Gold Royalty Corp. (AMEX:GROY) Q4 2023 Earnings Call Transcript March 28, 2024
Gold Royalty Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Joanne Jobin: Good morning. I’m Joanne Jobin, your VID Media host. Welcome to the Gold Royalty Quarterly Town Hall Forum. Before we commence just a reminder that if you do have any questions for the company, please place them into the Q&A tab located at the top of this screen. After the presentation, I will be delighted to moderate submitted questions from our audience. With us this morning is the Gold Royalty team, led by Chairman and CEO, David Garofalo, who will make the intros to the team and take you through the highlights of the most recent quarterly results. David, the stage is yours.
David Garofalo: Thank you, Joanne, and good morning, everybody. We’re delighted you could join us to talk about our fourth quarter results. I’m joined today by our Chief Financial Officer, Andrew Gubbels; and our Director of Investor Relations and Corporate Development, Peter Behncke. And I’ll pass it on to them shortly. But I thought what I would do to start today is talk a little bit about the gold price environment that we find ourselves in, and I think it’s been an auspicious start to the year. Many of the themes that we were talking about over the course of 2023 and even before that have really come to pass in terms of a rising gold price in the face of falling real interest rates. Inflation is still quite deeply entrenched.
The headline numbers really understate the reality on the ground. We’re not experiencing 3% or 4% inflation fact, if you look at our day to day expenses, whether it’s food, fuel, or shelter, and as we see interest rates reset on mortgages, we’re seeing 15% to 20% inflation on the ground. And gold is a very accurate barometer of the inflation we’re experiencing and where real interest rates lie. Yes, interest rates have stabilized on a normal basis. They have gone up significantly in the last couple of years as the Federal Reserve and other central banks have tightened monetary policy, but the reality is inflation’s continued to accelerate. So that’s driven real interest rates down deeper and deeper into negative territory. What gold is telling you is the purchasing power of your fiat currencies is steadily being deteriorated through inflation.
You’re losing your savings through inflation. Gold is the ultimate protector of your capital because it’s the one currency can’t be printed and it’s telling us that inflation is still undermining the value of our paper currencies, and we’ll continue to do so. The Federal Reserve is starting to pivot, or at least signaling that they will, and going to be cutting nominal rates, and I would argue that’s actually quite premature. It’s not going to be as a result of inflation coming down. It’s because of the onerous debt levels that we’ve stopped on globally, at the government level, corporate level, and individually at 350% to debt to GDP, interest rates right now, nominal rates make debt unserviceable. There’s no fiscally responsible way for these governments to repay the debt.
So the central banks are pivoting away from higher interest rates in order to preserve corporate and government balance sheets, not because inflation is slain. That’s why we think gold will continue to accelerate. And it’s nowhere near the all time highs for gold on a real basis, because you look at the last big inflation cycle we had in the 1970s, gold actually peaked close to $3,000 an ounce on a real basis [indiscernible]. So well away from where the all time high for gold is. And I would argue that we’re going to experience much higher gold prices than we experienced in the last big inflation cycle because, as I said, the central banks are cutting interest rates prematurely before inflation has actually been tamed and that will result in unprecedented levels for the gold price.
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Q&A Session
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And the question you quite often have to ask yourself is where are you best positioned to get leverage of the gold price? It certainly hasn’t been the equities, and I know that’s disappointing for many gold investors. You would think that you would get leverage from operating companies in a stable cost environment, but we are not in a stable cost environment. So even though gold is up nearly 8% this year, to all-time highs in U.S. dollar terms, we’ve actually seen the GDX, which is the large cap producers, see virtually no change in their equity valuation. So in other words, the gold equities have gone up zero year-to-date, in spite of an 8% increase in the gold price. And that’s also true for the juniors. That’s not unexpected. The smaller cap names tend to benefit from gold price rallies a little later in the cycle as money starts to trickle down from the larger cap players.
