the last few weeks. The first is Pueblo Viejo. With more than 1 million ounces of gold produced -- production annually, first-quartile costs and 18 years of initial mine life, Pueblo Viejo is truly a world-class gold mine and rare opportunity for Royal Gold. I just mentioned initial mine life, because the project has substantial and high-quality resourcing, consisting of 6.3 million ounces that we believe will likely find their way into production at some point in the future. The Rainy River project fits well into our high-quality portfolio and meets all of our criteria for new investments with nearly 4 million ounces of gold reserves, continued expiration upside and projected cash costs below $600 per ounce. We are particularly pleased to have another piece of business in Canada and to partner with New Gold, a company that is well known for its development track record and operational expertise. At Andacollo, we are eager to expand our business in Chile, and in a mine where Royal Gold and Teck have enjoyed an excellent relationship for several years. Our new stream gives us a larger interest in gold from Andacollo for a longer period of time and increases our optionality to new discoveries through an expanded area of interest. Finally, we closed our stream transaction with Golden Star in late July to fund development of the Wassa and Prestea underground projects, which are expected to transform Golden Star into a lower-cost producer. While development is under way, our stream covers existing production from surface operations. Not only does this investment provide immediate cash flow to Royal Gold, but Golden Star has one of the largest land packages in the prospective Ashanti Belt, offering what we believe is significant expiration option. Turning to slide 8, we thought it would be interesting to consider the points at which Royal Gold has made investments over the last five years. In any business, there is a time to be active in reinvesting and a time to be patient. As the chart shows, we have clearly considered these investment seasons for our major acquisitions. Turning to slide 9, you have also heard us say that one of our top priorities is to further diversify our revenue stream now that Mount Milligan is contributing meaningfully. Three of the four new pieces of business will result in immediate cash flow and will further diversify Royal Gold's portfolio (technical difficulty) assets. The chart here illustrates how we expect these new investments will impact our production profile. Remembering from a few slides back, our total net GEO production in fiscal 2015 was about 200,000 ounces, which is the bar on the left. The additions of these new streams have the potential to deliver new volume of over 125,000 ounces when they have reached their full annual run rates. I'd also like to point out that within the existing portfolio, Mount Mulligan still has 15% to 20% of additional capacity to add before reaching design throughput. Rubicon Minerals has just begun production in Phoenix, and we're just now starting to see some of those ounces. And Penasquito's metallurgical enhancement project offers additional sources of growth as well. Now, I'll turn the call over to Bill. -------------------------------------------------------------------------------- Bill Heissenbuttel, Royal Gold, Inc. - VP, Corporate Development and Operations [4] -------------------------------------------------------------------------------- Thank you, Tony. On slide 10, I'd like to start with Pueblo Viejo. The Pueblo Viejo mine is expected to be another cornerstone asset for Royal Gold and represents the attractive combination of size and cost competitiveness. On a 100% basis, Pueblo Viejo's gold and silver reserves of 15.5 million ounces and 97.2 million ounces, respectively, place the mine amongst the largest operating gold assets in the industry. And by the measurement of production and cost of production, it is the only gold mine with a projected near-term production of over 1 million ounces at an all-in sustaining cost of less than $700 per ounce. The resources at the mine are of a very high quality, and their conversion is limited more by infrastructure constraints than drill spacing. Our due diligence team, which consisted of experts in a variety of fields, spent considerable time with the processing facilities and were impressed by the progress made by the site team in terms of optimizing a complex operation during the mine's relatively short operating history. Attributable production for 2015 is estimated to be between 625,000 to 675,000 ounces and an all-in sustaining cost of $540 to $590 per ounce, and our stream will apply to gold ounce production from July 1. On slide 11, just in terms of the stream, the investment of $610 million, which is split roughly by value two-thirds, one-third between gold and silver, will entitle Royal Gold to purchase 7.5% of attributable gold production and 75% of attributable silver production at an ongoing price per delivered ounce of 30% to 60% of the spot price at the time of delivery. Upon delivery of just less than 1 million ounces of gold and 50 million ounces of silver, the stream percentages will decrease by 50%. The transition from 30% to 60% in the cash price is intended to occur at a time when the (inaudible) at the mine are lower and cash flow might be less available for deliveries. The structure also front ends more of the return of our investment, and as Barrick noted this morning, we are also paying a higher cash price at a time when the exploration upside becomes more important to the operator, so this structure has a mutually beneficial aspect to it. Turning to Rainy River, this is a project we have followed closely for a number of years, and we have consistently ranked it as one of the more attractive investment opportunities. The project meets our investment criteria for development projects in terms of the quality of the owner, upside, cross-competitiveness and jurisdiction. With 3.8 million ounces of gold in reserves, this 21,000-ton-per-day operation is expected to produce 325,000 ounces of gold per year for the first nine years, with stockpiled material providing a 14-year life in total based on current project