Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2015. Royal Gold acquires and manages precious-metals royalties and streams; it does not generally operate the mines underlying these interests. Financial amounts below are in U.S. dollars.
Financial performance
- Quarter revenue: $98.1 million, up 60% from $61.3 million. Stream revenue rose to $67.3 million from $17.3 million, while royalty revenue declined to $30.8 million from $44.0 million.
- Quarter earnings: Operating income was $27.2 million versus an operating loss of $2.0 million. Net income attributable to Royal Gold stockholders was $15.1 million, or $0.23 per diluted share, versus a $6.5 million loss, or $0.10 loss per share. Operating margin was approximately 27.7%.
- Six-month results: Revenue was $172.2 million, up 32% from $130.3 million. Operating income was $48.4 million versus $27.5 million. Royal Gold reported a $29.9 million attributable net loss, or $0.46 per diluted share, compared with attributable net income of $12.1 million, or $0.19 per share, in the prior period.
- Taxes and unusual item: Six-month income tax expense was $63.9 million, producing a 194.3% effective tax rate, primarily due to discrete tax effects from the Andacollo transactions and liquidation of a Chilean subsidiary. Management said the rate excluding discrete items would have been 15.6%. The Andacollo royalty termination contributed approximately $56 million of tax expense; management cited a $0.86-per-share effect.
- Cash flow: Six-month operating cash flow was $54.6 million, down from $82.3 million, including approximately $47.7 million of cash taxes related to Andacollo. Investing cash outflow was $1.0 billion, mainly for acquisitions; financing cash inflow was $320.4 million, including $350 million of revolver borrowings. Cash fell to $117.6 million from $742.8 million.
- Liquidity and debt: Working capital was $142.3 million; the current ratio was 8:1, down from 32:1 at June 30, 2015, largely following acquisitions. The company reported total liquidity of $442.3 million, including $300 million available on its $650 million revolving facility. Debt totaled $677.5 million: $350 million revolver borrowings and $327.5 million carrying value of 2019 convertible notes. The revolver rate was 2.82%; covenants were met.
- Other: Cash dividends declared were $0.23 per share for the quarter and $0.45 for six months. Gold accounted for about 90% of quarterly revenue. A 10% change in average gold price would have changed quarterly revenue by approximately $15.4–$15.5 million, according to the filing.
Changes and business developments
- Revenue growth principally reflected increased Mount Milligan stream production and new production from the Pueblo Viejo, Wassa/Prestea and Andacollo streams. Lower metal prices, reduced Cortez production and the sale of the Andacollo royalty weighed on royalty revenue.
- Royalty and stream interests, net, increased to $3.0 billion from $2.1 billion. Major transactions included a $610 million Pueblo Viejo stream advance, a $525 million Andacollo gold stream advance, and a $100 million initial Rainy River advance. Royal Gold also received $345 million for terminating its former Andacollo royalty.
- Stream cost of sales increased to $22.6 million for the quarter from $6.2 million, and depletion and amortization rose to $40.4 million from $20.3 million, reflecting higher and newly acquired stream production.
- Quarterly results benefited from the absence of the prior-year quarter’s approximately $29.6 million of impairment and receivable write-down charges.
Outlook, risks and contingencies
- Management expected operating cash flow to increase in the remainder of fiscal 2016, assuming similar gold prices, as recently acquired streams contributed. It believed existing resources and operating cash flow would cover anticipated needs, while noting that substantial future acquisitions could require additional debt or equity financing. No company-wide revenue or earnings guidance is provided in the filing.
- Operator forecasts included 2016 gold production of 240,000–270,000 ounces at Mount Milligan and 180,000–205,000 ounces at Wassa/Bogoso/Prestea. These are operator estimates, not Royal Gold guidance; actual results may differ.
- After quarter-end, Rubicon reported a significant reduction in Phoenix Gold mineralized material. Royal Gold was evaluating recoverability of its $75.8 million carrying value and said an impairment could be required. Rubicon was considering strategic alternatives.
- Royal Gold warned that Thompson Creek’s financial condition could affect Mount Milligan, a significant stream asset. Barrick also indicated potential impairment charges related primarily to Pascua-Lama and Pueblo Viejo; Royal Gold planned to review updated operator information.
- A dispute with Vale over deductions used to calculate the Voisey’s Bay royalty was in litigation. Royal Gold disputes Vale’s position on Long Harbour operating, capital and financing-cost deductions; the case was in discovery.
- Conditional remaining funding commitments were $75 million for Rainy River, $70 million for Wassa/Bogoso/Prestea and $163.75 million for Ilovica, in addition to an unspecified Peak Gold joint-venture commitment. Key broader risks include metal-price volatility, mine performance and development delays, operator financing, reserve changes, and legal or tax disputes.
Most important facts for investors to verify
- Whether new streams deliver expected production and cash flow, and whether conditional funding commitments are met.
- The outcome of Royal Gold’s Phoenix Gold impairment review and Rubicon’s strategic process.
- Thompson Creek’s ability to sustain Mount Milligan operations and any effect on Royal Gold’s stream receipts.
- Vale litigation developments and the resulting Voisey’s Bay royalty calculations and payments.
- The final tax and cash impacts of the Andacollo transactions and Chilean subsidiary liquidation, as well as available revolver capacity and covenant compliance.