Royal Gold, Inc. (NASDAQ:RGLD) Q2 2023 Earnings Call Transcript
Royal Gold, Inc. (NASDAQ:RGLD) Q2 2023 Earnings Call Transcript August 3, 2023
Operator: Hello, and welcome to the Royal Gold 2023 Second Quarter Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to Alistair Baker, Vice President, Investor Relations and Business Development. The floor is yours. Please go ahead.
Alistair Baker : Thanks, Elliot. Good morning, and welcome to our discussion of Royal Gold's Second Quarter 2023 Results. This event is being webcast live, and you will be able to access a replay of this call on our website. Speaking on the call today are Bill Heissenbuttel, President and CEO; Martin Raffield, Vice President of Operations; and Paul Libner, CFO and Treasurer; Randy Shefman, General Counsel; and Dan Breeze, Vice President, Corporate Development of RG AG are also available for questions. During today's call, we will make forward-looking statements, including statements about our projections and expectations for the future. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements.
These risks and uncertainties are discussed in yesterday's press release and our filings with the SEC. We'll also refer to certain non-GAAP financial measures, including adjusted net income and adjusted net income per share. Reconciliations of adjusted net income and adjusted net income per share to the most directly comparable GAAP measures are available in yesterday's press release, which can be found on our website. Bill will start with a review of the quarter. Martin will give some commentary on the portfolio, and Paul will wrap up with a financial summary. After the formal remarks, we'll open the lines for a Q&A session. I'll now turn the call over to Bill.
Bill Heissenbuttel: Good morning, and thank you for joining the call. I'll begin on Slide 4. Our second quarter was relatively steady, and we provided solid financial results. Revenue was $144 million for the quarter, and operating cash flow was strong at $108 million. Earnings were $63 million or $0.97 per share. After adjustments, adjusted earnings were $0.88 per share. We continued our practice of returning capital to shareholders and made a dividend payment of $1.50 per share for the quarter. We also maintained our focus on the balance sheet and repaid $100 million of the outstanding balance on the revolver, leaving us with liquidity at the end of the quarter of just over $700 million. With respect to the revolver, we completed an amendment to extend the maturity for another two years to June 2028.
The source of capital has been a key strategic financing tool that has allowed us to finance our growth over the past several years without issuing equity. Despite a market in which some companies have seen lenders exit credit facilities, sometimes requiring a reduction in the size of those credit facilities, I'm pleased to report that all of our lenders continue their participation in our revolving credit. A significant support of our commercial banking partners is very much appreciated. With respect to potential new business during the quarter, we announced the signing of a commitment letter to acquire precious and base metal royalties for $250 million on the producing Serrote and Santa Rita mines in Brazil as part of the acquisition financing of the mines by ACG Electric Metals.
This potential acquisition is subject to a number of closing conditions, including negotiation and execution of definitive documentation the closing of ACG's acquisition of the mines from Appian Capital. The conditions have not yet been satisfied, and there are no other details we can provide on the transaction at this time. I'll now turn the call over to Martin to provide some comments on the portfolio.
Martin Raffield : Thank you, Bill. Turning to Slide 5, I'll give some comments on the second quarter revenue. Overall revenue for the quarter was $144 million with a volume of 73,000 GEOs. Our Royalty segment contributed revenue of $38 million, down from $42 million in the prior year quarter. While we saw higher revenue from the Cortez Legacy Zone and new revenue from the Cortez CC Zone and King of the Hills royalties, the increase was more than offset by lower revenue from Penasquito and Voisey's Bay. At Penasquito, operations were suspended in early on due to a labor dispute and at Voisey's Bay production was impacted due to a maintenance shutdown from May to July at the Long Harbour processing plant and the transition from the Ovoid open pit mine to the new underground operations.
Our Stream segment revenue was $106 million, up slightly from the prior year quarter. The largest variances were due to higher revenue from Pueblo Viejo and Khoemacau and lower revenue from both Mount Milligan and Andacollo. Khoemacau continued to operate at the target throughput rate of 10,000 tons per day for the second consecutive quarter, after completing the ramp up and reaching nameplate capacity in December last year. I'll now turn to Slide 6 and give some comments on notable developments at the operations. At Mount Milligan, Centerra reported that mining of the ore waste transition zone is now mostly complete and they're on track to access the higher grade copper and gold from phases 7 and 9 in the second half of the year. For the full year 2023, Centerra expects gold production to trend near the low end of its 160,000 to 170,000 ounce guidance range and copper production towards the midpoint of its 60 million to 70 million pound guidance range.
Recall that we typically see a five to six months lag between production at the mine and stream sales. So we won't see the benefit of the stronger second half production until sometime in the first half of 2024. At Pueblo Viejo, I visited the site in late June to get an update on the expansion process and the status of the issues related to silver recovery. I was impressed with the progress overall and several components of the expansion have already been commissioned. Silver recovery has remained an issue and I think it's fair to say that Barrick's focus has been on maintaining gold production while completing the expansion rather than optimizing silver production. However, I came away feeling comfortable that Barrick understands the issues with silver recovery and they have a strategy to address those issues as the expansion commissioning progresses.
Silver is an important driver of overall all-in sustaining cost at Pueblo Viejo, and there are other stakeholders who also want to see the silver recovery improve. Barrick expects that silver recovery will improve during the third quarter and reach target rates during the fourth quarter. That said, there was a further deferral of silver deliveries of 89,000 ounces during the quarter, and the total deferred amount was 608,000 ounces at the end of June. We don't expect any material deliveries of deferred ounces for the remainder of the year while the expansions commissioned and ramps up to full production levels and we expect it will take several quarters to deliver the entire deferred amount after the plant is running at full capacity. Finally, at Penasquito, Newmont reported in mid-July that operations remain suspended after strike action was taken by the National Union of Mine and Metal Workers on June 7th.
