Q1 2020 Earnings Call
2021st quarter Conference call.
Participants will be in listen only mode should you need assistance. Please ignore conference specialist pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then to.
Please note that just being recorded I would now like to turn the conference over to Alister Baker Director of business development. Please go ahead.
Okay. Good morning, welcome to our discussion of Royal Gold's first quarter 220 results. That's about it being webcast live and you won't be able to boxes a replay of this call on our website.
Depending on the call tire, Tony Johnson, President and CEO Bill Heissenbuttel see up on Vice President strategy markets <unk>, Vice President operations.
<unk>, Vice President corporate development RG AG.
<unk>, Vice President General Counsel and Secretary.
That's discussion falls under the Safe Harbor provision other private Securities Litigation Reform Act, a discussion of the company's credit risks and uncertainties, including the safe Harbor cautionary statements in today's press releases like station.
In greater detail in our filings with the FCC.
Tony will give you an overview of the quarter followed by Mark for an update on our operating results Bill will provide a financial update and Tony will wrap the call with some closing comments well then open the lines for acuity session.
Now I'll turn the call over Tony.
Good morning, Thank you for joining the call.
We go let's begin on slide four.
This was another solid quarter for all goal our revenue for the quarter was approximately $119 million.
Record for all gold and up 3% from the previous chilling corridor and 19% year on year.
Earnings for the quarter or one dollar and seven cents per share, which included 49 sudden gain on tax and a two cents loss a mark to market equity securities both of which bill will discuss in his remarks.
Operating cash flow was a solid $71 million, which allowed us to pay $17 million and dividends and reduce are outstanding revolver balance by $50 million.
Over the past year, we have reduced our principal are outstanding debt by $200 million.
Only remaining debt outstanding because the $170 million drawn under our revolver.
Which will continue to pay down as or cast session allowance.
In addition to providing these solid operating and financial results. We also concluded our CEO succession process with the appointment of Bill Heissenbuttel.
As the new President and CEO upon my retirement on January 2nd 2020.
The board completed a thorough review a both internal and external candidates.
And it concluded that fills background experience and vision position CIMB best to lead the company in its next phase of growth.
Bill has held roles within Royal Gold and business development operations and finance so he knows the business well.
He and I have worked closely together since he joined the company in 2006.
And he has been involved in every major strategic decision that up let us that has led us to where we are today.
In the board has come up into that he has the skills to further build on the company's strikes.
I'd like to turn the call over to Bill for a few comments. Thanks, Tony I'm looking forward to leading the company and working with the board and management team to continue to build our business.
Our strategy is well established and and under my leadership will continue our disciplined focus on growth in our core business and measuring our success on a per share basis.
I've already made some organizational changes to make sure we're positioned to execute with success, most notably the promotional markets, though to the role as executive Vice President and Chief Operating Officer, Paul Live near to the role of Chief Financial Officer and Treasurer.
Randy Schatzman to Vice President General Counsel, all of which are effective January 2nd.
Mark is a seasoned mining engineer and it's been but the company since 2015 and his promotion reflects the importance we placed on technical excellence.
Paul is currently our controller and treasurer and he's been with the company. Since 2004. He has a deep understanding of the Trevor treasury function to oversee as our CFO .
Randy brings a strong background in commercial transactional experience and has worked closely with Bruce kirchhoff over his eight year career at Royal Gold.
Raise promotion reflects the desire Bruce to retire in January 2nd of next year. After a 12 year career at Royal Royal Gold.
Bruce has help navigate royal gold through the increasingly complex and demanding issues surrounding public company compliant and corporate governance and he will be missed by allowing the company.
It is a testament to the depth of talent in the organization that we've been able to make these appointments internally and I'm confident that we'd have the right team in place I look forward, introducing the new team to the market over the coming month.
With that I'd like to turn the call over to Mark to review our operating results.
Yeah. Thanks, Bill on slide five I'd like to start with an update on the call Macau project in Botswana currently under development, but Cooper Canyon capital.
I visited the site in mid October and met with the project team for a full review in advance of making our first funding contribution.
I was impressed by the progress being made the project organization and the focus on safety.
Construction is in full swing and at the end of September a total of more than 800 people working on site citizens, a botswana, making up 95% of the construction workforce with 34% from the local region at 26% from the immediate area.
