Q3 2023 Royal Gold Inc Earnings Call
Hello, and welcome to today's Royal Gold's 2023 conference call.
Name is bailey and I'll be your moderator for today, all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
You would like to ask a question. Please press star followed by one on your telephone keypad.
Now I'd like to pass the conference over to Alistair Baker, Vice President Investor Relations and business development Alistair. Please go ahead.
Thank you operator, good morning, and walk into our discussion of Royal Gold's third quarter 2023 results. This event is being webcast live and youll be able to access a replay of this call on our website.
Speaking on the call today are bill heightened level.
L. Martin Raffield, Vice President of operations all of them their CFO and treasurer.
Randy Schatzman General Counsel, and Dan Breeze, Vice President corporate development of RG AG are also available for questions.
On today's call, we will make forward looking statements, including statements about our projections or expectations for the future.
Statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements.
These risks and uncertainties are discussed in yesterday's press release, and our filings with the SEC. We will also refer to certain non-GAAP financial measures, including adjusted net income and adjusted net income per share.
Filiation of adjusted net income and adjusted net income per share. The most directly comparable GAAP measures are available in yesterday's press release, which can be found on our website.
Well, let's start with a preview of the quarter Martin will give some commentary on the portfolio and Paul will provide a financial summary, after the formal remarks, we'll open the lines for Q&A session now I'll turn the call over to Bill.
Good morning, and thank you for joining the call I'll begin on slide four our third quarter was quiet in the study we turned in good financial results with revenue operating cash flow and earnings all up compared to the same quarter of last year, and we maintained our strong margins.
Revenue was $139 million for the quarter and operating cash flow was $98 million.
Earnings were $49 million or <unk> 75 per share after a minor adjustment adjusted earnings were <unk> 76 cents per share.
We made a dividend payment of 37 five per share for the quarter.
We also continued our focus on the balance sheet and repaid a further $75 million of the outstanding balance on the revolver and we increased our available liquidity at the end of the quarter to about $770 million.
So far in 2020 through we've repaid $250 million of the outstanding balance on the revolver.
If you recall, we drew $200 million at the end of December last year to help fund the second of two royalty acquisitions on the Cortez complex. We have now fully repaid that draw and we've added a cash flowing asset with multi decade production potential without diluting shareholder exposure.
While interest costs have risen recently, we believe that paying debt service cost for a short period is a worthy tradeoff for full exposure to long life assets.
Barring further business development investments in the short term, we will continue to allocate free cash flow to further reduce outstanding debt balance.
Our capital allocation strategy of using non dilutive financing to acquire high quality assets has been effective over the long term.
And our commitment to that strategy helps explain why we have the lowest share count in the Gtx Index I will now turn the call over to Martin to provide some comments on the portfolio.
Thanks, Bill turning to slide five I'll give some comments on third quarter revenue.
Overall revenue for the quarter was $139 million with volume of 72000 gold equivalent ounces.
Yes.
Our royalty segment contributed revenue of $40 million.
81% increase over the prior year quarter.
The positive variance was driven by higher quarter over quarter metal prices.
Higher revenue from the Cortez legacy zone.
Also.
From both the quarter Ccs zone, and King of the Hillsboro Ts.
This was partially offset by scotto, we recognized no royalty revenue in the quarter due to the production suspension that started in early June.
<unk> is one of the principal properties and there's generally an important revenue driver.
We're pleased that the strike has been settled and operations are ramping up and we look forward to seeing royalty contribution restart before the end of the year.
Revenue from the stream segment was flat compared to last year at $99 million.
The largest variances were due to higher revenue from current Macau rainy River, and Korea, which were offset by lower contributions from Mount Milligan.
Oh.
I'll turn to slide six and give some comments on notable developments at operations.
At Mount Milligan Center reported that production in the quarter was impacted by mine sequencing with the mining of some residual waste transition material.
As well as lower recoveries because they'll.
Elevated pyrite to choke the pirate ratios from the lending low grade gold high grade copper ore mined and placed nine with high grade coal gold low grade copper ore mined in phase seven.
As a results in territories lowered 2023 gold production guidance to 150 to 160000 ounces.
Copper production is coming to the low end of the 60 to 70 million pounds guidance range.
<unk> is expecting medium term recoveries for gold and copper to be similar to those seen in 2023.
