Business context and reporting period
Royal Gold, Inc. acquires and manages precious-metals streams and royalties; it generally does not operate the mines. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2017 (fiscal 2018 Q2), compared with the same periods in 2016. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 31, 2017 | Year-over-year change | Six months ended Dec. 31, 2017 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $114.3 million | +6.9% | $226.8 million | +0.9% |
| Operating income | $41.0 million | +18.8% | $82.7 million | +9.7% |
| Operating margin | 35.8% | Up from 32.2% | 36.5% | Up from 33.5% |
| Net income (loss) attributable to Royal Gold stockholders | $(14.8) million; $(0.23) per diluted share | Prior-year income was $28.1 million | $13.9 million; $0.21 per diluted share | Down from $57.9 million |
| Operating cash flow | $147.2 million for the six-month period | Up from $124.9 million |
Quarterly stream revenue was $79.3 million and royalty revenue $35.1 million. For the six months, stream revenue was $158.0 million and royalty revenue $68.8 million. Six-month operating cash flow benefited from lower foreign income-tax payments and higher net proceeds from streams and royalties. Investing used $0.1 million, versus $191.0 million in the prior-year period, when acquisitions were substantially higher. Financing used $134.9 million, including $100 million of revolving-credit repayments and $31.4 million of dividends. Cash increased $12.3 million to $98.1 million.
At December 31, 2017, current assets were $165.5 million and current liabilities $41.6 million, yielding working capital of $123.9 million and a 4:1 current ratio. Debt was $520 million principal, reported at $493.5 million net of discounts and issuance costs: $370 million of 2.875% convertible notes due June 2019 and $150 million drawn on a $1 billion revolver. The revolver had $850 million available; total available liquidity, including working capital, was approximately $970 million. The company reported compliance with its credit-facility covenants. Declared dividends were $0.25 per share for the quarter and $0.49 for the six months.
Material changes versus prior comparable periods
- Quarterly revenue rose on higher metal prices, increased production at Andacollo and Wassa/Prestea, and initial Rainy River deliveries; lower Mount Milligan deliveries partly offset the increase. Six-month revenue was nearly flat, with higher royalty revenue—particularly from Cortez—offset by lower stream revenue, chiefly at Mount Milligan.
- Operating income improved in both comparisons, but quarterly results shifted to a net loss because of sharply higher income-tax expense. The six-month net income decline had the same principal driver.
- Income-tax expense was $48.4 million for the quarter and $55.9 million for the six months. The reported effective rates were 148.5% and 83.9%, respectively, versus 15.7% and 18.5% in the prior-year periods. The company recorded a provisional $26.4 million net charge related to U.S. tax reform and a separate $15.9 million non-cash expense from a Canadian functional-currency election.
- Debt principal declined by $100 million from June 30, 2017, following revolver repayments. No stream or royalty-interest acquisitions were made in the six-month period, unlike the prior-year period.
Outlook, commentary, risks and contingencies
- Management expects the U.S. tax-law changes to benefit future results; it estimates a 17%–23% effective tax rate for the second half of fiscal 2018. Tax-reform accounting amounts remain provisional, with analysis expected to continue through no later than fiscal Q2 2019. No consolidated revenue or earnings guidance is provided.
- Mount Milligan’s operator temporarily suspended milling in December because of insufficient water and reported a partial-capacity restart on February 5, 2018. Full-capacity operations were expected in April; delayed metal deliveries could affect Royal Gold’s mid-2018 results.
- Rainy River entered commercial production in October 2017. Its operator estimated 2018 production of 310,000–350,000 ounces of gold and estimated deliveries to Royal Gold of about 21,500 ounces of gold and 185,000 ounces of silver.
- Pascua-Lama faces material development and permitting uncertainty. Following a Chilean environmental order to close existing surface facilities, Barrick reclassified approximately 14 million ounces of open-pit-plan reserves as mineralized material. Royal Gold’s carrying value for its Pascua-Lama interests was approximately $416.8 million; it said it would assess recoverability and that impairment may be necessary.
- A dispute over calculation and past underpayment of the Voisey’s Bay royalty was in discovery, with trial expected in the second half of calendar 2018. Damages sought were unspecified.
- Results depend on mine operators’ production, mine development, permitting and access to water, as well as metal prices. Royal Gold estimated that a 10% change in six-month average prices would change revenue by approximately $18.2 million for gold, $2.1 million for silver, and $2.2 million for copper. Operator production information is third-party information that Royal Gold says it has not independently verified.
Important facts for investors to verify
- Whether Mount Milligan returns to full capacity as expected and how the water disruption affects stream deliveries and timing.
- The outcome of Royal Gold’s Pascua-Lama recoverability review, including any impairment and updates from Barrick on project plans and mineralization.
- Developments in the Voisey’s Bay royalty litigation and any effect on future royalty calculations or recoveries.
- Final tax-reform accounting and the effective tax rate as provisional estimates are updated.
- Production and delivery performance at major properties, metal-price exposure, and the company’s ability to meet the 2019 convertible-note maturity and other capital needs.