[noise]. The project is about one third into the 30 month execution phase.
At the end of September engineering was approximately 85% complete and overall construction progress was about 11%.
The project remains on budget and the first concentrate shipment is expected in mid 2021.
We funded our first contribution to the project on Tuesday up 66 million.
And future funding will be made on a quarterly basis alongside contributions from other sources of capital.
Slide six shows progress on the three box cuts, which are the current construction priority and provide access to the zone five ore body.
[noise] each excavation requires the removal of about a million cubic meters a material.
As you can see in the photos the exco excavations have progressed well through the soils calibrate weathered rock in the finish Wallace look excellent.
Central box cut is scheduled to be completed first and turned over to bar minco. The mining contractor, which is targeted for the end of this calendar year.
Turning to slide seven you can see a close up with the Geo sell installation and engineering solution to protect the slopes from erosion the shot to be access corridor between zone, five and up a settle mill at a photo of the existing settle Mel.
Outside of the box cuts the three me project areas of the order these own fly the infrastructure the access infrastructure corridor between zone, five and the mill and the bus settle mail refurbishment.
Most of the work currently underway is on his own probably infrastructure to support bar minco, consisting of accommodation power and water services.
Development of the access quarters core daughters progressing with the construction the light vehicle Road first followed body or haul road and the transmission line.
One of the unique aspects to this project is the ownership of the existing to settle mail and work on refurbishing. The plan is scheduled to start shortly upon award at the main structural mechanical piping contract.
Definition drilling to provide a basis for detailed stope design in the first three levels of the mines was completed in October which will eliminate the need for this time consuming step associated with the early production stopes.
As a project progress is and prior funding and funding future contributions will be completed further reviews on the site will be completed and.
And updates will be provided on earnings calls.
Turning to slide eight.
I'd like to discuss some recent developments as several of our key operating properties, starting with Mount Milligan inadequate.
Mount Milligan had a solid operating quarter with average mill throughput at 56000 tonnes per day.
Copper and gold production were also strong at 55000 ounces at 21 million pounds, respectively.
At all in costs at $557 per ounce remains at the bottom of the second quartile I want to cost curve.
Progress on sourcing water was positive and the operation has about twice the amount of water stored now compared with this time last year.
They've also had success with water exploration and expect to bring in water from additional ground water sources in December subject to receipt of applicable permits.
Centera expects that they will be able to continue operations and the first calendar quarter without slowing production to conserve water, which is positive news.
So the terror also announced last week that there will be publishing an updated 43, one on one technical report in the coming months.
Updating the technical report was prompted by their 2020 budgeting process when they identified that recent higher operating costs will remain steady over the medium term.
And long term gold recoveries are expected to be lower than the original plan.
This triggered a financial review of Centerra is carrying value of Mt. Milligan.
Caused them to highlight potential reduction in reserves and resources.
The updated technical report will include the impact of caution recoveries as well as recent exploration results and other optimization work.
It's worth keeping all of this in perspective.
Well increased costs and lower recoveries will likely impact economics, a lower grade material.
Assuming a new mine plan focuses on higher grade or it may bring metal production forward, which may mitigate the NPV impact up losing that'll come the latter years mine life.
At this point is unclear what the impact maybe at a Royal gold and we'll look forward to receiving a report when it becomes available.
In the meantime, Centera has reaffirmed their 2019 production and cost guidance for Mt. Milligan.
[noise] had adequate oil operations were suspended on October 14, due to a strike by the workers Union, It's an important asset for us and we currently have received 100% of the payable gold frantically ill, which contributed approximately 17% of our gross revenue in the quarter.
We understand that negotiations are ongoing between tech and the Union and we continue to monitor the situation.
It is worth noting that the strike started before some of the recent widespread protests in Chile.
And that strike is unrelated to these events that are occurring.
We expect the impact of production suspension to be in the June quarter. As we typically receive deliveries are within 12 months of concentrate shipment.
[noise] moving on to slide nine I'll provide some comments on rainy river and Penasquito.
At rainy River, New gold turned in another quarter of solid operating results mill throughput for the quarter averaged 24500 tonnes a day, which is a first full quarter. The mill was achieved the target 24000 tonnes per day rate.