Im just taking vessels surgical reviews to increase recoveries.
For 2020 for Centuri expects higher levels of gold and similar levels of copper production compared to 2023 guidance levels.
Also at Mount Milligan, Sentara is launched and asset optimization review to assess productivity and cost efficiency opportunities alongside mine plan optimization and their goal is to drive incremental operational improvements. We expect the review to be completed in 2024.
Portland, Idaho equipment design deficiencies impacted ramp up of the expansion project during the quarter.
Gold production was impacted by lower ore grades process due to the mine sequencing as well as lower mill throughput and recovery associated with the commissioning of the mill.
Eric is working to address these issues.
Approximately 81000 ounces of silver during the quarter.
The deferred amount was 698000 ounces at the end of September.
We don't expect any material deliveries of deferred ounces for the remainder of the year only expansion is commissioned and ramps up to full production levels and we expect it will take several quarters to deliver the implied 30 months. After the clumps is running at full capacity.
At Cortez Barrick released the results of the conceptual preliminary economic assessment on the formal project, which indicates a potential gold production profile of 300 to 400000 ounces per year. In addition to the Cortez complex production profile of 950000 ounces to one two.
And then ounces per year over the 10 years.
America's stated that ongoing drilling demonstrates the potential to increase the growth in the size of the project and work is underway to assess an underground exploration decline to support a pre feasibility study.
Both of the royalty acquisitions, we completed last year on the Cortez complex provide exposure to this project and we are pleased to see the upside potential that advancing so quickly.
And finally, we are pleased to see continued positive developments at smaller assets in the portfolio, including <unk>.
Significant reserve and resource growth at the King of the Hills mine in Western Australia.
So let's go produce last week, the Bellevue Gold project in Australia.
Construction progress at Cotai in Ontario, with first production expected in early 2024.
Production expected monitor Rossa in Brazil in the first half of 2024 and strong quarterly production at rainy River in Ontario, and progress towards first oil production in the second half of 2024 for the new underground mine zone.
I'll now turn the call over to Paul for a review of our financial results.
Thanks, Martin I'll now turn to slide seven and give an overview of the financial results for the quarter.
For this discussion I'll be comparing the quarter ended September 32023 to the prior year quarter.
Revenue was up five 5% to $139 million for the quarter.
As Martin mentioned in his remarks contributions from the new Cortez royalties and the ramp up of Chrome account were large drivers to our increased revenue in this quarter.
Metal prices also contributed to the increase in our revenue this quarter as the price of gold was up 12%. So it was up 23% and copper was up 8%.
Golar remains the dominant revenue source, making up 78% of our total revenue for the quarter, followed by silver at 11% and copper at 10%.
At 78% Royal Gold has the highest core revenue percentage compared to your major peers in the royalty and streaming sector.
Turning to slide eight I'll provide a bit more detail on specific line items.
G&A expense increased to $10 million and was due to higher corporate costs and higher employee related costs, which include noncash stock compensation expense.
While we are not directly exposed to inflationary pressures that have impacted operating costs in the mining sector. We have seen some inflation impact on our cash G&A.
Although we did see an increase over the prior year, our margins remain high and with a small employee count and a focus on cost control our cash G&A costs remained low at about 5% of total revenue.
Our DD&A expense increased to $40 million from $38 million in the prior year.
On a unit basis. This expense was $558 per geo for the quarter compared to $497 per geo in the prior year.
The higher overall DD&A per <unk>. This quarter was a result of revenue mix.
Specifically, we had higher overall revenue contributions from our Cortez royalties in the current quarter.
Which royalties carry a higher average depletion rate in.
In addition, we had no revenue from tenant scale, which has one of our lowest depletion rates in the portfolio.
These two factors resulted in the higher DD&A per geo for the quarter as there were no other significant changes to our depletion rates during the period.
Provided a pilot scale can return to full capacity by the end of the fourth quarter. We are currently forecasting that our DD&A per geo will be near the upper end of our previously provided guidance range of 490 to $540 per geo for the fourth quarter.
Interest expense decreased to $7 $3 million for the quarter from $8 $8 million in the prior period.
The decrease was due to our continued focus on debt servicing during the quarter as we had lower average amount outstanding under our revolving credit facility when compared to the prior year.
The all in interest rate for borrowings under our credit facility was six 7% at the end of the third quarter.