Newmont is working to resolve the dispute, but has not provided an estimate as to when operations could restart and they have withdrawn 2023 guidance for Penasquito. At this point, we are maintaining our total sales guidance of 320,000 to 345,000 GEOs for 2023. However, if there are no other unforeseen events at our producing properties and operations at Penasquito suspended through the remainder of 2023, total GEO sales may come in around the low end of the guidance range. Note also that our 2023 guidance does not include any impact from potential acquisitions. I'll now turn the call over to Paul for a review of our financial results.
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Paul Libner: Thanks, Martin. I'll now turn to Slide 7 and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended June 30, 2023, to the prior quarter. . Revenue was $144 million for the quarter, which was in line with the prior year. The main drivers of the variance in our revenue this quarter were lower sales a coil, the impact from the strike at Penasquito and a shutdown of the Long Harbour processing plant at Voisey's Bay. The downward impacts to our revenue this quarter from Penasquito and Voisey's Bay were partially offset by new revenue of approximately $6 million from the additional Cortez royalty interest we acquired during the second half of 2022. With respect to metal prices and compared to the prior year quarter, the price of gold was up by 6%, silver was up 7% and copper was down 11%.
Gold remains the dominant revenue source making up 77% of our total revenue, followed by silver at 15% and copper at 6%. Turning now to Slide 8. G&A expense was in line with the prior year quarter at $9 million. Although inflationary pressures continue to have some impact on others within the metals and mining sector, our cash G&A costs have remained low or less than 5% of total revenue. Our DD&A expense decreased to $38 million from $44 million in the prior year quarter. On a unit basis, this expense was $527 per GEO for the quarter compared to $562 per GEO in the prior year period. The DD&A rate on a unit basis declined in the current quarter due to lower depletion rates at Mount Milligan and Pueblo Viejo, which were the result of reserve additions at the end of 2022.
The decrease was partially offset by increased depletion expense at Cortez due to the newly acquired royalty interest and additional depletion expense at Khoemacau, which was a result of higher silver sales due to the continued ramp up when compared to the prior year quarter. We continue to expect DD&A for the full year to be in the range of $490 to $540 per GEO. Interest expense increased to $8.4 million for the quarter from $1.4 million in the prior period. The increase was due to higher average amounts outstanding under our revolving credit facility when compared to the prior period. The all-in interest rate for borrowings under our credit facility was 6.7% at the end of the second quarter. Tax expense for the quarter was $2 million, resulting in an effective tax rate of 3.1%.
This compares to a tax benefit of $5.9 million in the prior year period. All periods included discrete tax benefits attributable to the release of a valuation allowance on certain deferred tax assets. Excluding the discrete tax benefit, our tax rate would have been approximately 17% for the current quarter. We continue to expect our effective tax rate absent discrete tax items to be in the range of 17% to 22% for the full year. Net income for the quarter was down over the prior year to $63 million or $0.97 per share. After adjusting for the discrete tax benefit, the change in fair value of equity securities and a onetime noncash adjustment made to our Williams royalty new, our adjusted net income was $57 million or $0.88 per share, which is higher than the adjusted net income in the prior year quarter of $54 million or $0.81 per share.
Our operating cash flow was strong again this quarter at $108 million compared to $120 million in the prior year. The decrease during the quarter was a result of higher interest payments on our revolving credit facility and lower royalty revenue. I will now turn to Slide 9 and provide a summary of our financial position at the end of the quarter. During the quarter, we repaid $100 million on the revolving credit facility and reduced the amount drawn on the facility to $400 million. For the first six months of 2023, we have repaid $175 million of our revolver balance. And in keeping with our approach to capital allocation, we expect to repay the remaining $400 million in a revolver balance as cash flow allows. The $600 million undrawn revolver capacity, combined with $102 million of working capital, provided us total available liquidity of just over $700 million at the end of the quarter.
As Bill noted earlier, we extended the maturity of our $1 billion revolver out two years to June 2028. And I want to echo his sentiment that we greatly appreciate the strong and continued support of our entire bank group. With respect to further material financial commitments, assuming satisfaction of all closing conditions for the potential acquisition of the royalties from ACG, we anticipate the purchase price for the royalty assets would be made from cash on hand and an approximate $200 million draw on the revolving credit facility. That concludes my comments on our financial performance for the quarter. And I now turn the call back to Bill for closing comments.
Bill Heissenbuttel: Thanks, Paul. I want to briefly mention something that is becoming more topical for our sector, that's the implementation of a global minimum tax or GMT. At this time, we do not anticipate any significant impact due to this worldwide rollout for a couple of reasons. First, we currently fall below the annual revenue threshold of EUR 750 million, so the GMT would not apply to us. Second, as a U.S. domicile company, our royalty revenue is taxed to various rates all in excess of 15%, and our streaming business has been subject to the U.S. GILTI minimum tax since 2018. The GILTI tax rate is currently 13%, rising to 16% to 2026. As a result, we don't expect the implementation of a GMT at a rate of 15% will have a material impact on our business.
And finally, I want to comment on Mark Isto's pending retirement, which we announced in May. Since joining Royal Gold in 2015, Mark has been a key part of Royal Gold, and he has grown and strengthened our internal technical capacity. Mark will be missed, but he's done a great job of building talent within our technical team, and I'm confident that Martin has the right skills to lead that team when he assumes Mark's responsibilities. Mark will be with us for a few more weeks, but I hope you join me in wishing him well in his retirement. . Operator, that concludes our prepared remarks. I'll now open the line for questions.
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