Gold recovery of 91% was in line with the mine plan and efforts continue to further improve recoveries through additional circuit optimizations as well as the commissioning of the gravity circuit.
Mining operations continued to transition from phase one to phase two of the pit.
And production included planned lower grade ore from phase two as well as the remaining higher grade ore from phase one.
New gold expects grades in the December quarter to decline an average between <unk> 0.81 Gram per tonne has or from phase one is now mined out.
We're continues to advance a comprehensive mine optimization study that includes a review of alternative open pit and underground mining scenarios.
The new gold and new gold expects to release the study in mid February 2020.
At Penasquito, we were pleased to see the removal of the blockade the caused operations to be suspended on September 14.
The dispute leading to this suspension was the same as the one that caused the operations to be suspended from April 29 through June 17, which was an illegal blockade of the mine by a trucking contractor.
Some members of the said gross community.
The last blockade was lifted on October eight concentrate shipments started immediately and attend a ramp up commenced on October 22nd.
And the site is now back and full operation.
The impact of Penasquito during the quarter was lower production of approximately 51000 gold equivalent ounces.
Q1, Goldcorp is seeking a sustainable long term solution to the dispute and has been working with state and federal government to ensure ruled was upheld and government sponsored negotiations with the said gross communities started earlier this week.
Newmont Goldcorp also reported the stripping of the main depend Jasko pit is near completion and higher grade ores are expected during the December quarter and into 2020.
I'll now turn the call over to build to discuss our financial results. Thanks, Mark I will turn your attention to slide 10, and give an overview of the financial results for the quarter unless otherwise indicated I will be comparing our first quarter fiscal 2020 to the prior year September quarter.
As Tony mentioned at the beginning of the call revenue this quarter was $119 million a quarterly record for us on volume of 80700 gold equivalent ounces or geos.
Geos decreased approximately 2% year on year. The most significant reasons for the change were lower in the Cleo sales through the shipment timing the absence of revenue from Molotovs. This quarter. After the royalty cap was reached in our last fiscal year and the receipt of only one quarter of revenue for voice. These bay as opposed to last year September quarter in which the Royal.
Two litigation settlement provided us with two quarters of revenue in one reporting period.
Those decreases could not be fully offset by increased about milligan sales and Cortez royalty revenue.
Dream segment volume for the quarter was in line with the expectations. We discussed during our last earnings call in August and as we announced last month.
Metal prices had a positive effect and Golden 12 are up 21% and 13%, respectively, while copper was down 5% year on year.
Gold accounted for 79% of our revenue for the quarter.
[noise] gionee expense for the quarter was $7.4 million.
Down from $9.9 billion.
Prior year quarter included spending the preparation for the Valley litigation and its ultimate settlement.
Compared to the June quarter of fiscal 2019, DNA expense was approximately $1.1 million higher primarily due to non cash compensation expense.
And the high relative expense and this reporting period is consistent with previous years as equity compensation is typically awarded in the first quarter fiscal year.
Our DNA expense for the quarter was $38.7 million or $480 per geo.
We expect full fiscal year 2020, DNA to range between 450 and $500 per Geo, although a change to the reserves at Mt. Milligan could impact our depletion rate and we may update. This range later in the fiscal year. Once additional information is available from Centera.
Earnings were $70.5 billion or dollar seven per share up significantly compared to the first quarter of last year.
Earnings in this period included a net noncash discrete tax benefit of $32.3 million and a 1.4 million dollar mark to market loss on our equity holdings.
If you exclude these items earnings would've been $39.3 million or 60 cents a share.
The tax benefit was primarily due to Swiss tax reform and the passage of a new tax law to be enacted on January Onest 2020.
This new law required the Remeasurement this quarter of tax assets held by our Swiss subsidiary.
Excluding this benefit our tax rate for the quarter was 19.5% and we expect our full fiscal 2020 tax rate absent unusual items to be in the range of 19% to 23%.
I'll also note that October we decided to recall relocate our Swiss corporate office from the Cantona zoo to the canton of Lucerne, which we anticipate will result in a further step up and tax basis during the December quarter.
We are in the process of updating all valuation work associated with the tax reform effort and negotiating a tax ruling with Lucerne and are therefore, not able to quantify any additional tax benefit at this time.