Tax expense for the quarter was $11 million, resulting in an effective tax rate of 17, 8%.
This compares to a similar tax expense of $11 million and then effective tax rate of 19, 3% in the prior year period.
We continue to expect our effective tax rate absent discrete tax items to be in the range of 17% to 22% for the fourth quarter and full year.
Net income for the quarter was up over the prior year to $49 million or <unk> 75 per share.
After adjusting for a small change in the fair value of equity Securities. Our adjusted net income was $15 million or <unk> 76 per share, which is five 5% higher than our adjusted net income in the prior year quarter of $47 million or <unk> 71 per share.
Our operating cash flow was strong again this quarter at $98 million compared.
Compared to $95 million in the prior year.
The increase during the quarter was the result of higher royalty revenue primarily from the addition of Cortez interest we acquired in 2022.
I will now turn to slide nine and provide a summary of our financial position at the end of the quarter.
During the quarter, we repaid $75 million on our revolving credit facility and reduce the amount drawn to $325 million.
As Bill mentioned, we have repaid $250 million of revolver balance so far this year and.
And in keeping with our approach to capital allocation, we expect to repay the remaining $325 million before the end of 2024 apps.
Absent significant business development activity and its cash flow allows.
The $675 million Undrawn revolver capacity.
Find with $93 million of working capital provided us total available liquidity of just under $770 million at the end of the quarter.
That concludes my comments on our financial performance for the quarter and I will now turn the call back to Bill for closing comments. Thanks.
Thanks, Paul we had a solid quarter in our portfolio generally performed well. However, we did see short term production delays and interruptions at a small number of our larger assets. As a result, we expect the total sales for 2023 may come in at the low end of or slightly below our initial April sales guidance.
320 to 345000 Geos.
Drivers for this are well known and they are one of the slower than anticipated ramp up of the plant expansion of Pueblo Viejo and two of the four five months suspension of operations at <unk>.
We hope that these issues are behind US now and we are pleased that newmont has restarted operations at <unk> and <unk>.
Felt confident that Barrick is working to address production levels at Pueblo Viejo.
Finally, I want to comment briefly on the metal and jurisdictional mix of our portfolio both of which are important differentiators for Royal gold.
Bold has remained strong this year with strong central bank demand and has performed well despite steady increases in interest rates as Paul highlighted 78% of our revenue came from Goldman This quarter, which is the highest among our large cap peers and jurisdiction only the two most significant revenue sources for this quarter were Canada and the U S.
Yes.
Which combined provided about 53% of our revenue.
We seek to acquire precious metal assets in safe jurisdictions operated by high quality Counterparties and we believe the transactions. We've completed over the past couple of years, we will continue to enhance our shareholders' exposure to gold revenue in low risk jurisdictions, operator that concludes our prepared remarks I'll now open the line for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to turn that question. Please press star followed by cheap again to ask a question. Please press star followed by one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. Please.
Do you ensure that youre on mute locally.
Our first question today comes from the line of Jackie <unk> from BMO capital markets. Please go ahead. Your line is now open.
Alright. Thanks, Thanks, very much for taking my questions I have a couple of thought maybe I'll start with a quick one just to get it out of the way.
On <unk>, you mentioned that the mine restarted after they.
After the strikes can you can you just remind us.
What if any of the alpha lag do you expect to see between the mine restart and sales our production to your credit.
Yes, Jack this is bill.
The patent skewed on royalty, we get paid on provisional and final settlement, so if either of <unk>.
Those occur in the fourth quarter, we should receive revenue.
There isn't the delay that we havent in some of the streams, but I can't tell you and Martin can interject, if he disagrees how fast they're going to start up that's just an unknown for us yes.
That's fair, but no and I appreciate that I guess.
Difference between a royalty and a midstream and kind of create accepting delivery right.
A little quicker.
And it is quite clear, but I would say that the delays in the streams are unique to two contracts. So that doesn't that doesn't apply to all <unk> with us.
A few months delay.
Got it that's helpful. Thank you.
If I can ask.
It's probably the first opportunity we've had to ask you about.
The press release, you put out in September about the ACG transaction.
I read through the disclosures.
Disclosures that ACG had on its web site as well as your disclosure.
Maybe I'm not enough of a legal expert, but if you can maybe to simplify it a little bit is that opportunity.
