Royal Gold, Inc. — Form 10-Q Summary
Business and period: Royal Gold acquires and manages precious-metals royalties and streams. This unaudited report covers the three months ended September 30, 2013, the first quarter of fiscal 2014, and compares results with the same quarter of 2012. Royal Gold does not operate mines; its results depend principally on metal prices and production at operator-controlled properties.
Financial performance
| Metric | Quarter ended Sept. 30, 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $56.5 million | $77.9 million |
| Operating income | $25.7 million; 45.6% margin | $47.6 million; 61.2% margin |
| Net income attributable to Royal Gold stockholders | $15.2 million; $0.23 per diluted share | $24.8 million; $0.41 per diluted share |
| Operating cash flow | $35.5 million | $53.5 million |
| Capital invested in royalty and stream interests | $48.0 million | $120.0 million |
Revenue declined 27.4%. Management attributed the drop primarily to lower average prices for gold, silver, copper and nickel, together with lower production at several properties, including Peñasquito, Voisey’s Bay, Las Cruces, Robinson, Leeville and Cortez. Gold averaged $1,326/oz versus $1,652/oz; silver $21.32/oz versus $29.80/oz; copper $3.21/lb versus $3.50/lb; and nickel $6.31/lb versus $7.40/lb. Higher production at Andacollo, Holt, Dolores and Wolverine partly offset declines.
Depreciation, depletion and amortization rose to $22.4 million from $21.5 million. The effective tax rate fell to 24.1% from 39.4%, contributing to the smaller decline in net income relative to operating income. Cash dividends declared were $0.20 per share, compared with $0.15.
Financial position and liquidity
- Cash and equivalents were $637.9 million at September 30, 2013, down from $664.0 million at June 30. Total assets were $2.90 billion.
- Current assets of $715.4 million exceeded current liabilities of $28.0 million; the reported current ratio was 26:1.
- Debt carrying value was $304.6 million, consisting of convertible notes due 2019. The notes have $370 million principal and a 2.875% coupon. The $350 million revolving facility was undrawn; the company reported compliance with its covenants.
- Operating cash flow of $35.5 million was below $48.1 million of investing outflows and $13.6 million of financing outflows. Cash decreased by $26.1 million. Investing included the $35 million El Morro royalty acquisition; the quarter also included the final $12.9 million Mt. Milligan stream commitment payment.
Material developments, outlook and risks
- Acquisition: In August 2013, Royal Gold paid $35 million for a 70% interest in a 2.0% NSR royalty on certain portions of Chile’s El Morro project. Goldcorp reported reinstatement of the project’s environmental permit on October 24, 2013; community engagement, project optimization and power-supply evaluation remained ongoing.
- Development exposure: On October 31, 2013, Barrick announced a temporary suspension of Pascua-Lama construction, apart from environmental protection and regulatory compliance. Restart depends on improved economics and reduced legal and regulatory uncertainty. Royal Gold said it did not expect the announcement to affect the royalty’s carrying value.
- Operator outlook: Thompson Creek began commissioning Mt. Milligan in August 2013 and expected commercial production in the fourth quarter of calendar 2013. Goldcorp narrowed Peñasquito’s 2013 gold production guidance to 370,000–390,000 oz. Operator estimates are not independently verified by Royal Gold; the filing provides no consolidated company revenue or earnings guidance.
- Commitments and litigation: Royal Gold had a remaining $50 million commitment for the Tulsequah Chief stream. A Voisey’s Bay royalty dispute seeking at least $29 million in past underpayments, plus further damages and other relief, remained in discovery; no material quarterly development was reported.
- Tax and unusual items: The quarter included a $1.7 million tax benefit relating to an error identified in the review of the fiscal 2012 tax return; management deemed the error immaterial to fiscal 2012 statements. Gross unrecognized tax benefits were $21.9 million, and the company considered a $5–$5.5 million decrease reasonably possible over the next 12 months. Management also intended to indefinitely reinvest certain foreign earnings, leaving those earnings without a U.S. tax provision.
- Principal risks: Results are exposed to metal prices and mine production, as well as project delays, permitting and community challenges, operator financial or operating difficulties, foreign-jurisdiction and tax risks, and acquisition and financing risks. A 10% gold-price change would have changed quarterly revenue by approximately $4.5–$4.6 million, according to the filing.
Important facts for investors to verify
- Whether weaker metal prices and production at key properties persist, and how that affects revenue, margins and cash generation.
- Progress and economics at Mt. Milligan and El Morro, and the duration and implications of Pascua-Lama’s suspension.
- Timing and resolution of the Voisey’s Bay royalty litigation and the company’s remaining Tulsequah Chief funding commitment.
- Tax developments, including the uncertain tax positions, possible near-term benefit reduction and treatment of indefinitely reinvested foreign earnings.
- Whether acquisition spending, dividends and debt obligations remain supported by operating cash flow and available liquidity.