Cash from operations was approximately $71.2 million up significantly from the prior prior year quarter, mostly due to higher scream sales and lower income taxes paid.
At the end of September we held approximately 25000 geos in inventory, which was within the guidance range I provided in the last quarterly call.
Looking forward to the December quarter, we expect strain segment sales to be in line, but the guidance. We gave last quarter, which is 60000 geos and inventories at quarter end to be in the range of 20000 to 25000 Geos.
I'll now turn to slide 11, we provide a summary of our financial position.
Our liquidity continued to strengthen over the quarter. We ended September with cast of $122 million and working capital of $132 million.
During the quarter, we pay down $50 million on our revolver at our only outstanding debt is the $170 million drawn on this facility.
The $830 million remaining on drawn on this facility combined with our working capital provided us with almost $1 billion a total liquidity as of the end of September .
With the cash and total liquidity figures outlined above being calculated prior to the call Macau investment we made this week.
The making up the 66 million dollar investment in Cold Macau represents the initial advance payment we will make for project development and we expect to make further contributions of approximately $125 million in calendar 2020, and from $21 million to $74 million in 2021, depending on weather Cooper exercises its option to increase.
The size of the advance payment from $212 million to $265 million.
Our payments are scheduled to occur on a quarterly basis as we move forward.
And we'll be in proportion to the total capital spend at the project.
Before passing the call back to Tony I would like to take this opportunity opportunity to extend thanks from all of us at Royal Gold to Tony for his long and successful career at Royal Gold. While there are number specific achievements, we can point to over his career I believe is tone at the top message of consistency discipline and honesty.
Represent values that will remain corridor this company well beyond his tenure.
Back to you Tony.
Thanks for the kind words, Bill I thoroughly enjoyed my time at Royal Gold and it's been an honor to serve the shareholders over these last 16 and a half years.
I'm very proud of the Roebel team both the management in the board.
In the culture that we have created together.
This company isn't dealt with talton assets and I leave with confidence.
Covenants that the corporate principles will be maintained including.
Judging success accretion and everything we do on a per share basis.
Joined our company out of cash flow to the greatest extent possible, while protecting our valuable shares from dilution.
Striving to be at the most valuable precious metal company not necessarily the largest.
Providing a steady and growing returned to our shareholders.
Sticking to our core business and what we do well.
And conducting our business with respect for others fair dealing integrity in responsibility.
Also confidence that the company isn't a very good position.
Our cash flow is powerful and growing.
Our balance sheet is strong our asset base is robust and in my opinion will continue to yield organic growth.
And our home grown team is excited to take control.
Going back to the quarter and the near term activities I'm pleased to see that Mount Milligan and rainy River are now showing attractive production results.
That Mount Milligan has made significant progress in developing sustainable water sources and is not expected to reduce production. This winter.
[noise] that crossroads is now in full production.
The opinion Scioto is now coming into higher grade after an extensive stripping campaign over last several years.
That the public vehicle expansion studies continue to yield positive results.
And that the Comac, our construction is off to a good start advancing well.
It is great to see this level of activity in our portfolio of 41 producers.
Now I can tell you that over my career.
I've seen that all assets have issues at some point in time.
But they tend to get sorted out overtime with good management.
And we've always kept mariah on that long game.
Operator with that our prepared remarks are concluded and we'd be happy to open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question Kim Please press star one too.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Shane Nagel of National Bank Financial. Please go ahead.
Thanks, guys for taking my question, just with Mount Milligan positive to see the the water situation improved obviously centera highlighted that they'd be.
Potentially taking a write down I'm just curious if that's related to in your opinion related to the escalating costs that they're seeing and just wondering if you've kind of run your own.
Resource internally and do you see any risk of impairment there.
In terms of Royal Gold's interest.
Yes, yes, there is there's a couple of different issues, there I'd like to Peel them apart one is.
Is the cost structure the mine and the other is since Harris carrying cost and and the write down that Centera experience is very much specific to them and they're carrying cost. It does not impact our are carrying cost.
Specifically.
Our carrying cost would only be impacted if there was a reserve reduction that actually.
Required us to revalue or re estimate.
The carrying cost and.
