Royal Gold, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015. Although the request metadata refers to “2014 Q4,” this filing is the company’s annual report for FY2015, with FY2014 as the main comparable period. Amounts below are in U.S. dollars.
Business context
Royal Gold acquires and manages precious-metals royalties and streams; it generally does not operate mines or bear their operating costs. At June 30, 2015, it held royalty interests on 36 producing, 22 development-stage and 135 exploration-stage properties, and stream interests on one producing and two development-stage properties. Results depend principally on metal prices and third-party mine production.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $278.0 million | $237.2 million | Up 17% |
| Operating income | $87.2 million | $108.7 million | Down 20% |
| Operating margin | 31.4% | 45.8% | Down 14.4 percentage points |
| Net income attributable to Royal Gold shareholders | $52.0 million | $62.6 million | Down 17% |
| Basic and diluted EPS | $0.80 | $0.96 | Down 17% |
| Cash from operations | $192.1 million | $147.2 million | Up 31% |
- Revenue growth was driven mainly by Mount Milligan stream revenue, which increased to $94.1 million from $27.2 million as production ramped up. Gold represented 81% of FY2015 revenue; average realized gold price was $1,224/oz versus $1,296/oz in FY2014.
- Royalty revenue declined to $183.9 million from $210.0 million. Lower metal prices and lower production at Andacollo and Voisey’s Bay weighed on royalties; higher Cortez production partly offset the decline.
- Cost of sales rose to $33.5 million from $9.2 million, reflecting increased Mount Milligan stream deliveries. Net revenue after stream cost of sales was $244.6 million, or 88.0% of revenue, versus $228.0 million, or 96.1%, in FY2014.
- FY2015 included $28.3 million of royalty and stream impairments, principally a $26.0 million Wolverine impairment, plus a $3.0 million allowance against past-due Wolverine royalty receivables. The company reported the impairment’s after-tax impact on EPS as $0.37. G&A was $27.9 million versus $21.2 million, including the receivable allowance and higher stock compensation.
- Income tax expense fell to $9.6 million from $19.5 million; the effective tax rate was 15.4% versus 23.5%. Management cited foreign-exchange effects, jurisdictional tax rates, tax-law changes and the Wolverine impairment tax benefit. Excluding specified tax-law and impairment items, the stated FY2015 effective rate was 19.6%.
- Cash and equivalents were $742.8 million; current assets were $790.8 million and current liabilities $25.0 million, yielding working capital of $765.8 million and a 32:1 current ratio. The company had no revolver borrowings and $650 million available under its credit facility.
- Debt carrying value was $322.1 million, representing $370 million principal of 2.875% convertible notes due 2019. The filing lists approximately $10.6 million of annual debt service and $412.6 million of total scheduled principal and estimated interest payments.
- Cash used in investing was $51.2 million and cash used in financing was $57.6 million. The calendar-2015 dividend was increased 5% to $0.88 per share, paid quarterly subject to board approval.
Material developments and changes
- The Mount Milligan stream became a larger revenue source as the mine ramped up; it contributed 33.8% of FY2015 revenue. The operator reduced 2015 gold production guidance to 200,000–220,000 payable ounces from 220,000–240,000 after operating issues, while continuing to target throughput improvements.
- Royal Gold entered a $175 million Ilovitza gold stream, subject to conditions; $7.5 million had been advanced by year-end and up to $167.5 million remained conditionally committed. It also formed the Peak Gold/Tetlin joint venture and acquired Tetlin royalties.
- Royal Gold terminated the Tulsequah stream after the operator repaid the $10 million advance; approximately $0.6 million of direct acquisition costs were written off.
- After year-end, the company agreed to major transactions: a $610 million Pueblo Viejo gold-and-silver stream; a $175 million Rainy River stream; and a $130 million Wassa, Bogoso and Prestea stream plus a separate $20 million Golden Star term loan. The Golden Star transactions closed July 28, 2015; the other transactions’ timing and funding were subject to stated conditions.
- After year-end, Royal Gold paid $525 million for a new Carmen de Andacollo gold stream and received $345 million to terminate its former Andacollo royalty. The company estimated termination proceeds net of tax at approximately $300 million, plus a final royalty payment of approximately $9.7 million. These are post-year-end events, not FY2015 revenue or cash receipts except where specified.
Outlook, risks and contingencies
- Management expected FY2016 operating cash flow to increase, assuming similar gold prices, as three new transactions were expected to contribute. It anticipated approximately $1.1 billion of FY2016 capital commitments and expected to fund them from existing liquidity and operating cash flow; before future operating cash flow, it estimated about $350 million of liquidity would remain after those commitments.
- Management stated that available financial resources and operating cash flow should cover foreseeable debt service, general and administrative costs and capital commitments. Further large acquisitions could require additional debt or equity financing.
- Revenue is materially exposed to metal-price changes: management estimated a 10% change in average gold price would change FY2015 revenue by about $24 million. Risks also include mine interruptions, operator financing and execution, permitting and environmental challenges, foreign-jurisdiction risks, and the company’s limited control over third-party operators.
- Pascua-Lama construction remained suspended except for environmental and regulatory compliance; restart and production timing were uncertain. Vale’s calculation of the Voisey’s Bay royalty, including deductions associated with its Long Harbour facility, was disputed and subject to litigation. Yukon Zinc entered creditor protection, and Wolverine was placed on care and maintenance.
- Management and the auditor reported effective disclosure controls and internal control over financial reporting. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether post-year-end stream transactions closed as planned, their actual funding schedules, and liquidity remaining after commitments and Andacollo termination proceeds.
- Mount Milligan throughput, recovery, production and stream margins, and whether operator guidance was achieved.
- Progress and potential recovery of the Voisey’s Bay disputed royalty amounts, and the status and financial impact of the litigation.
- Wolverine’s creditor-protection sale process, collection prospects for the receivable, and any further impairment exposure.
- Updated project economics, permitting and restart prospects for Pascua-Lama and other development-stage assets.
- Metal-price assumptions, concentration in major operators and assets, and the effect of royalty or stream delivery caps and step-downs.