parameters. Cumulative capital spending on the project through the end of June was $119 million, and New Gold had $760 million remaining to be spent to complete the project. A mid-2017 startup is anticipated. There are an additional 2.9 million ounces of gold and resources that we have not considered in our valuation approach. The all-in sustaining costs for the project are currently estimated to be $658 an ounce, so while Rainy River might not have Pueblo Viejo's production scale, it could be a similarly cross-competitive project. This stream applies to 6.5% of gold production and 60% of silver production, although the silver is a relatively small value driver in this transaction. In addition to the $175 million Royal Gold has agreed to invest, of which $100 million has been paid and $75 million will be paid upon completion of 60% of the project spend, we will also pay 25% of the spot price for gold and silver at the time of delivery of the refined metal. And as is typical for our transactions, the stream percentages will reduce by 50% after the current reserves have been processed. Turning to slide 13, at Andacollo, this is an operation that we have known for over five years and an operator with which we maintain an excellent relationship. The 1.6-million ounce reserve will support production for over 20 years. In the transaction, we were able to extend the area to which the stream applies to a one-and-a-half kilometer area around the pit area and a 900,000-ounce threshold, so the street step-down now covers all of the current reserve. In analyzing the transaction, we focused on the cost competitiveness of the operation. Gold represents a potential by-product credit for the copper mine of between $0.30 per pound and $0.35 per pound, but the new stream transaction only adds $0.03 to $0.04 per pound in incremental cash costs when compared to the mine burdened by the previous royalty. On slide 14, we are very pleased to be involved in the financing of Golden Star's Wassa and Prestea underground projects, which are expected to facilitate the transformation of Golden Star from a larger, higher-cost mine company to a smaller producer of higher-quality ounces. Reserves are 1.9 million ounces as currently defined, but that excludes the resource of 600,000 ounces of Prestea underground on a project that is expected to see a completed feasibility study during this quarter. Total M&I resources at both projects are over 6 million ounces, and we like the upside resource potential at both projects. With the benefit of existing infrastructure, the costs to complete these projects is relatively modest, the returns to the Company are high, and initial production from these new underground sources is expected to occur at various points in 2016. The first (inaudible) recently occurred at Wassa, and permits for the Prestea south open pit oxide project were also recently received. We have invested $40 million of the $130-million stream and funded the US -- the $20-million term loan as well. The remainder of this stream will be invested quarterly over a little more than a year. Initial stream deliveries of 8.5% of gold are effective. And in addition to the production from this quarter, we expect some catch-up deliveries of gold related to the second quarter based on our agreed stream effective date. In addition to our advanced payment, we will initially pay 20% of spot for each delivered ounce. Turning to slide 15, with respect to the operations, we have provided a quarterly waterfall comparison of our key producing properties to the immediately-prior quarter and the same quarterly period last year. The key items to note on the prior-quarter comparison is the slight reduction of Mount Milligan, which is really due more to the record sales of the prior quarter that resulted from the settlement of higher gold grade concentrate shipments in that period, and also Cortez, where we expect to see quarter-over-quarter reductions in royalty ounces during calendar 2015. On the same basis, we saw Andacollo's ounces increase for the first time in a number of quarters, and Penasquito benefited from higher-than-expected ore grades, which contributed to much higher production in the most recent quarter. On a comparable quarterly period relative to fiscal 2014, the Voisey's Bay reduction is attributable in part to our adoption of a cash-based approach to revenue, while the increase of Mount Milligan reflects that operation's continued ramp up. On slide 16, in terms of comparing six-month results to the current year-end forecast provided to us by certain operators, we point you to the Cortez figure, where we have already seen over 80% of the royalty production forecast for this year as of the end of June, and we should see lower production to our interest in the latter half of this year. In addition, although Penasquito had a very strong performance in the last quarter, it has not prompted the Company to alter its 2015 guidance range. Turning to slide 17, with respect to a few key operating assets, Mount Milligan made progress in its mill throughput and gold recoveries during the quarter. After a slow April, the mine achieved May and June throughput of about 50,000 tons per day, or 83% of capacity, and gold recoveries were almost 73% for the quarter. The Penasquito produced record gold production due to a 68% increase in ore grades compared to the same period last year, and this included an 18.5% positive model reconciliation in one of the mining phases. Gold Corp also announced it completed the pilot plant construction and commenced pilot plant testing for its (inaudible) project. At Phoenix, Rubicon has made its first gold pour and its first delivery to Royal Gold. Mill commissioning is continuing with the processing of low-grade mineralized material, and the Company is focused on mining its first two trial [starts]. Now I'll turn the call over to Stefan. -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [5] -------------------------------------------------------------------------------- Thanks, Bill. I'll start on slide 18. Today, I will briefly summarize the financial results we reported this morning, and then I'll spend a bit of time discussing our financial liquidity. For the fourth quarter, we