Right now we have $402 per ounce of gold as a depletion rate and 81 cents per pound of copper. So we think we've got quite a bit of headroom in our.
In our numbers, but ultimately we won't see.
We won't know those final details.
Paul and his financial team will have a look at that once the new resource and reserve statements come out, but we think we're in we're in a very good position.
And then let me just speak a little bit more to the the costs that.
That you alluded to it.
I just want to take the opportunity to emphasize what marks comments were that the the mine this producing that.
Very low cash cost and all in sustaining cost basis, I think his comments where that it was a lower.
Cortile second quartile type of production, so I really don't want the.
The carrying cost in the write down issue that centera had actually carry over into the quality asset because we're still seeing a very very good quarter very good cash costs coming out of the project.
Okay, and then maybe similarly.
My interpretation of the rainy River mine optimization is that we may see.
You know potential increase in production in the short term, but potentially sacrifice by a reduction in mine life you guys.
Again dug into there.
The similar similar thinking around potential impairment or how it may potentially impact.
Your business and cash flows going forward.
You're correct chain, we adapted once we see the the results of their their new 43, one to one that they put out I think they're talking about the first quarter of next year. Then we'll have to take a look at our carrying cost make sure that we have sufficient cover there I'm sitting here right now I don't have those details of.
Of what our depletion rate is at rainy River.
But we would have to do a very similar exercise and make sure we have enough headroom there.
Okay. There's there's probably just maybe slightly less headroom than there would be under Milligan, just just guessing myself.
I can't answer that question, specifically, but we're absolutely happy to too.
Provider the details of our depletion rate there if that use of interest that'd be great. Maybe I'll follow up with that that later that that's all for me, Thanks, again and Tony all the best.
In retirement, if I don't speak with you before January 2nd.
Thanks, very much and appreciate your support over the years.
Again, if you have a question. Please press Star then one.
Okay.
The next question comes from Tanya just kind of scenario of Scotia Bank. Please go ahead.
Hi, good morning, everybody and a bell congrats to you and the came and Tony Good luck in your new endeavor.
Welcome.
My question, just a quick one long on taxation within movement of the Swiss offer from two to Lucerne can you just give us an idea of what the streams are going to be tax that right.
No.
Yeah. So that they are really two elements to the to the Swiss tax reform.
As you may recall our current.
Tax rate in Switzerland is 8.7, if we'd stay it into I think the tax rate would have gone to 11.9, and then Lucerne is going to be would be 12.0.
But one of the things the Swiss have done is they basically said, we're going to give you a period of time to transition.
To those higher tax rate and we're going to do that by allowing you to step up the value of the assets to what I'll call effectively market value and depreciate that excess value against taxes.
And then Zuke it would have been for five years Lucerne, what's going to be a 10 year.
Period.
And the and hence the reason for that for the move from a corporate perspective, our taxes are not expected to change relative to what.
They would it then for that 10 year period. After 10 years, yes. They will go up to the higher the higher tax rate.
But but for this transition period, we don't see that much of a move and corporate cash taxes paid.
So so are you, saying for drilling from a person it doesn't have a financial background that the next 10 years sort of look in that sort of 9% uranium and then after the tenure as we move up to 12.
Hi in Switzerland that as that is correct.
Yes, I think the or anything that go through Switzerland.
Can you I think the the most important overall I think you're you're absolutely correct with regard to Switzerland, but more important issue for us what is our global tax cash tax.
A mountain and Thats, where bill was emphasize and we don't think we're gonna have very much of a change at all as we as a result in the Swiss tax reform over the next 10 years and then obviously, we'll we'll have to reassess that for the longer term, but.
There is this is a very complex area as you could well imagine and we're trying to make sure we understand Swiss tax reform and us tax reform the interplay between the two <unk>.
Yeah I appreciate that is from for our perspective, just in valuing stream alone on the Standalone basis.
If we like to look at it for the next 10 years at 9% and then after that 12 would that be a fairly valuing it separate from what you're doing it at head office.
Yes.
Yes, so so what the what the one thing that you're you're missing there is that we undertook us tax reform there was another global tax that were.
Clickable or that's applicable to us.
And I believe it or not the acronym as guilty tax and it stands at 13.1%.