<unk> off the table for you now or is there still like I know it obviously delayed from the original timeline, but is there still an opportunity at some point that could re materialized.
Well the original transaction.
Terminated.
Our involvement was based on the satisfaction of certain conditions precedent in those.
Conditions were not satisfied.
The assets still remain with the seller.
Could it come back yet and might come back.
We're not going to know that for a period of time.
Okay No that's helpful.
The disclosures that ACG had on its lets say it sounded like.
It sounded like they were sort of still working on it but it was.
It's just my my poor reading of the of the text I think that'd be hard time understanding you correctly with everything.
Yes.
Today.
What I would tell you is this just this.
And there is no transaction that.
That's helpful. Thanks, and maybe just.
Bigger picture on that on that point, though.
What is your outlook for new royalty or stream transactions right now is there a lot.
And the pipeline is there a lot that you guys are kind of working on or how optimistic are you at the moment.
I'm always optimistic we're always busy from a business development perspective, but maybe if I can get Dan to chime in here and give you his perspective.
As head of our business development team.
Sure Bill hijack you hope you're doing well thanks, thanks for the question there.
Yes.
Bill its been quite busy for us Jackie and I think where we're seeing a lot of the activity right now is in let's call it sub $100 million range.
So more on the royalty side and I think thats, just a function of where the equity markets are right now as you know, it's really difficult for smaller companies to raise equity.
And so there they are talking to groups like ours.
That'll change with goal to 2000 here, so maybe that window will open up but right now they're very interested to talk to a group like ours. So we're.
We are quite active on that side, where we're looking at geology, we're looking at the land packages. Our geologists are quite busy and we're just trying to look for good investments with interesting upside. So that's really where a lot of the focus is right now.
If you look at what Martin talked about.
In the in the comments there and the various royalties that are just starting to produce we've had good success with with these smaller royalty. So how do we add more of those in the portfolio.
We always talk Jackie about this $100 million $300 million range, that's still very much intact.
And so we do see opportunities in that range. It's more development type project financing that we're seeing and more on the gold side as well so overall quite quite busy for us right now.
That's great I mean is that help them.
Yes, absolutely.
Totally understandable in light of the relatively high cost of other sort of project financings that you should be fairly attractive but also.
Also.
The equity and debt are unavailable it makes it difficult to do those bigger stream. So I appreciate that that's helpful. Color. Thanks, and then I think so that's all for me.
Thanks Jackie.
Keith.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Our next question today comes from the line of Brian.
Brian Macarthur from Raymond James. Please go ahead, Brian Your line is now open.
Hi, Good morning, My question has to do with the deferred silver stream.
And can you just remind me.
When we finally get this up and running how this trigger works do you get back once they get a fixed rate, 70% and it works you are entitled to 75% of this of the silver as I understand it.
<unk> to catch up do you go right and get 100% of the silver when the trigger works or is there a.
Scale in function because you made the comment it would take a number of quarters going forward I mean, any details you could give us on that would be helpful.
Yes, Brian.
The thing that sticks in my mind is I believe somewhere around the seams and correct me if the recovery goes about somewhere around 52, 5%.
We start to recoup the silver so is gradual we don't jump to any given number.
The reason there is deferred silver is we could not demand from <unk> more than 100% of their share of the silver.
So it's not as though we can go beyond that but that's really to me. That's the number I'm looking for if the recovery gets above that above that 52 and a half.
We'll start to see it.
At that point, we can probably do a better job of helping you figure out when it might come in.
Okay, but you do.
You do get like like technically investment stream right you get 75% you can't go over 100, but the minute you get the trigger then you can go and take you can basically sweep all the silver that comes out any quarter theoretically is that fair theoretically there sure okay.
Right sure.
Okay, I think I've got that assist I've always because I noticed last year you did get some you did catch up some and then it went the other way. So I was just trying to figure out exactly because it is starting to build up to be significant amount right. Now. So I was just trying to figure out how fast that would come out going forward great. Thanks, very much bill that was my question.
Thanks, Brian.
Thank you there are no additional questions waiting at this time, so I'd like to pass the call back over to Bill heightened Buffalo for any closing remarks.
Well. Thank you very much for taking the time to join US today. We certainly appreciate your interest in Royal Gold and we look forward to updating you on our progress during our next quarterly call. Thank you.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
[music].
This call. Thank you all for your participation you may now disconnect.