reported earnings of $74 million, an increase of 5% despite a 7% decline in the gold price compared to the fourth quarter of 2014. The revenue increase was driven by a 13% increase in GEOs to 61,700, from 54,500 in the prior year. Our operating cash flow increased 37% to $44 million. Our net income per share for the fourth quarter was $0.23, compared to $0.26 in the fourth quarter last year. This quarter, we recorded a $4.1 million, or $0.06 per share, in additional deferred income tax expense due to a tax rate change from 10% to 12% in Alberta, Canada, where certain of our Canadian subsidiaries are domiciled. This resulted in an effective tax rate of 30% for the quarter. Without this change in Alberta, our effective tax rate for the fourth quarter would have been about 11%, and our EPS would have been $0.29 per share. For the full fiscal year, we report revenue of $278 million, which was driven by an increase in GEOs to 227,000, compared with 183,000 in fiscal 2014. The resulting 17% increase in revenue was notable in an environment where the price of gold decreased by 6% year over year. We report strong operating cash flow of $192 million, an increase of 31% over fiscal 2014. Our net income for the year was $52 million, or $0.80 per share. Net income for the year was impacted by the Wolverine impairment charges that we took in the second quarter, which impacted our earnings by $31 million, or about $0.37 per share. We paid out $56 million in dividends during fiscal 2015, which represented a payout ratio of 29% of operating cash flow. This dividend represents the 14th year of increasing dividends paid to our shareholders. You'll see on slide 19 that our liquidity position was nearly $1.4 billion on June 30th. While we've been very active over the last several weeks, we are still favorably positioned. Netting out our commitments for the next 12 months leaves us with about $350 million in remaining liquidity. That does not include the operating cash flow that we expect to generate over the next 12 months. I'll point out that we generated just under $200 million in operating cash flow in fiscal 2015, and that is before the benefit of any of the new streams we've added recently along with the continued ramp-up of Mount Milligan that we expect during fiscal 2016. And with that, I'll turn the call back over to Tony. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [6] -------------------------------------------------------------------------------- Thank you, Stefan. Now, to wrap up on slide 20. Just as we positioned the Company in 2012 with financial strength ahead of the decline in gold price, we are now positioning the Company for more favorable times in the gold business with these recent transactions. When considering new opportunities, we will always preserve price and reserve optionality, just as we have done in each of our recent transactions. Price optionality comes when making investments at the right entry point, and we think that time is now. With regard to reserve optionality, it has been our experience that good mines get better, and having a foothold in the world-class asset like Pueblo Viejo early in its mine life is exactly where we want to be. We are certainly proud of the quality of our portfolio, but on a personal note, I am equally pleased to be surrounded by a high-caliber and talented Board and staff. As you can imagine, there haven't been many days off in the last several months, and I would like to publicly thank them for their dedication to the Company. In closing, and speaking of quality, I'm delighted to announce that Jamie Sokalsky will be joining our Board at our next regularly-scheduled meeting. Jamie needs little introduction in the gold sector, having served as the prior CEO of Barrick, topping off a very successful career in the business. We are looking forward to his contributions as we continue to pursue growth, quality and opportunities. With that, operator, we'd be happy to take any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- We will now begin the question-and-answer session. (Operator Instructions). Andrew Quail, Goldman Sachs. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [2] -------------------------------------------------------------------------------- I suppose this is a high-level question, but it has a few parts to it, and I think it's -- Stefan you can sort of jump in. As far as that capital allocation, you guys have done an excellent job, I think, from my perspective over the last few months, or this quarter, and this is the time you want to be, I suppose, allocating capital, especially given some of the Company's financial positions. You outlined, I think on slide 19, you've got $350 million around that for total liquidity without free cash flow. You actually go into net debt going forward. Is there a level that you guys are comfortable with net debt? If there was another deal that came, would you issue equity at this price? And what is your cost of debt, one, and sorry to finish off -- I know this is a lot of questions, but what's the minimum amount of cash you want to hold on your balance sheet? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [3] -------------------------------------------------------------------------------- Andrew, good day, and thanks for the question -- the multiple questions there. Let me just start. This is Tony. We're not interested in issuing equity at this kind of market environment, so we're quite pleased to have available reasonable lines of credit, and I believe we're just a shade below 2% on our credit facility, so we're quite happy with that. With regard to how much leverage we might put on the balance sheet, I think if we -- we certainly want to stay below 3X as far as a coverage ratio. I think this puts us, Stefan, where -- just about around -- a little under 2 or right at 2? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [4] -------------------------------------------------------------------------------- Yes, on a pro-forma basis, we'd be about at net 2 times levered, assuming we draw about $300 million on the credit facility to fund the Barrick acquisition. