Royal Gold, Inc.

Hello and welcome to today's Royal Gold Incorporated calendar year 2022 first quarter conference call. My name is Bailey and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Alistair Baker. Please go ahead.

Thank you, Operator. Good morning and welcome to our discussion of Royal Gold's first quarter 2022 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 Heismuttle, President and CEO, Paul Lindner, CFO and Treasurer, and Mark Kisto, Executive Vice President and COO of Royal Gold Corporation. Dan Brees, Vice President Corporate Development of RGHE, and Randy Shepman, General Counsel, are also available for questions. During today's call, we will make forward with the 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 will also refer to certain non-GAAP financial measures, including adjusted net income, adjusted net income per share, and adjusted EBITDA margins. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available on yesterday's press release, which can be found on our website. Bill will give you an overview of the quarter, followed by Mark with an operating update. Paul will then provide a financial update, and Bill will wrap up the call with some closing comments. We'll then open the lines for a Q&A session. I'll now turn the call over to Bill.

Good morning, and thank you for joining the call. Our call today will be relatively short as we provided an in-depth review of our business two weeks ago during our annual investor update. For those who are unable to join the event, it is available for replay on our website. Turning to the results for the quarter, I'll begin on slide four. It was another good quarter with very solid operating and financial results. We recorded healthy revenue of $162 million, operating cash flow of $101 million, and earnings of $66 million, which were all up significantly over the prior year period. It is worth noting that our margins remain strong and our adjusted EBITDA margin for the quarter was 81%, which is consistent with the 80% we saw for the same quarter a year ago. Unlike operating companies who often see margins erode with the effects of cost inflation, our business model's low cost base has limited the impact of inflationary pressures and allowed us to maintain our high margins. The solid cash flow allowed us to further strengthen the balance sheet and at quarter end we remained debt free with cash on hand of $184 million and access to our full $1 billion revolving credit facility. We remain active in the search for new business opportunities and our strong balance sheet and cash flow position us well to act. We paid our quarterly dividend at our new higher rate of 35 cents per quarter and we were included in the S&P High Yield Dividend Aristocrats Index in January, which reflects our approach to steadily growing our capital return to shareholders over the long term. During the quarter, we issued our first annual guidance for GEO sales, DDNA, and effective tax rate, and I'm pleased to say that we remain on track to meet that guidance. Within the portfolio, we funded the final advance payment on the stream at ComiCow, and we are now entitled to 100% of the payable silver from this high quality and long life operation. We also added a royalty in the lawyers project in British Columbia. This is a small investment that provides us exposure to an emerging gold camp and is a good example of how we use our internal technical skills to identify early stage opportunities that have interesting long-term potential. And finally, just after quarter end, we issued our inaugural ESG report, which is available for review on our website. We think our approach to ESG is unique and well-suited to our business model, and we look forward to engaging with our stakeholders over the coming months to get feedback on the direction we've taken. With that, I'll turn the call over to Mark for an update on our portfolio. Thanks, Bill.

