ROYAL GOLD INC quarterly report, Q3 FY2011

Business context and reporting period

Royal Gold, Inc. acquires and manages precious-metals royalties and similar interests; it does not generally operate mines. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended March 31, 2011, compared with the periods ended March 31, 2010. Financial amounts below are U.S. dollars.

Financial performance and position

• Operating margin was approximately 57% for the quarter and 54% for the nine months; the comparable prior-period margins were approximately negative 4% and 26%, respectively.
• At March 31, 2011, cash and equivalents were $125.8 million, total assets $1.913 billion, and total debt $245.0 million ($15.6 million current). Current assets of $185.0 million exceeded current liabilities of $33.9 million; the reported current ratio was 5:1. The company had $110 million available on its $225 million revolving facility.
• Nine-month investing cash outflow was $275.8 million, primarily reflecting $279.5 million of royalty-interest acquisitions. Cash decreased $199.1 million from June 30, 2010.
• Dividends declared were $0.11 per share for the quarter and $0.31 for the nine months, compared with $0.09 and $0.26, respectively.

Material changes versus prior periods

• Revenue rose about 59% for the quarter and 64% year to date, supported by higher average metal prices, the Andacollo royalty, acquired International Royalty Corporation (IRC) producing royalties, and Peñasquito’s ramp-up. Average gold prices were $1,386/oz for the quarter and $1,325/oz year to date, versus $1,109/oz and $1,055/oz.
• Growth was partly offset by lower production at Cortez and Robinson and the exhaustion of dollar caps at Taparko and Siguiri. Taparko revenue also declined after its capped royalties ended.
• Quarterly results benefited from the absence of $16.9 million of IRC severance and acquisition-related costs recorded in the prior-year quarter; nine-month results benefited from the absence of $19.2 million of such costs.
• Depreciation, depletion and amortization increased to $15.8 million for the quarter and $50.8 million year to date, reflecting acquired and newly producing royalties. Interest expense also rose with debt balances.

Outlook, management commentary, risks and contingencies

• Management said existing resources and operating cash generation should cover foreseeable operating costs, debt service, dividends, and the potential Mt. Milligan commitment. A major acquisition could require additional debt or equity financing.
• Royal Gold paid $226.5 million for a 25% share of payable gold from the development-stage Mt. Milligan project and may make additional payments of up to $85 million subject to contractual conditions. Gold purchases after production begins are priced at the lesser of market price or $400/oz for the first 550,000 ounces, then the lesser of market price or $450/oz.
• The company paid $53 million for additional Pascua-Lama royalties, increasing its gold NSR royalty to as much as 5.23% at gold prices above $800/oz and its copper royalty to 1.05% effective after January 1, 2017.
• Operator estimates, not independently verified by Royal Gold, included 2011 production expectations for principal properties. Management cautioned that estimates may not be achieved. Updates included delayed Gwalia Deeps access to higher-grade stopes, lower-than-expected first-quarter Mulatos output, and continued production constraints at Cortez and Robinson. Wolverine began generating royalty revenue in the quarter; Canadian Malartic commercial production was anticipated in May 2011, and Pascua-Lama construction work continued.
• Material risks include metal-price volatility, mine output and operator decisions, project delays or operating issues, foreign-country and permitting risks, and availability or financing of acquisitions. A 10% change in average gold, copper, or nickel prices for the nine-month period would have changed revenue by approximately $9.3 million, $2.0 million, or $2.8 million, respectively.
• Voisey’s Bay litigation seeks correction of royalty calculations and at least $29 million in past damages, plus additional amounts; the outcome was not reasonably estimable. In the Holt royalty dispute, an appeal followed a ruling that Newmont Canada owed the full sliding-scale royalty; oral argument occurred March 28, 2011. Royal Gold recognized approximately $1.6 million of Holt royalty revenue in the quarter and nine months.
• February 2011 amendments increased revolving capacity, extended facility maturities to February 2014, reduced the term-loan rate to LIBOR plus 1.875%, and added a 1.25:1 debt-service covenant. The company reported compliance with financial covenants at March 31, 2011. Management concluded disclosure controls were effective; no material change in internal controls was reported.

Important facts for investors to verify

• Whether operators meet production forecasts, particularly at Cortez, Gwalia Deeps, Mulatos, Robinson, Wolverine, Canadian Malartic, Pascua-Lama, and Mt. Milligan.
• Actual timing and conditions for Mt. Milligan’s potential additional payments, project production, and gold deliveries under the stream pricing terms.
• Developments and potential financial effects of the Voisey’s Bay and Holt royalty disputes.
• Liquidity after acquisition spending, debt amortization, dividends, and any further royalty purchases; confirm covenant compliance and available revolver capacity.
• Sensitivity of revenue and asset value to metal prices, production interruptions, and royalty caps or buy-down provisions.