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [5] -------------------------------------------------------------------------------- Andrew, there was another piece to your question that you had that I was reserving for Stefan, and I've forgotten the last bit of it. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [6] -------------------------------------------------------------------------------- The cash -- how much cash you guys -- -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [7] -------------------------------------------------------------------------------- We've typically said that we'd like to keep a minimum amount of cash in the Company of about $100 million, Andrew. That's not a hard and fast number, as you can imagine. We don't have a lot of toss in this Company. We have our staff, and we have an office here, so we're a lot different than an operating company in that we can operate with a pretty lean cash balance. But we are still in the business of looking at new deals as well, so we'd keep a reasonable amount of cash on the books. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [8] -------------------------------------------------------------------------------- Okay. I mean, I think all these deals you guys have done, to me look very accretive, and I suppose the other one -- the one I sort of want to talk about is Milligan, and it looks like it's going well. Not so much there, but is there -- for you guys, does it worry you that -- not just the gold prices are a bit more like a commodity sell-off broadly, and your partner there has all the debt -- can you just comment? Have you been asked to put any more money there, and also, if not, do you sort of -- are you comfortable that if there was sort of any sort of adverse, I suppose, financial conditions put towards these guys legally, that you guys would actually get your stake back in that Milligan? Is there any precedence to it in streaming? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [9] -------------------------------------------------------------------------------- Andrew, again, lots of questions in there -- let me pull them apart just a bit. First of all, we are very pleased with our position at Mount Milligan, and it is performing wonderfully. You've given me the opportunity to say that we almost have $100 million back of our $781-million investment, and we've just been there a few years, a couple years, so it's providing us with a fantastic amount of return at the present time, and that's really indicative of the asset itself. We very much appreciate partnering with Thompson Creek. They've been a fabulous partner to be with. We do recognize that they have issues of debt that they're addressing, and I think that's probably -- if you talk to Thompson Creek, they'd say it's their top priority, or one of them, and they'd -- you'd have to speak directly to them to understand exactly how they plan to meet their obligations there. But for us, we look to the asset, and when we look at the asset, it's very low. It's certainly lower -- the low half of the worldwide production in copper. I think it's just a little over $1 a pound on an equivalent basis, and that's after our gold is taken out of it, so it's a very, very strong producer, and any kind of liquidation event or anything like that, we'd expect the asset to continue to produce. It only makes sense, because it's making money, so we feel quite good from that standpoint. And then, finally, we do have different structures for different pieces of business, and there we have a secured position should we need it, but really our interest is maintaining the stream through any kind of an issue, and that's where we would focus. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [10] -------------------------------------------------------------------------------- Would you put in more money there, Tony, if they had to (inaudible)? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [11] -------------------------------------------------------------------------------- Well, I'm happy to say we haven't been asked, and the project still has capacity. We like the project. You can see it has capacity, because it's still a very low cash cost producer. But as I've said many times with this very same question, we will be opportunistic and we can't speculate on some kind of situation that might come up in the future, but we'll be very much willing to listen to any ideas that might come our way. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [12] -------------------------------------------------------------------------------- Okay. Thanks very much, and congratulations on a good quarter. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [13] -------------------------------------------------------------------------------- Thank you, Andrew. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- (Operator Instructions). John Tumazos, John Tumazos Independent Research. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Independent Research - Analyst [15] -------------------------------------------------------------------------------- Congratulations on the New Gold and Barrick deals. If you had an opportunity that was a large-sized transaction, let's say $500 million or $1 billion, that offered you a 15% of 20% return -- companies are having a hard time getting money together. How would you do it in terms of debt and equity, or would you syndicate a little bit of it and just take a piece of it? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [16] -------------------------------------------------------------------------------- So I think what the nature of your question is, is if we had something in front of us we could not turn down, what would we do. Is that the nature of the question? -------------------------------------------------------------------------------- John Tumazos, John Tumazos Independent Research - Analyst [17] -------------------------------------------------------------------------------- That's a more articulate way. Thank you, Tony. You could be an analyst. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [18] -------------------------------------------------------------------------------- John, I think what we would do is, first of all, we would make sure that we're within our capacity of those debt limitations that Stefan and I just spoke of a moment ago. We are not interested in putting our Company into a position where some of the other folks with a broader commodity cycle are experiencing right now, so we want to protect ourselves in that fashion. And yes, there is some more debt capacity that we could put in. Again, we're equity shy, but we do have a number of different individuals, entities -- I don't know how to phrase that -- that have expressed interest in working with Royal Gold. So indeed, at the kinds of returns that you posed your question with, there would be a number of companies or entities that would love to have a piece of that business. So, again, I can't speculate, but we are still interested in being active in the business, so your question is a fair question. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Independent Research - Analyst [19] -------------------------------------------------------------------------------- If I could follow up, in ancient times, when I learned accounting, coverage meant pre-tax income plus interest expense divided by interest expense. Is your coverage total debt-to-EBITDA that you're referring to? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [20] -------------------------------------------------------------------------------- Hey, John. This is Stefan. We look at that on a net debt-to-EBITDA coverage ratio basis. That ties into how our credit facility looks at it, as well. -------------------------------------------------------------------------------- John Tumazos, John Tumazos Independent Research - Analyst [21] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Cosmos Chiu, CIBC. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [23] -------------------------------------------------------------------------------- A few questions here -- maybe, first off, again, on the balance sheet. I think I can sort of work this out myself, but I'm just trying to see if you can provide me with, as of today, how much cash and how much have you drawn on your line of credit. I believe, based on my calculation, you might have already needed to have drawn on your line of credit. Am I correct? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [24] -------------------------------------------------------------------------------- Hey, Cosmos. This is Stefan. I can walk through that. Today, we have about $400 million of cash on the balance sheet. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [25] -------------------------------------------------------------------------------- $450 million. Okay. -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [26] -------------------------------------------------------------------------------- $400 million today. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [27] -------------------------------------------------------------------------------- $400 million. Okay. -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [28] -------------------------------------------------------------------------------- And that's after the Andacollo stream acquisition, after we've received proceeds on the sale of our former royalty at Andacollo, and also after funding Golden Star and the first piece of Rainy River, so today $400 million on the balance sheet, so we have not drawn on our credit facility. The Barrick deal on Pueblo Viejo is expected to close in the next 90 days, and depending on what our cash levels are at that time based on our continuing strong cash flow, we would look to draw on our credit facility an amount around $300 million to complete that. At the same time, Cosmos, as you know and I've told you a number of times, we constantly evaluate our capital structure in light of the needs of the business, and I won't stop that work as we go forward as well. But today, we feel like we're in a pretty good situation with respect to our funding needs. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [29] -------------------------------------------------------------------------------- Okay. And as you mentioned, Stefan, that was funding for Golden Star. Can you remind me -- that's $40 million for Golden Star, right? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [30] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [31] -------------------------------------------------------------------------------- And then for New Gold, what was the first one? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [32] -------------------------------------------------------------------------------- Let me just back up, and I'll walk through each piece of it. We invested $525 million in the new Andacollo stream, but then we received proceeds of $345 million, or $300 million net of taxes, on the sale of Andacollo's royalty, our former royalty. We then invested $100 million in the Rainy River stream, and we invested a total of $60 million into the Golden Star structure -- $20 million was a loan, and $40 million went to the stream. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [33] -------------------------------------------------------------------------------- Great. -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [34] -------------------------------------------------------------------------------- So that's what we've funded to date, since June 30th. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [35] -------------------------------------------------------------------------------- Maybe switching gears a little bit, on the Pueblo Viejo stream -- congrats again on getting that done. Looking at some of these trigger points here, I guess one trigger point is the 990,000 ounces. That's when your percentage comes down in terms of contribution. Based on current reserves today and my working through the calculation, it doesn't seem like, based on the current reserves, you can actually get to 990,000 ounces. So based on that perspective, am I safe to assume that you've sort of factored in some upside to it in your calculations? And more specifically, I know Barrick had talked about potential expansion at Pueblo Viejo. Have you factored that in? Although, I know that that's actually quite preliminary. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [36] -------------------------------------------------------------------------------- Yes -- Cosmos, Tony here. Yes, we have. We rarely do factor in a large component of resources. In this case, I'd just point you to the fact that they're very high-quality resources, as both Bill and I said in our prepared remarks, and in fact the -- a lot of those resources were in the reserve book just a few years ago. And Barrick had talked this morning in their press -- in their conference call that they're looking to extend the mine life by expanding the tailings facility and has the potential to convert a lot of those resources into reserves (technical difficulty), so it's -- for us, we look beyond just the reserves there to get our return because of the quality of the resource in this particular case. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [37] -------------------------------------------------------------------------------- Of course. And maybe -- I don't know how much you can comment on this, Tony, but was it a competitive process whereby you acquired the stream? And then maybe a follow up on that as well -- was there an opportunity to go beyond the 7.5% that you ultimately negotiated on? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [38] -------------------------------------------------------------------------------- Well, the former question first. In any kind of transaction like this, I would only assume that it was competitive, because these are rare, unique and highly coveted assets, and I would think that anybody that's in this business would have wanted to take a look at that. But I'm not in a position to be able to tell you exactly who was involved or anything like that, because I don't know, so that's the nature of the competition. With regards to size, this negotiation was very extensive, and all kinds of different things were batted back and forth, but let me just say that where we ended up, we're ecstatic about. We think this is the perfect size piece of business for us on this kind of a property, so it's exactly where we want it to be. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [39] -------------------------------------------------------------------------------- And maybe, Tony, taking a step back here, certainly you've been -- the Company has been quite active. Not just yourself, but your whole team has been quite active in the past quarter. We've seen streams whereby, much like the stream with Golden Star, higher return potentially -- based on my calculation, almost 10% IRR, but certainly higher risk, in my opinion. On the other hand, you have something like Pueblo Viejo, where, based on my calculation -- lower IRR, low single digits, but the same -- at least based on reserves, but currently in production, much less risk. Is that the type of return that we should be expecting? Is this kind of like the double-barrel approach that we should also be expecting from Royal Gold as well in terms of how you look at future acquisitions? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [40] -------------------------------------------------------------------------------- I think that is -- there's a lot of truth in what you just said there, and the fact that each investment that we consider is going to be unique. There aren't any two transactions that are the same, and we have to look at the totality of the piece of business -- who the counterparty is, where the asset is located, what the quality of the asset is, what's the serviceability of our particular revenue source that's to be coming out of that. And we'll be very creative and put something different in front of each operator. So I think it's -- suffice it to say, there are times where we need certain bells and whistles in our streams that you've seen in the past, and we need a higher rate of return because I think it demands it because of the risk, and then there are other times where we might just, as in Pueblo Viejo, think this is a fantastic opportunity to be associated with for decades and decades. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [41] -------------------------------------------------------------------------------- For sure. Maybe some last housekeeping questions here. In terms of the structure of the stream at Pueblo Viejo, is it going through your Zug subsidiary, and in that case, is it subject to the same kinds of tax rates and things like that when it goes through your Zug subsidiary? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [42] -------------------------------------------------------------------------------- Correct. We structured it the same way we did Mount Milligan, Cosmos, who you should be very familiar with all of that structure. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [43] -------------------------------------------------------------------------------- Yes. And then the overall tax rate -- maybe for Stefan. You talked about 11% for the quarter if you adjust for the tax adjustment, the Alberta tax adjustment. I feel like I ask you this every single time, but what tax rate should we be using on a go-forward basis? Because I think in the past, you've mentioned like maybe 25%, 26%, and we've seen low 10%, 11%. I just wanted to ask that question and throw that question out there, and I'm just going to plug that into my model. -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [44] -------------------------------------------------------------------------------- Cosmos, it's an excellent question, because I have -- I know, as you do, the tax area is one that's complex, specifically for us because we do have a corporate structure that includes Canadian entities and our Swiss entity as well. And this year, notably, had a lot of moving parts. We had a good strong benefit this year from the strong US dollar that I talked about last quarter. We also had some tax reform in Canada and Chile that gave us some interesting components as well. But if you strip through all of that, and with the new streams in our business, you should see our normal tax rate decline to somewhere in the low 20% range, and I'll give guidance or at least a directional indication of tax rate after our first quarter call as well, but today I'm not ready to give a specific rate. But one thing you're see is that we are investing more and more in the streaming side of our business, and as you know, that brings with it a more efficient tax rate for us, so you're going to see our overall tax rate decline on a normal run rate. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC World Markets - Analyst [45] -------------------------------------------------------------------------------- Okay. Great. Congrats on the quarter, and that's all I have. Thank you. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [46] -------------------------------------------------------------------------------- Thank you, Cosmos. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Bank. -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [48] -------------------------------------------------------------------------------- I have a technical question on Pueblo Viejo and then just some financial questions for Stefan, so maybe if I just do Stefan first -- Stefan, just to make sure, on your moving all of our streams through to Zug, we won't be dividending back that income back to the US. Is that correct? We're just going to be collecting it in Zug? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [49] -------------------------------------------------------------------------------- That's correct. Our business plan is to reinvest the revenue that we receive in our Swiss structure into new opportunities. We still have a good strong cash flow from our royalty portfolio that's available to fund dividends and debt service here in the US. -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [50] -------------------------------------------------------------------------------- Okay, so that will be kept over there. And then just from an accounting perspective, I mean, we got the tax now in the low 20s, but just for Pueblo Viejo, will you be depreciating that $610 million over proven and probable reserves because you report under US GAAP? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [51] -------------------------------------------------------------------------------- That's correct. Our depreciation or depletion on that would be over proven and probable reserves, just like we're doing for Mount Milligan and the other streams. -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [52] -------------------------------------------------------------------------------- Even though you are looking at the conversion longer term in your overall valuation, but your depreciation will have to be over proven and probable? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [53] -------------------------------------------------------------------------------- Yes, Tanya, that's a great point. We are required to depreciate over proven and probable and not consider any future resource. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [54] -------------------------------------------------------------------------------- But to the extent that those resources get converted, then we -- -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [55] -------------------------------------------------------------------------------- You redo it. Yes, I know. Absolutely. Absolutely. Which then comes to, Stefan, how about a guidance for depreciation and depletion for the Company going forward? -------------------------------------------------------------------------------- Stefan Wenger, Royal Gold, Inc. - Treasurer and CFO [56] -------------------------------------------------------------------------------- Tanya, this year, our DD&A rate per ounce was $412 an ounce, and that was right in the middle of the guidance that I gave last year. I'm not prepared to put a range out yet for next year. I would guide, though, that we'll see our DD&A rate go up a bit because of the new streams that are going to go into production are slightly -- I think have slightly higher DD&A rates than that $412-an-ounce average, but I'll firm that up at our first quarter guidance as well. But you should expect a slight increase there. -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [57] -------------------------------------------------------------------------------- Okay. Yes, that's what we see. And then, Tony, just for your thoughts, coming back to the technical question on Pueblo Viejo, I just wanted to talk to you about the silver circuits, silver recoveries. I mean, we've struggled with Pueblo Viejo on that front, and I don't know how many times we've been down, back up, down. Barrick did mention on their call that they're getting recoveries in excess of 80%, that they've had it for over a month. What sort of due diligence did you do on that circuit, and what did you see? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [58] -------------------------------------------------------------------------------- Well, extensive due diligence, and first of all, let me say that we feel the chemistry works fine and it's not an issue of getting the chemistry to get the recovery. It's a matter of just getting sustainability in the circuit. -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [59] -------------------------------------------------------------------------------- Absolutely. Yes. Uh-huh. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [60] -------------------------------------------------------------------------------- And getting those new tanks in place that I think Barrick had spoken to about this morning, and so it's a matter of getting steady-state production from the circuit. Having said all of that, we recognized it as a risk from the standpoint it's not proven itself yet, and we don't want to necessarily take that risk, and so -- and Barrick is quite confident in its ability, and we said, well, let's just agree that we'll fix it at a 70% recovery and to the extent that you do better than that, that's to your account, and to the extent you do less than that, we can reach into some of the Barrick ounces and be made whole per our transaction. So I think we structured something that is indicative of that particular risk element that you identified. -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [61] -------------------------------------------------------------------------------- And is that why that one is starting as of January 1, 2016, or why did that one start later? -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [62] -------------------------------------------------------------------------------- Well, yes, I think that's largely the reason, is that Barrick had some items that they wanted to get into the -- implement into the circuit, and that gives them some time to do that and get a little more steady state before our stream is impacting that silver. -------------------------------------------------------------------------------- Tanya Jakusconek, Scotia Capital - Analyst [63] -------------------------------------------------------------------------------- Okay, just wanted to check. Okay, thank you. