Royal Gold, Inc. — FY2019 Form 10-K
Period clarification: The filing is the annual report for the fiscal year ended June 30, 2019, not a standalone 2018 fourth-quarter report. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Royal Gold acquires and manages precious-metal streams and royalties; it generally does not operate the mines. Streams generated 72% of FY2019 revenue and royalties 28%. The company reported interests in 35 producing, 14 development-stage and 129 exploration-stage royalty properties, and seven streams across producing and development-stage properties. Results depend principally on gold prices and third-party mine production.
Financial performance and liquidity
| Metric | FY2019 / June 30, 2019 | Prior comparable period |
|---|---|---|
| Revenue | $423.1 million | $459.0 million in FY2018 |
| Operating income (loss) | $140.7 million | $(74.5) million in FY2018 |
| Net income (loss) attributable to Royal Gold common stockholders | $93.8 million; $1.43 per diluted share | $(113.1) million; $(1.73) per diluted share in FY2018 |
| Operating cash flow | $253.2 million | $328.8 million in FY2018 |
| Cash and equivalents | $119.5 million | $88.8 million |
| Debt | $214.6 million carrying value; $220 million principal outstanding on revolver | $351.0 million carrying value, including the 2019 notes |
| Working capital | $121.1 million; current ratio 5:1 | $74.4 million; current ratio about 2:1 |
Revenue fell 8% year over year. Stream revenue was $305.8 million (down from $324.5 million); royalty revenue was $117.2 million (down from $134.5 million). Operating margin was approximately 33% of revenue. Gold accounted for 78% of revenue, silver 9%, copper 9% and other minerals 4%; average gold, silver and copper prices were $1,263/oz, $15.00/oz and $2.79/lb, respectively.
Lower revenue reflected lower average metal prices and weaker production/sales at Mount Milligan, Pueblo Viejo and Peñasquito. Higher sales at Andacollo and Rainy River partly offset the declines. Cash from operations decreased mainly because income taxes paid rose and net proceeds from streams and royalties declined. Investing activities used $5.6 million; financing activities used $216.8 million, including repayment of $370 million of 2019 notes and $67.5 million in cash dividends, partly offset by $220 million drawn on the revolver.
Material changes and notable items
- FY2019 earnings recovered from the FY2018 loss, primarily because FY2018 included $239.4 million of impairment charges, principally on Pascua-Lama. No impairment charge was recorded in FY2019.
- The company settled litigation over the Voisey’s Bay royalty calculation; the revised method applies to production after April 1, 2018. FY2019 royalty revenue attributable to the interest was approximately $11.9 million, including the non-controlling interest.
- Royal Gold entered a conditional $212 million Khoemacau silver stream commitment for 80% of silver production, with an optional additional $53 million for up to 20%. It also may provide up to $25 million in subordinated debt at LIBOR plus 11%. Advance payments depend on project conditions and development progress.
- The $370 million, 2.875% convertible notes matured and were settled in cash in June 2019, primarily using the revolver. The revolver was amended, extending maturity to June 2024; $780 million remained available at year-end, and the company reported covenant compliance.
- Calendar-year 2019 dividend was increased 6% to $1.06 per share. FY2019 dividends declared were $1.05 per share.
- A new accounting standard resulted in a $6.8 million loss on fair-value changes in equity securities. The company completed acquisition of its final tranche of Contango ORE shares.
Outlook, commentary and risks
The filing does not provide a consolidated company revenue or earnings guidance range. Operator estimates are third-party forecasts, not Royal Gold guidance. Mount Milligan’s operator maintained calendar-2019 production guidance of 155,000–175,000 ounces of gold and 65–75 million pounds of copper, but warned that continued dry conditions could require production management in early 2020 and identified the need for a long-term water supply. Golden Star reduced Wassa calendar-2019 gold guidance to 150,000–160,000 ounces, citing lower expected grades. Peñasquito operations resumed after a blockade-related suspension; the interruption materially reduced June-quarter royalty revenue. Rainy River had a temporary mill suspension due to excess water, then restarted.
Key risks include exposure to metal-price movements, dependence on third-party operators and their reported production and reserve data, concentration in major properties (seven named properties contributed about 76% of FY2019 revenue), development and permitting delays, operational and water constraints, community or indigenous opposition, foreign-jurisdiction risks, and potential mine interruptions. A 10% change in average gold price was estimated to change FY2019 revenue by about $34 million; corresponding silver and copper sensitivities were about $4.0 million and $4.1 million. Pascua-Lama remains an exploration-stage interest with a $177.7 million carrying value after the prior-year impairment. The company also reported monitoring insolvency proceedings at El Toqui, whose royalty carrying value was approximately $1.4 million and could be written down. CEO Tony Jensen announced plans to retire by the end of the first quarter of calendar 2020.
Management and the independent auditor concluded that internal controls over financial reporting were effective; the auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified impairment assessment of stream and royalty interests as a critical audit matter. The filing reports no material legal proceedings involving Royal Gold.
Important facts for investors to verify
- How current operator guidance, production and water-management plans compare with realized results, particularly at Mount Milligan, Wassa, Peñasquito and Rainy River.
- Whether Khoemacau meets funding and development conditions and whether the planned stream advances occur on schedule; assess the optional stream and subordinated facility separately.
- Royal Gold’s post-note repayment debt profile, revolver availability, interest costs and capacity to fund commitments, dividends and acquisitions.
- The assumptions supporting reserve estimates, depletion and impairment assessments, especially for Pascua-Lama; reserve and operating information is supplied by operators and is not independently verified by Royal Gold.
- Revenue concentration and sensitivity to metal prices, production disruptions, contract thresholds and changes in stream or royalty rates.
- Resolution and potential financial effect of El Toqui insolvency proceedings, tax uncertainties, and the CEO succession plan.