But it’s telling that the larger cap players in our universe, the producers, are not experiencing any leverage to the gold price. And there really is two distinct reasons for that. One is cost inflation. They have an overhang in their costs due to inflation in the general economy, they are certainly not immune from inflation, fuel and labor costs and we’re still experiencing that to a great degree. And that’s overhung their margins. And so even though the gold price has been going up, their margins continue to be compressed and stressed. And the other reason is because the industry continues to shrink, because of the lack of capital for the juniors, who have not experienced any sort of relief in the space of this gold price rally, we haven’t seen any significant exploration in the industry to replace depleting reserves.
And so as a result, we’ve seen a 40% decline in reserves since 2012, among the producers. And we continue to see a cannibalization of the companies within the space, more and more merger activity to sustain unsustainable production levels among the senior companies. The biggest producers in the gold universe, the largest cap names, are producing the same amount of gold today that they did 26, 27 years ago. The big change has been that their share count has gone up exponentially. So in other words, they have had to cannibalize other companies in order to maintain production levels that frankly are unsustainable, given the global decline in gold reserves and the lack of exploration activity to replace those depleting reserves. That’s why time and again, we’ve said that the best place to be placed to get optimum leverage of the gold price is among the royalty companies that offer top line exposure while protecting you from inflation, they offer you diversification, and they also offer you leverage to the exploration upside of our underlying operating partners.
Last year alone, our operators invested over $200 million in exploration on their properties. We contributed nothing to those exploration budgets, but we got all of the upside within our very diversified royalty portfolio of over 240 royalties. And we’ve actually started to see good financial results in the fourth quarter for the first time in our history, and we’ve only been in business for a little over three years now. Our anniversary was March 11 since our IPO, third year anniversary since our IPO in March of 2021. And we’ve already realized a $0.01 of adjusted earnings in the fourth quarter versus a $0.02 loss on an adjusted basis in the previous fourth quarter of 2022. We did actually book a non-cash impairment of just under $20 million in the fourth quarter.
Again, that’s an accounting impairment, it doesn’t have anything to do with cash on the balance sheet. Really the biggest chunk of that write off related to First Majestic’s Jerritt Canyon Mine, which suspended operations on last year. We took the conservative view of writing that down to zero, even though First Majestic has been aggressively drilling out that mine and is looking at ways to bring that back online. So, in fact, if they do bring it back online, we would actually reverse the impairment as a result of that. So we’re optimistic that First Majestic will find a plan to resume operations there, and then we’ll start to get cash flow from that operation going forward once they do that. We’re poised to deliver very significant growth this year.
100% increase in our revenue versus what we realized in 2023, so a doubling. And we’ve run a lot of costs out of our company as a result of the post-merger integration efforts. As you’ll recall, we merged with three other companies over the course of 2021. We bought Ely Royalties, Golden Valley Royalties and Abitibi. And as a result of our integration efforts, we run almost 40% out of our operating costs last year, and now we’ve stabilized our cash operating cost of about $8 million per annum. So we’re in a position now to continue to book positive earnings, we believe, and also positive free cash flow for the first time in our history, so starting to compile cash going forward from our operations. And that’s a remarkable achievement for a company that’s only three years old.
You’ll remember when we started our company back at our IPO in March of 2021, we only had 18 royalties. None of them were cash flowing, a significant mineral endowment underlying those 18 royalties. But as a result of our consolidation efforts and the acquisition of some very strong royalties, including Cote in Ontario, Cozamin in Mexico and Borborema in Brazil, all of which are going to be contributing meaningfully to our revenue growth this year. We’ve seen significant revenue growth, and we’re forecasting on a consensus basis, about 60% compounded annual growth in our revenue right through the end of this decade. And given that our costs are quite stable right now, that means that our revenue growth is going to fall right to the bottom line and continue to compound the increase in our free cash flow going forward.
So with that, I’d be delighted to hand it over to Andrew Gubbels to talk about our financial results in the fourth quarter.