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [64] -------------------------------------------------------------------------------- Thank you for the questions. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- John Doody, Gold Stock Analyst. -------------------------------------------------------------------------------- John Doody, Gold Stock Analyst - Analyst [66] -------------------------------------------------------------------------------- Congratulations on these three recent deals. You've really been active, and I hope you get at least a weekend off coming. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [67] -------------------------------------------------------------------------------- Yes, we hope so too. -------------------------------------------------------------------------------- John Doody, Gold Stock Analyst - Analyst [68] -------------------------------------------------------------------------------- Okay. Cosmos kind of swept the field on my questions about the competitive climate now, but I thought it was unique in that your friends -- your close friends might have thought to have more of an entry into the New Gold and the Pueblo Viejo transaction, but I guess that didn't prevail. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [69] -------------------------------------------------------------------------------- Well, I can't comment on anything specific there, John. I can just tell you that we run as hard as we can from our standpoint, and we let the cards fall where they may, so I don't know any details. -------------------------------------------------------------------------------- John Doody, Gold Stock Analyst - Analyst [70] -------------------------------------------------------------------------------- Yes. No, that's fine. That's fine. Refresh my memory on the secure position that the Company has at Mount Milligan. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [71] -------------------------------------------------------------------------------- Bill, do you want to take that? -------------------------------------------------------------------------------- Bill Heissenbuttel, Royal Gold, Inc. - VP, Corporate Development and Operations [72] -------------------------------------------------------------------------------- Sure. There are some existing bonds that are in the amount of, it looks like, $350 million -- I think that's the right number -- that have a first secured position with respect to the asset. We have a second position with respect to the asset, but a first position when it comes to I'll call gold that's been shipped or severed from the ground, which at any point in time would be a relatively small value, so we sit behind those particular bonds. We would come next. There are some unsecured guarantees for the corporate debt that reach down into the company that holds the Mount Milligan operation, but they are -- they would be subordinated to us, so we just worry about that one bond being in front of us. -------------------------------------------------------------------------------- John Doody, Gold Stock Analyst - Analyst [73] -------------------------------------------------------------------------------- Okay. So the worst case is that -- and I certainly hope this wouldn't happen, but worst case is you would end up owning the mine subject to $350 million in bonds ahead of you. -------------------------------------------------------------------------------- Bill Heissenbuttel, Royal Gold, Inc. - VP, Corporate Development and Operations [74] -------------------------------------------------------------------------------- Technically, that's true. I think what you would -- if we ever got to that position, I think ultimately what you would see is some transfer of ownership of the mine before we ever really got to that period of time or got to that situation, and we would keep it intact. I would think that would be the first port of call. -------------------------------------------------------------------------------- John Doody, Gold Stock Analyst - Analyst [75] -------------------------------------------------------------------------------- All right. Great. Well, thanks, and congratulations on the deals and the great quarter. Looking forward to more. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [76] -------------------------------------------------------------------------------- Thanks for the support, John. -------------------------------------------------------------------------------- Operator [77] -------------------------------------------------------------------------------- And this concludes our question-and-answer session. I would like to turn the call back over to Tony Jensen for any closing remarks. -------------------------------------------------------------------------------- Tony Jensen, Royal Gold, Inc. - President and CEO [78] -------------------------------------------------------------------------------- Well, thank you, again, for taking time to join us today. We certainly appreciate your questions, your interest and your continued support of Royal Gold, and we look forward to updating you on our next conference call. Thanks very much. -------------------------------------------------------------------------------- Operator [79] -------------------------------------------------------------------------------- The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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