And so anything we don't pay in Switzerland, we would have to top up to that 13.1%. So that's probably the more accurate.
Hey use in the short term and to the extent Theres theres more questions that are specific to that we can surely get to our tax.
Experts on the phone Okay now that that's appreciate it thank you.
The next question is from Mike Javelin then of Bank of America. Please go ahead.
Well thank you.
And Tony Good luck in the future and Bill and Mark Congratulations on your question.
More furmark actually.
Mark I cover some terror also and I.
Correct me, if I'm wrong, but did you say the NPV up effect.
Potentially shorter life at Mt Milligan could be offset by.
Higher production in the early years after you did say that.
I guess just did some tariffs for that to you or is that your own assumption.
Oh, that's that's a generic.
Review of thinking about.
Cut off grade going up and your earlier years seeing higher grades assuming.
Constant mill throughput and then the latter years of the mine life being.
Cut off at some in some fashion so there's a there's.
Now there's the possibility of.
Having these earlier, having earlier production offsetting leased some of some of the impact on an NPV basis.
I certainly wouldn't give you the impression that it would impact the data would offset all of them back because I have no basis to two to know that but certainly on a generic basis I would expect some.
Some ounces and pounds to move forward in the schedule.
With that with the adjustments were talking about.
Okay.
I guess I asked a question also because.
Mount Milligan mind gold grade 0.52 grams. The average greatest 0.33, so I'm kind of saying to myself there already super high grading the begin west. So you take on some low greater should really make much difference as kind of my view, but.
Because of the situation I would I guess so.
I was just like the well, we always knew and the early years. It was more gold production there mining in areas that were were higher grade gold and you actually saw this year versus last where we switched a little bit more too.
Two of the more copper production than we have the here prior write less gold production and we had the your prior so.
I think those things thats, it's probably not it's not.
Appropriate just the judge on the gold headway, but really the gold equivalent grade for both those metals coming together.
That's a good points I guess I'm thinking of that the old technical study on Mt. Milligan effect of gold production. The first five years was 280000 or 90000 ounces something like that correct me if I'm wrong Tony.
And that range.
And how we think we really got close to that so.
So.
Otherwise, Okay, we'll see what Centera says a few months. Thank you and good luck.
Thanks for the question Mike.
Okay and if you have a question. Please press Star then one.
Your next question comes from Greg Barnes from TD Securities. Please go ahead.
Thank you for Tony do we have a better sense on what the profile will look like at Cortez slashed pipeline going forward in terms of the impact it will have on you.
Yes, great. Thanks for the question we.
Last I think it was last conference call, we Mark and I had just come back from the property from Cortez and.
And with the new joint venture that was going on there. They advise that they would have something by the end of the year or close to the end the year.
And I think in the conference call, we talked about being able to have some kind of better.
Guidance for you at Cortez and the in the March quarter.
And we also get a.
Oh I'm just looking at Mark No. We also get our life of mine plan by contract in the first quarter first calendar quarter of every year. So if you can just be patient with us for for another quarter.
Well as low quarter, the half I guess before we get that we will get that information out to your Greg, but I think it's it's if you look at the last couple of quarters.
You'll have seen that.
That's a cortez is done.
Quite well in its growing quite significantly from what it's done in the prior quarters. We have Oh, we have a nice chart on page 10 of our press release that just reference you to.
And.
Actually the last three quarters, it's done pretty well and I think absent any other information I would I would look at that history as syndication of the next quarter, Okay, that's great and more weight to the update later on that thanks.
This concludes our question and answer session I would like to turn the conference back over to Tony Johnson for closing remarks.
Hi, good operator, let me just go back to Shane Nagel, Shane I hope you're still in the line.
In for everybody that's there.
We are fortunate to get the DNA at rainy River during our call here.
Just want to read these out the DNA at rainy River is $591 per ounce of gold.
And $6 per ounces silver.
So we up quite a bit head room at rainy river as well so I'm glad we're able to get that information broadly to the market during this call.
Well everybody. Thank you very much for your support over the years and.
Usually conclude this call by saying I look forward to updating you on this next conference call that I look forward to begin in your chair and asking questions of the management team Our next conference call.
So with that.
Let me say, thank you for joining us bye for now.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.