Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2010 (fiscal 2011 second quarter). Financial statements are unaudited. Royal Gold acquires and manages precious-metals royalties and similar interests; it does not operate mines.
Financial performance
| Metric | Three months ended Dec. 31, 2010 | Prior-year quarter | Six months ended Dec. 31, 2010 | Prior-year six months |
|---|---|---|---|---|
| Royalty revenue | $56.3 million | $34.7 million | $101.7 million | $60.9 million |
| Operating income | $31.6 million | $15.2 million | $52.4 million | $26.0 million |
| Operating margin | 56.1% | 43.7% | 51.5% | 42.7% |
| Net income attributable to Royal Gold stockholders | $18.3 million | $9.6 million | $30.1 million | $16.7 million |
| Diluted EPS | $0.33 | $0.23 | $0.55 | $0.41 |
- Quarterly royalty revenue increased 62%; six-month revenue increased 67%. Higher average metal prices, newly acquired royalties, and Peñasquito’s ramp-up contributed. Acquired IRC royalties generated $13.4 million in the quarter and $21.2 million in the six-month period.
- For the quarter, average gold, copper, and nickel prices were $1,367/oz., $3.92/lb., and $10.70/lb.; gold represented 65% of revenue. Six-month average gold and copper prices were $1,295/oz. and $3.60/lb.; gold represented 69% of revenue.
- Six-month operating cash flow was $61.4 million, versus $27.9 million a year earlier. Investing activities used $277.4 million, including $279.5 million for royalty acquisitions. Financing activities used $37.4 million, including $23.0 million of debt repayment and $10.0 million of dividends. Cash declined to $71.4 million from $324.8 million at June 30, 2010. Quarterly cash flow is not separately presented in the supplied filing text.
- At December 31, cash and equivalents were $71.4 million; current assets were $128.4 million and current liabilities $38.0 million, a 3:1 current ratio versus approximately 10:1 at June 30. Debt totaled $225.5 million ($26.0 million current), down from $248.5 million. The company reported compliance with its debt covenants.
- Cash dividends declared were $0.11 per common share for the quarter and $0.20 for the six-month period. The balance sheet showed total assets of $1.864 billion and equity of $1.455 billion.
Material changes and transactions
- Royal Gold paid $226.5 million for a 25% share of payable gold from the Mt. Milligan project, with potential additional development payments of up to $85 million. Once production begins, the purchase price per ounce is capped at $400 for the first 550,000 ounces and $450 thereafter, subject to prevailing market price.
- The company paid $53 million for additional Pascua-Lama interests, raising its gold NSR to 5.23% above $800/oz. and its copper royalty to 1.05% from 2017.
- On February 1, 2011, subsequent to quarter-end, credit facilities were amended: revolving availability rose from $125 million to $225 million; term-loan borrowings increased by $19.5 million; maturities were extended to February 2014; and the term-loan effective rate fell from LIBOR plus 2.25% to LIBOR plus 1.875%. The amendments also changed covenants and collateral arrangements.
Outlook, risks, and contingencies
- Management said current resources and operating cash flows should cover foreseeable operating costs, debt service, capital needs, dividends, and the Mt. Milligan commitment; substantial future acquisitions could require additional debt or equity financing. No company-wide earnings or revenue guidance is provided.
- Operator updates included expected 2011 production of 350,000 oz. of gold at Peñasquito, 160,000–175,000 oz. at Mulatos, and 105–120 million lb. of payable copper and 45,000–50,000 oz. of payable gold at Robinson. These are operator estimates, not company guidance, and actual results may differ. Cortez 2011 guidance was still pending.
- Operator and project risks include metal-price volatility, production and ramp-up performance, mine disruptions, geological or processing issues, permitting, labor disputes, and foreign-country risks. A $100/oz. change in average gold price was estimated to change six-month revenue by about $5.3 million; corresponding sensitivities were about $1.8 million for a $0.50/lb. copper move and $1.4 million for a $1.00/lb. nickel move.
- Voisey’s Bay royalty litigation seeks at least $29 million for alleged past underpayments, plus further damages; the outcome could not be reasonably estimated. The Voisey’s Bay strike ended after a new labor agreement was ratified January 31, 2011. A separate Holt royalty-payment dispute was on appeal, with oral argument scheduled for March 28, 2011.
- IRC acquisition purchase-price allocations remained preliminary; management expected to finalize them in the quarter ending March 31, 2011. The filing reports $15.0 million of gross unrecognized tax benefits at December 31, 2010.
Important facts for investors to verify
- Whether key operators meet production and ramp-up expectations, particularly at Peñasquito, Las Cruces, Dolores, Robinson, and Voisey’s Bay.
- Metal prices and production exposure, including the concentration of revenue in gold and the disclosed price sensitivities.
- Funding needs for the Mt. Milligan commitment and future acquisitions, alongside cash levels, debt service, and compliance with amended facility covenants.
- Developments in the Voisey’s Bay and Holt litigation and any resulting effect on royalty receipts.
- Final IRC purchase-price allocation and the treatment or resolution of tax uncertainties.