Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016; comparative period is the three months ended September 30, 2014. Balance-sheet comparisons are to June 30, 2015. Royal Gold acquires and manages precious-metals royalties and streams and does not generally operate the mines.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2015 | Prior-year quarter |
|---|---|---|
| Revenue | $74.1 million | $69.0 million |
| Operating income | $21.2 million | $29.5 million |
| Net income attributable to Royal Gold | Loss of $45.0 million; $(0.69) per share | Income of $18.7 million; $0.29 per share |
| Operating margin | 28.6% | 42.8% |
| Operating cash flow | $2.5 million | $52.5 million |
- Revenue increased 7.3%. Stream revenue rose to $37.9 million from $19.7 million, while royalty revenue fell to $36.2 million from $49.4 million. New streams and higher Mount Milligan production supported growth; lower metal prices, lower Cortez production, and the Andacollo royalty sale weighed on royalties.
- Average gold price was $1,124/oz versus $1,282/oz; silver was $14.91/oz versus $19.76/oz; copper was $2.39/lb versus $3.17/lb; and nickel was $4.79/lb versus $8.43/lb.
- Net loss chiefly reflected $59.2 million of income tax expense and a 415.7% effective tax rate, largely from discrete tax effects of the Andacollo transactions and planned liquidation of the Chilean subsidiary. Management said the rate would have been 22.2% excluding the discrete effect of the royalty termination; that termination’s tax effect was about $0.86 per share.
- Costs and expenses were $52.9 million, up from $39.5 million. Higher stream cost of sales and depletion reflected increased and newly acquired stream production; G&A rose partly because of higher performance-share compensation. No royalty or stream impairment was recorded, compared with $1.8 million in the prior-year quarter.
- Cash and equivalents were $104.3 million, down from $742.8 million at June 30. Investing cash outflow was $976.1 million, principally for acquisitions; financing provided $335.1 million, including $350 million of revolver borrowings. Dividends paid were $14.3 million; dividends declared were $0.22 per share.
- Total assets were $3.23 billion and royalty and stream interests, net, were $3.01 billion. Debt was $674.8 million: $324.8 million of convertible notes, net, and $350 million drawn on the $650 million revolver. The revolver had $300 million available at a 1.46% all-in rate; the company reported covenant compliance.
- Working capital was $125.2 million; reported total liquidity, including undrawn revolver availability, was $425.2 million. Current assets were $152.3 million against current liabilities of $27.1 million.
Material transactions and changes
- Closed a $610 million Pueblo Viejo gold and silver stream with Barrick. Gold deliveries are scheduled to begin in December 2015; the silver stream starts in January 2016.
- Acquired the Andacollo gold stream for a $525 million advance payment and terminated the existing Andacollo royalty for $345 million. The royalty termination generated significant tax consequences.
- Paid $100 million toward a $175 million Rainy River stream, with the remaining $75 million conditional on project spending. Also committed up to $130 million for the Golden Star Wassa/Bogoso/Prestea stream; $55 million had been paid by quarter-end. A separate $20 million Golden Star term loan was funded.
- Acquired an additional Pascua-Lama royalty for $8 million, with further contingent consideration of $1 million or $2 million depending on production timing. The portfolio’s net royalty and stream interests increased from $2.08 billion to $3.01 billion during the quarter.
Outlook, commentary, and risks
- Management expected operating cash flow to increase during the remainder of fiscal 2016, assuming similar gold prices, as new transactions contribute. It stated existing resources and operating funds should cover foreseeable debt service, expenses, and capital expenditures; further substantial acquisitions could require additional financing.
- Management cited approximately $72.5 million of anticipated capital expenditures for the remainder of fiscal 2016. Separate conditional commitments at quarter-end included $75 million for Rainy River, $75 million for Golden Star, and $167.5 million for Ilovica.
- Operator estimates are not company guidance and are not independently verified. Golden Star expected 2015 production guidance to be met; Goldcorp expected Peñasquito to exceed its 700,000–750,000-ounce gold guidance. Rainy River was projected by its operator to start production in mid-2017; Golden Star forecast underground Wassa production in 2016 and Prestea production in 2017.
- Key exposures include metal prices and operator production, development, permitting, and financing. The filing estimates a 10% change in gold price would have changed quarterly revenue by about $6.3–$6.4 million.
- Vale and Royal Gold dispute deductions used to calculate the Voisey’s Bay royalty; litigation was in discovery. At Andacollo, an earthquake damaged the operator’s port loading facilities, temporarily suspending shipments, though production had not been materially affected as reported by Teck. Rubicon reported it was suspending underground work at Phoenix Gold while revising its geological model and project plan.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Review the Andacollo tax treatment and whether the unusually high effective tax rate is nonrecurring.
- Track cash generation, liquidity, revolver usage, and funding of outstanding acquisition commitments.
- Verify delivery and production performance from the new streams, including Pueblo Viejo, Golden Star, and Rainy River development milestones.
- Monitor the Voisey’s Bay royalty dispute and any effect on royalty calculations or payments.
- Check operator updates on metal prices, production, project schedules, and risks at Andacollo, Phoenix Gold, and other principal properties.