I'll start on slide five with some commentary on revenue and production in the quarter. The portfolio performed well again this quarter. and overall volume was 86,500 gold equivalent ounces, or GEOs. Our royalty segment contributed $57 million in revenue, an increase of 21% over the prior year quarter. Cortez had a strong quarter, and we received our first annual royalty payment from Red Chris, which represents payment for the full calendar year of 2021. On the stream segment side, revenue of 105 million was up about 10% from the prior year quarter, driven by strong gold sales from Mt. Milligan and new revenue from ComiCal and NX Gold, which was partially offset by lower gold and silver sales from Pueblo Viejo. Silver deliveries from Pueblo Viejo were approximately 275,000 ounces in the quarter, which included a modest delivery of about 20,000 ounces of deferred silver. leaving a balance of approximately 439,000 deferred ounces. We don't expect material deliveries of deferred silver this year, as we expect silver recoveries to remain highly variable until the expansion project is complete and bottlenecks associated with the silver circuit and silver recovery can be fully addressed. We continue to see this as a cash flow timing issue, and we don't expect it to have any lasting impact on silver revenue. Turning to slide six, I'll make some brief comments on a few recent developments within the portfolio. We've provided more in-depth discussion during our recent Investor Day update, so my comments here will be brief. At ComiCow, KCM reported strong progress on the ramp up of mine production over the quarter. The mining rate steadily increased from about 3,500 tons per day in January to about 5,700 tons per day in March, and the positive trend continued in April. KCM expects to reach the full run rate of 10,000 tons per day by the fourth quarter of this year. Absent any further complications from COVID, KCM believes they have sufficient liquidity available to allow ComiCow to reach its full production level. At Mount Milligan, Sentero reported a significant increase in resources after the 2021 infill drilling program. as well as an amendment to their environmental assessment that will allow access to long-term water resources subject to receipt of permits. Sentara is working to conclude its life of mine planning work and expects to issue a new technical report during the current quarter. At Pueblo Viejo, Barrick announced that construction of the plant expansion is approximately 39% complete at the end of March and is on track for completion by the end of the year. Eric has also been working with the government of the Dominican Republic on location options for additional tailings capacity. The final location will be subject to the completion of an environmental and social impact assessment, which will be submitted to the government for evaluation and final decision. Turning to slide seven at Cortez, Nevada gold mines provided updates to the life of mine plan for our royalty areas in April. As of December 2021, total gold reserves on the areas covered by our royalties at Cortez contained about 4.1 million ounces. Approximately 3 million ounces of these reserves are contained at Crossroads and Pipeline, and approximately 1.1 million ounces are contained at the Gold Rush Project, where we have a 1% net value royalty on the portion of Gold Rush that falls within our royalty area. Gold Mines expects production from our royalty areas at Cortez or at Crossroads and Pipeline will be approximately 280,000 ounces this year and will average 332,000 ounces per year from 2022 to 2026. Gold's interest in this production is roughly equivalent to an 8% gross smelter return royalty. At Rainy River, New Gold issued an updated technical report which indicates an extension of mine life by about three years to 2031 with an addition of 569,000 ounces of gold in the underground main zones. Finally, at NX Gold, AeroCopper announced year-end increases in M&I resources at 32% and 2P reserves at 25%. Recall that our stream agreement includes potential payments to support Arrow to continue exploring and adding to the resource base. And in the quarter, we funded $3.2 million in additional advance payments for exploration and resource growth success. We have a remaining outstanding commitment of up to $6.8 million for meeting certain targets through the end of 2024. I'll now turn the call over to Paul for a review of our financial results.

Thanks, Mark. I'll now turn to slide eight and give an overview of the financial results for the quarter. For this discussion, I'll be comparing the quarter ended March 31, 2022 to the prior year quarter. Revenue was $162 million for the quarter, a 14% increase. Approximately two-thirds of the revenue increase was driven by strong operating performance, as well as new revenue from ComiCal, NX Gold, and Red Chris, which together contributed $9.8 million during the quarter. About one-third of the revenue increase was driven by realized metal prices, And compared to the prior year quarter, the average prices for gold and copper were up 5% and 17% respectively, while silver was down 9%. Gold continued to be dominant, making up about 71% of our total revenue, followed by copper at 14% and silver at 10%. G&A expense increased to $8.9 million from $6.9 million in the prior year quarter. The increase in our G&A expense was primarily attributable to higher employee-related costs, which also includes non-cash stock compensation expense. Higher ESG costs, as part of our broader ESG initiatives, also contributed to the increase. Our DD&A expense was $48 million, up from $41.3 million. On a unit basis, this expense was $555 per GEO for the quarter, compared to $520 per GEO in the prior year. The increase was mainly due to higher gold sales from Mount Milligan, higher gold production at Cortez, and additional depletion expense from ComiCal and the recently acquired NX Gold Stream and Red Chris Royalty. Income tax expense was $15.3 million for the quarter, which resulted in an effective tax rate of 18.8% for the quarter. Earnings were $65.7 million, or $1 per share, a 22% increase. After adjusting for a $600,000 gain related to fair value change in equity securities, our adjusted earnings were $0.99 per share. We reported another very strong quarter of operating cash flow of $101 million, which was a 10% increase and was primarily due to higher proceeds received from both our royalty and stream interests. I will now turn to slide nine and provide a summary of our financial position at the end of the quarter. Our liquidity position continued to strengthen as we ended the quarter with $184 million of cash, working capital of $209 million, and just over $1.2 billion of available liquidity. We remain debt-free and have our full $1 billion revolver undrawn and available. We continue to view the revolving credits facility as a key financing tool, and we are comfortable drawing on the facility in a measured way, while repaying any amount outstanding as cash flow allows. With respect to further financial commitments, after making the final $26.5 million ComiCal stream advance payment in March, our only remaining near-term commitment is additional success-based payments for the NX Gold stream. of up to $6.8 million through 2024. We expect that any funding for this commitment will be made from our available cash resources. 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, Paul. We turned in a solid first quarter for 2022, and we look forward to building on this through the remainder of the year. Our balance sheet is strong, and our diversified, precious metals-focused portfolio continues to perform well. We expect some positive developments from within the portfolio over the next several months, as we outlined in our investor update. And I look forward to updating you further on these later in the year. I think we're positioned very well. And in this environment of strong metal prices and high inflation, our business models should allow us to maintain consistent and high margins and provide shareholders with continued leverage to the gold price. 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 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, it will be star followed by 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question today comes from Brian MacArthur from Raymond James. Brian, please go ahead. Your line is now open.

