Royal Gold, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter and nine months ended March 31, 2019 (fiscal 2019 Q3), not 2018 Q3. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless noted.
Business context and reporting period
Royal Gold acquires and manages precious-metal streams and royalties; it generally does not operate the mines. For the three months ended March 31, 2019, streams generated 71% of revenue and royalties 29%. Gold accounted for 77% of revenue. The interim statements are unaudited.
Key financial metrics
| Metric | Three months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $109.8m | $307.4m | $116.0m quarter; $342.8m nine months |
| Operating income (loss) | $43.2m | $100.0m | $(193.5)m quarter; $(110.8)m nine months |
| Net income (loss) attributable to Royal Gold stockholders | $28.8m; $0.44 per diluted share | $67.4m; $1.03 per diluted share | $(153.7)m; $(2.35) per share quarter; $(139.8)m; $(2.14) per share nine months |
| Operating margin | 39.4% | 32.5% | Not meaningful due to prior-period impairment losses |
| Cash from operations | Not separately provided | $180.9m | $251.8m nine months |
At March 31, 2019, cash and equivalents were $216.0m; current assets were $265.4m and current liabilities $49.3m, giving working capital of $216.1m and a 5:1 current ratio. Total assets were $2.70bn and equity $2.16bn. Debt was $362.9m net carrying value, representing $370m principal on 2.875% convertible notes due June 15, 2019. The $1bn revolving credit facility was undrawn, with the company reporting approximately $1.2bn of total liquidity. The company was in covenant compliance.
Cash increased $127.2m from fiscal year-end to $216.0m. Nine-month investing cash use was $4.8m and financing cash use was $48.9m, including $50.1m of dividends. Dividends declared were $0.265 per share for the quarter and $0.78 per share year to date.
Material changes versus comparable periods
- Revenue fell 5.3% in the quarter and 10.3% over nine months year over year. Management attributed the declines mainly to lower stream revenue and lower average gold, silver and copper prices; reduced Mount Milligan deliveries were a key factor. Higher deliveries at Pueblo Viejo and Andacollo partly offset the quarterly decline.
- Nine-month operating cash flow declined $70.9m year over year, mainly due to $41.2m more cash taxes paid and approximately $27.5m lower proceeds from streams and royalties, net of production taxes and cost of sales.
- Reported earnings improved sharply against 2018, but the comparison is substantially affected by the prior-year $239.4m royalty-interest impairment, primarily Pascua-Lama. The company said the after-tax impairment reduced prior-year quarterly EPS by $2.74.
- Cash at March 31, 2019 was $127.2m above June 30, 2018. Current ratio increased from about 2:1 to 5:1.
- Effective tax rate was 24.7% for the quarter and 15.1% year to date; period-to-period comparisons reflect discrete tax items and prior-year impairment-related tax benefits.
Outlook, management commentary, risks and unusual items
- Khoemacau silver stream: Royal Gold agreed to advance $212m for 80% of project silver, with an optional additional $53m for up to 20%. Payments are conditional and expected principally in late 2019 and 2020, with the balance in 2021. A separate, conditional subordinated facility of up to $25m was also contemplated. Funding was expected from cash, operating cash flow and/or the undrawn revolver.
- Debt maturity: The $370m convertible notes mature June 15, 2019. Management intended to repay principal in cash, primarily using the revolving credit facility, and settle any excess conversion value in shares. The filing does not report the eventual repayment outcome.
- Operator outlook and disruptions: Centerra expected Mount Milligan throughput to return to full capacity by mid-May 2019 after water-related constraints, while its longer-term water supply plan remained under review. New Gold reported a temporary Rainy River milling suspension on April 24 due to excess tailings-facility water and expected resumption within days, subject to precipitation. Newmont Goldcorp reported Peñasquito operations suspended from April 29 because of a blockade; the production effect was not yet clear.
- Other operating developments: Barrick expected Pueblo Viejo production broadly in line with 2018 and was studying an expansion; completion of prefeasibility work was expected by year-end 2019. These are operator expectations, not Royal Gold guidance. The filing provides no company-wide revenue or earnings guidance.
- Market and portfolio risks: Results depend primarily on metal prices and mine production controlled by third-party operators. The filing estimates that a 10% change in average metal prices over the nine-month period would have changed revenue by approximately $24.5m for gold, $3.0m for silver and $3.1m for copper. Other disclosed risks include permitting, development delays, water and power availability, operating interruptions, reserve changes, litigation and foreign-country risks.
- Unusual accounting item: Adoption of new equity-security accounting guidance moved fair-value changes into earnings; it produced a $1.8m gain in the quarter and a $3.3m loss year to date, potentially increasing earnings volatility. ASC 606 adoption had no reported impact on revenue or net income.
- Management stated that current resources and operating cash flow were expected to cover foreseeable debt service, expenses, capital needs and dividends. Lease-accounting adoption was planned for July 1, 2019, with an anticipated insignificant increase in recognized lease assets and liabilities.
Most important facts for investors to verify
- Confirm the period: this filing covers fiscal 2019 Q3, ended March 31, 2019—not 2018 Q3.
- Review the June 2019 convertible-note repayment and any resulting revolver borrowings; these outcomes are not in this filing.
- Track conditional Khoemacau funding, project development progress and any draw on the optional stream or subordinated facility.
- Check subsequent updates on the Peñasquito blockade, Rainy River water-related interruption and Mount Milligan water supply and throughput.
- Assess revenue sensitivity to metal prices and production at major properties, especially Mount Milligan, Pueblo Viejo and Peñasquito; operator estimates are not independently verified by Royal Gold.
- Distinguish recurring operating performance from the prior-year impairment and from current-period fair-value and tax items when comparing earnings.