Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2014. This is fiscal 2014 third quarter, although the request metadata identifies 2013 Q3. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Royal Gold acquires and manages precious-metals royalties and streams and does not operate mines. At March 31, 2014, it held interests in 37 producing, 22 development-stage and 142 exploration-stage properties. Its results are principally exposed to metal prices and production at third-party-operated mines.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2014 | Three months ended Mar. 31, 2013 | Nine months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Revenue | $57.7 | $74.2 | $167.0 | $231.9 |
| Operating income | $28.6 | $42.9 | $77.3 | $141.2 |
| Operating margin | 49.5% | 57.9% | 46.3% | 60.9% |
| Net income attributable to Royal Gold stockholders | $20.1 | $6.5 | $46.0 | $58.5 |
| Diluted earnings per share | $0.31 | $0.10 | $0.71 | $0.93 |
Quarterly revenue fell 22% year over year; nine-month revenue fell 28%. Lower average prices for gold, silver, copper and nickel and production declines at several properties were principal factors. Quarterly earnings rose from the prior-year quarter largely because that period included a $12.1 million impairment loss on available-for-sale securities and had higher tax expense. Nine-month earnings declined alongside revenue.
For the nine months, operating cash flow was $115.1 million, investing cash outflow was $79.5 million, and financing cash outflow was $53.5 million. Cash and equivalents were $646.1 million at March 31, versus $664.0 million at June 30, 2013. Current assets of $712.4 million and current liabilities of $25.5 million yielded a 28:1 current ratio.
Debt carrying value was $309.4 million, consisting of convertible notes due 2019; the notes have $370 million aggregate principal and a 2.875% coupon. The amended revolving facility provides $450 million of availability, with an option to increase total availability to $600 million subject to conditions. No amounts were drawn, and the company reported compliance with its financial covenants. Dividends declared were $0.21 per common share for the quarter and $0.62 for the nine months.
Material changes and business developments
- Mt. Milligan began production and reached commercial production in February 2014. The stream generated $6.0 million of quarterly revenue and $8.6 million for the nine months. Thompson Creek expected mill throughput to reach 75%–85% of design capacity by year-end 2014.
- Royal Gold agreed to fund a $75 million gold stream for Rubicon’s development-stage Phoenix Gold Project; $30 million had been paid by March 31, with $45 million remaining, conditional installments. Rubicon projected production to begin in mid-2015. Royal Gold is entitled to 6.30% of gold deliveries until 135,000 ounces, then 3.15%, paying 25% of spot price per ounce, subject to contract terms.
- Acquired a 1.0% net revenue royalty on the Goldrush deposit for $8 million, including $7 million payable in seven annual installments; the property is exploration-stage.
- Increased its effective NVR1 interest at Cortez for approximately $11.5 million. The purchase included interests from directors and former directors and raised Royal Gold’s partnership ownership to 81.098%.
- Acquired a 70% interest in a 2.0% NSR royalty on the development-stage El Morro project for $35 million. A further $50 million commitment remained for the Tulsequah Chief stream, subject to conditions precedent.
Outlook, commentary and risks
Management said existing financial resources and operating cash flows should cover foreseeable debt service, administrative costs and commitments, as well as support dividends and acquisitions. The filing does not provide company-wide earnings or revenue guidance. Calendar 2014 production figures are operator estimates, not company forecasts, and Royal Gold cautions that they are not independently verified and may not be achieved.
Property updates were mixed: reported production increased at Peñasquito, Canadian Malartic and Cortez, while declines at Andacollo, Voisey’s Bay, Mulatos and Robinson weighed on results. Management identified metal-price volatility, operator production and project delays, permitting, mine risks, foreign-country exposure, acquisition financing and tax-law changes as material risks. A Voisey’s Bay royalty litigation remains in discovery; the claim seeks at least $29 million for alleged past underpayments plus additional damages, interest and costs. The company also reported $23.6 million of gross unrecognized tax benefits and said net unrecognized benefits could decrease by $4.0–$4.5 million within 12 months.
Management reported effective disclosure controls as of March 31, 2014, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether lower metal prices and production at major royalty properties persist, and how operator estimates compare with actual output.
- Mt. Milligan’s throughput, shipment settlement timing and resulting stream deliveries; Phoenix Gold’s construction progress, remaining funding conditions and projected start date.
- Cash available after the Phoenix Gold and Tulsequah Chief commitments, and any changes in revolver availability, debt or covenant compliance.
- Progress and potential recovery in the Voisey’s Bay litigation, along with resolution of uncertain tax positions and any tax-law changes affecting foreign earnings.
- The performance and valuation of the Seabridge investment; its fair value was $7.2 million at March 31, 2014, with no impairment write-down recorded in the period.