Good morning. Just two quick questions. Just on Cortez, your guidance for the year is 288,000 ounces from lands which your synthetic 8% NSR is on, but there's 102 in the first quarter. Was there any catch-up in that 102 for the first quarter, or should I just assume that we're just way ahead of? They've just been on your lands a lot in this quarter, and it'll fall off dramatically throughout the rest of the year.

Yeah, Brian, thanks for the question. I might ask Mark to add anything that he can to that question.

Yeah, you're right. I think the guidance that we're giving for the year we think is pretty solid, and they just had a very good quarter. But we still suspect that the year will look like we're forecasting.

Great, thanks. And just on the red, Chris, so I fully understand this. You book it like one year later, effectively. So obviously, in this quarter, you had last year payments, right? So then as you say, first quarter next year, you'll get this year.

Do they

Is there actually in the contract that anything adjusts for the fact that, you know, you're effectively getting paid money earning this year, a year later? Like, is there an interest carry thing in there or anything? Or is it just, it is what it is that comes out at the end of the day? Because technically you're not actually getting, you're not going to book it as I understand it. You actually don't get the cash until a year later. So it's almost like on a year delay. Is that how it works? Or is there any other adjustment in the contract?

Brian, that's a good question. I would be extremely surprised if there was an interest component. We knew the royalty payment terms going in, and it might be a little bit unusual, but we're not uncomfortable receiving the revenue or the cash after a full year of production. It just gets built into the timing and the valuation. Paul, is there anything? Am I off base here?

No, you're not, Bill. And Brian, you're correct in that we are recording this on a cash basis, so in the period in which we receive the actual calculation. That's primarily due to just some of the information that we receive during the period, not quite understanding that an accrual could be made during the quarter, each quarter during the calendar year.

Great, thanks. Sorry, just a small point, but I just thought I'd flesh that out. Thank you very much. I appreciate it.

You're welcome. Thanks for the question.

Thank you, Brian. The next question today comes from Josh Wolfson from RBC. Josh, please go ahead. Your line is now open.

Thank you very much. I noticed the commentary on the ComaCow operator financial condition, I guess, has improved versus some of the prior language. I'm just wondering were there any additional funding related items maybe by other third parties there or would this just be a function of maybe the ramp up performing well and some of the funds that Royal Gold provided having resolved that?

Josh, I'm not aware of any third party fundings there. Mark, chime in if I'm going astray. We're really happy with the way the ramp-up is going, and again, I don't know of any additional commitments or advances made. Good. Okay.

I noticed there were some articles about the operator looking at potentially looking at some sort of transaction of some sort that could develop and it sounds like these talks are early stage. I'm just wondering, would Royal Gold in any capacity be involved with this? Probably not on the stream side is my guess, but maybe as a debt holder or is this something that you can comment on at least if something were to happen, how the company would be involved?

I don't expect that we would be involved in a going public scenario. We've always built abilities to transfer and an IPO in this scenario was contemplated from, I think, from day one.

Okay. Those are all my questions. Thank you.

Thank you. Thank you, Josh. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad.

Our next question today comes from... Unfortunately, that is all we have time for today.

Thank you very much for your... time today. I'd now like to pass the conference over to Bill Heisenpatel for closing remarks. Please go ahead.

Well, thank you very much for 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 the next quarterly call.

Thank you. That concludes today's conference call. Thank you.