Royal Gold, Inc. — Form 10-Q Summary
Business and reporting period. Royal Gold acquires and manages precious-metals royalties and streaming interests; it generally does not operate mines. This unaudited report covers the three and six months ended December 31, 2014, the second quarter and first half of fiscal 2015. Comparisons are with the corresponding prior-year periods. Results depend principally on metal prices and production at properties operated by third parties.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Prior year | Six months ended Dec. 31, 2014 | Prior year |
|---|---|---|---|---|
| Revenue | $61.3 million | $52.8 million | $130.3 million | $109.3 million |
| Operating income (loss) | $(2.0) million | $22.9 million | $27.5 million | $48.7 million |
| Net income (loss) attributable to Royal Gold stockholders | $(6.5) million | $10.7 million | $12.1 million | $25.9 million |
| Basic and diluted EPS | $(0.10) | $0.16 | $0.19 | $0.40 |
| Operating margin | (3.3%) | 43.4% | 21.1% | 44.5% |
| Net margin attributable to Royal Gold stockholders | (10.7%) | 20.2% | 9.3% | 23.7% |
Margins are calculated from reported figures and rounded. Revenue increased 16% for the quarter and 19% for the half-year. Stream revenue rose to $17.3 million for the quarter and $37.0 million for the half-year, largely reflecting Mount Milligan’s production ramp-up. Royalty revenue fell to $44.0 million and $93.4 million, respectively, amid lower average prices for gold, silver and copper and weaker production at certain properties. The average gold price was $1,201/oz for the quarter and $1,243/oz for the half-year, versus $1,276/oz and $1,302/oz a year earlier.
Operating results were weighed down by impairment charges: $26.6 million for the quarter and $28.3 million for the half-year. The quarter’s Royal Gold stockholder loss included an approximately $0.34-per-basic-share after-tax effect from impairment charges. General and administrative expense also included a $3.0 million allowance against a past-due Wolverine royalty receivable.
Cash flow and liquidity. Six-month operating cash flow was $82.3 million, compared with $70.2 million a year earlier; investing cash outflow was $39.3 million versus $48.1 million, and financing cash outflow was $27.4 million versus $26.8 million. Cash and equivalents were $675.1 million at December 31, 2014, up from $659.5 million at June 30. Current assets of $751.9 million and current liabilities of $19.5 million yielded a reported current ratio of 39:1. The company had $316.9 million of debt carrying value, comprising convertible notes, and no borrowings under its $450 million revolving credit facility; it reported compliance with facility covenants. The notes have $370 million aggregate principal, bear 2.875% interest and mature in 2019.
Dividends declared were $0.22 per common share for the quarter and $0.43 for the half-year, compared with $0.21 and $0.41, respectively, in the prior-year periods.
Material changes and business developments
- Mount Milligan: Higher stream deliveries were a major revenue driver as the mine continued ramping up. Operator-reported payable gold production was 41,000 ounces for the quarter, compared with 20,400 ounces a year earlier. Thompson Creek reported mill throughput at 73% of capacity for the quarter and said additional crushing capacity was needed. Its 2015 production forecast was 220,000–240,000 payable gold ounces.
- Wolverine: An updated mine plan showed materially reduced reserves and resources. Royal Gold recorded a $26.0 million impairment, leaving the royalty interest with a $5.3 million carrying value, and fully allowed for an approximately $3.0 million past-due receivable. The operator placed the mine on care and maintenance; collection is uncertain.
- Tulsequah Chief: Royal Gold terminated the stream agreement in December and wrote off its $10.6 million carrying value. Chieftain repaid the original $10.0 million advance in January 2015; at December 31, the repayment was recorded as a receivable/prepayment. Royal Gold retained a two-year right of first refusal over certain future interests at the project.
- Ilovitza: Royal Gold entered a conditional $175 million gold-stream transaction for a project in Macedonia. Funding includes $15 million of feasibility and permitting deposits and up to $160 million toward construction, subject to specified conditions, including project viability, permits and financing. The stream provides 25% of gold production until 525,000 ounces are delivered and 12.5% thereafter, at a purchase price of 25% of spot. The operator’s prefeasibility study estimated a 23-year mine life and 2018 startup.
- Tetlin / Peak Gold: Royal Gold acquired two royalties for $6 million in September 2014 and contributed $5 million to the Peak Gold joint venture in January 2015. It may earn up to a 40% interest through cash contributions totaling up to $30 million by October 2018.
Outlook, risks and contingencies
Management said available resources and operating cash generation should cover anticipated debt service, overhead and capital needs for the foreseeable future, including dividends and existing acquisition commitments. Remaining commitments included up to $175 million for Ilovitza, subject to conditions, and approximately $12.8 million for the Phoenix Gold stream. Management noted that a substantial acquisition could require additional debt or equity financing. The filing provides no consolidated revenue or earnings guidance; production projections cited are operator estimates, not Royal Gold guidance.
Operator commentary included a 2015 Peñasquito gold production forecast of 700,000–750,000 ounces, with lower production expected in the first calendar quarter and growth thereafter. Andacollo production was lower year over year due primarily to grades; Mulatos production was affected by a transition between ore bodies and mill upgrades; and Robinson gold and copper production declined. These operating and timing estimates are subject to change.
Royal Gold’s Voisey’s Bay royalty is subject to litigation with Vale over royalty calculations on concentrate sales, including future processing at Vale’s Long Harbour facility. Royal Gold alleges underpayment and seeks damages and a ruling on future calculations; the case was in discovery. Management said Vale’s proposed calculation could substantially reduce future royalties and that there is no assurance of agreement. Other principal risks include metal-price volatility, operator performance, production interruptions, permitting and project-development delays, reserve changes, and legal or title disputes. A 10% change in the average gold price during the half-year would, all else equal, have changed revenue by approximately $10.7–$10.8 million.
Important facts for investors to verify
- Whether Wolverine’s mine status, royalty receivable collection prospects, or carrying value have changed.
- Whether Ilovitza’s feasibility, permitting, financing and construction conditions are met before further funding is made.
- Progress on the Voisey’s Bay royalty dispute and the financial effect of any Long Harbour royalty calculation.
- Mount Milligan’s throughput, crushing-capacity additions, gold deliveries and operator production forecasts.
- Actual performance against operator estimates at Peñasquito, Andacollo, Mulatos and Robinson, as well as changes in metal prices.
- Funding and timing of the remaining Phoenix Gold and Ilovitza commitments, and any resulting change in liquidity or debt.