Royal Gold, Inc. — Form 10-Q Summary
Business and period: Royal Gold acquires and manages metal streams and royalties; it generally does not operate the mines underlying those interests. This report covers the quarter and six months ended December 31, 2018, the second quarter and first half of fiscal 2019. Financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2018 | Prior-year quarter | Six months ended Dec. 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $97.6 million | $114.3 million | $197.6 million | $226.8 million |
| Operating income | $31.4 million | $41.0 million | $56.8 million | $82.7 million |
| Operating margin | 32.2% | 35.8% | 28.7% | 36.5% |
| Net income (loss) attributable to Royal Gold stockholders | $23.6 million | $(14.8) million | $38.6 million | $13.9 million |
| Diluted EPS | $0.36 | $(0.23) | $0.59 | $0.21 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $103.5 million | $147.2 million |
Quarterly revenue declined about 14.7%; six-month revenue declined about 12.9%. Gold accounted for 75% of quarterly and 76% of six-month revenue. Average gold, silver and copper prices were all lower year over year. Stream revenue was $67.7 million and royalty revenue $29.9 million in the quarter.
- Cash and liquidity: Cash and equivalents were $156.5 million at December 31, 2018, versus $88.8 million at June 30. Working capital was $166.5 million, compared with $74.4 million; the current ratio was approximately 5:1 versus 2:1.
- Debt: Reported debt carrying value was $358.9 million, including $370 million principal of 2.875% convertible notes due June 15, 2019. The company reported no borrowings and $1 billion available under its revolving credit facility; it said it intended and was able to settle the notes’ principal in cash using facility availability. It was in compliance with facility covenants.
- Cash flows: Six-month operating cash flow was $103.5 million. Investing used $3.7 million, largely reflecting the CORE share purchase; financing used $32.0 million, including $32.8 million of dividends. Cash increased $67.8 million during the half.
- Dividends: Declared dividends were $0.265 per share for the quarter and $0.515 for the six months, versus $0.25 and $0.49, respectively, in the comparable periods.
Material changes and unusual items
- Despite lower revenue and operating income, Royal Gold reported positive attributable earnings in the quarter versus a year-earlier loss. The principal driver was a sharply lower tax expense: the prior-year quarter included approximately $26.4 million of Tax Act effects and $15.9 million from a non-cash functional-currency election. The current quarter recorded a $2.1 million tax benefit; the six-month tax expense was $2.0 million versus $55.9 million a year earlier.
- Revenue weakness reflected lower metal prices and lower stream sales, particularly timing-related decreases at Andacollo and Pueblo Viejo in the quarter. For the six months, lower Mount Milligan and Pueblo Viejo sales were partly offset by Andacollo and Rainy River.
- New accounting guidance moved fair-value changes in equity securities into net income. Royal Gold recorded losses of $3.6 million for the quarter and $5.1 million for the six months; the company cautioned this may increase earnings volatility. Revenue-recognition adoption had no reported impact on revenue or net income.
- In September 2018, Royal Gold’s Voisey’s Bay royalty partnership settled long-standing litigation with Vale and agreed to a revised calculation for concentrates processed at Vale’s Long Harbour plant, effective for production after April 1, 2018. Royal Gold recognized approximately $2.5 million of related royalty revenue in the quarter and $7.5 million for the six months, including the non-controlling interest.
- Royal Gold’s conditional funding schedule for its Ilovica stream acquisition remained subject to conditions; the amount was $163.75 million at December 31.
Outlook, commentary and risks
- Management said current resources and operating cash generation should cover anticipated debt service, overhead and capital needs for the foreseeable future, and may fund dividends and acquisitions. A major acquisition could require additional debt or equity financing. No company-wide revenue or earnings guidance is provided in the filing.
- Operator outlook included lower 2019 gold production at Mount Milligan than its 195,000 ounces in 2018, with winter throughput constrained by water availability; permit applications and assessment of additional water sources were ongoing. These are operator estimates, not Royal Gold guidance.
- Other operator updates were mixed: Rainy River continued its production ramp-up, while its underground development plan was deferred to 2020; Prestea’s slower-than-planned ramp-up affected stream deliveries; Peñasquito’s Pyrite Leach Project reached commercial production in December 2018, with operator expectations for improved production in 2019.
- Metal prices are a significant exposure. For the six-month period, management estimated that a 10% change in gold prices would change revenue by approximately $15.6 million; corresponding 10% changes in silver or copper prices would each affect revenue by approximately $2.0 million.
- Other key risks include operator production shortfalls or delays, permitting and water constraints, mine and processing hazards, commodity-price volatility, foreign-country and tax risks, and uncertainty in operator-provided production information. Royal Gold disclaims independent verification of operator estimates. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the 2019 notes were repaid or refinanced at maturity, and the resulting debt, interest expense and facility availability.
- Whether Mount Milligan’s water constraints, production outlook and permit applications affected stream deliveries and revenue.
- Actual operator production and delivery results at Andacollo, Pueblo Viejo, Peñasquito, Rainy River and Prestea versus the estimates and developments described.
- How the Voisey’s Bay settlement affects royalty receipts as metal prices and Long Harbour operations change.
- Whether the $163.75 million Ilovica conditional funding obligation became payable, and whether any new material acquisition financing was needed.
- How metal-price movements and fair-value changes in equity securities affected subsequent revenue and earnings.