Royal Gold, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended June 30, 2020. The request metadata says “2019 Q4,” but the supplied filing is the FY2020 annual report; figures below reflect the filing period. Unless noted, amounts are U.S. dollars.
Business context
Royal Gold acquires and manages precious-metals streams and royalties; it generally does not operate the mines underlying these interests. Streams generated approximately 72% of FY2020 revenue and royalties 28%. At year-end, it held streams on six producing and two development-stage properties, plus royalties on 35 producing properties and a broader development and exploration portfolio. Gold accounted for 79% of revenue, silver 9%, copper 9%, and other minerals 3%.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $498.8 million | $423.1 million |
| Operating income | $198.9 million | $140.7 million |
| Net income attributable to Royal Gold stockholders | $199.3 million; $3.04 basic EPS, $3.03 diluted | $93.8 million; $1.43 basic and diluted EPS |
| Operating margin | Approximately 39.9% | Approximately 33.3% |
| Operating cash flow | $340.8 million | $253.2 million |
| Cash and equivalents at year-end | $319.1 million | $119.5 million |
| Debt at year-end | $305.0 million principal; $300.4 million carrying value | $220.0 million principal; $214.6 million carrying value |
FY2020 stream revenue was $359.9 million and royalty revenue $139.0 million. Cost of sales was $83.9 million, depletion and other depreciation and amortization was $175.4 million, and segment gross profit was $236.1 million. The company reported a $3.7 million income tax benefit versus a $17.5 million tax expense in FY2019; the FY2020 result included Swiss tax reform effects and release of an uncertain tax liability. These items materially affect the year-over-year earnings comparison.
Investing activities used $152.9 million, primarily reflecting stream and royalty acquisitions, including $135.7 million of Khoemacau silver-stream advances. Financing activities provided $11.8 million. Working capital was $318.6 million and the current ratio was 8:1 at June 30, 2020. The company reported approximately $1 billion of total liquidity, including $695 million available on its revolving facility. It repaid $30 million after year-end; the filing says this raised facility availability to $725 million. The facility matures in June 2024, and the company reported compliance with its financial covenants.
Changes versus FY2019
- Revenue increased 18%; higher average gold and silver prices and higher production or sales at Mount Milligan, Pueblo Viejo, Peñasquito, and Cortez were principal contributors. Average gold price rose to $1,560/oz from $1,263; silver rose to $16.90/oz from $15.00. Average copper price fell to $2.57/lb from $2.79.
- Operating income increased about 41%, and stockholder-attributable net income more than doubled. Drivers included higher revenue, lower interest expense, and tax benefits; results should be assessed with those tax items in view.
- Operating cash flow increased to $340.8 million. Cash rose substantially, while debt principal increased, partly reflecting a $200 million precautionary revolver draw in April 2020 amid pandemic uncertainty.
- Revenue from Peñasquito rose to $25.5 million from $13.9 million, and Cortez rose to $22.3 million from $11.4 million. Mount Milligan revenue rose to $131.4 million from $101.0 million.
- Dividend declared per share was $1.11 for FY2020; the calendar-year 2020 dividend was increased to $1.12 per share, paid quarterly. The company reported a 6% increase over the calendar-year 2019 dividend.
Outlook, developments, and key risks
- COVID-19: Several operators temporarily curtailed or slowed operations and some withdrew or reviewed guidance. Royal Gold said it could not predict the full effects on results or financial condition. Peñasquito temporarily moved to care and maintenance in April 2020 and returned to pre-pandemic plant production levels by mid-June, according to its operator. Mount Milligan also experienced temporary workforce and throughput reductions.
- Operator estimates, not company guidance: The filing presents operator forecasts for calendar 2020, which Royal Gold had not independently verified. Examples include Mount Milligan guidance of 140,000–160,000 payable gold ounces and 80–90 million pounds of copper, and Peñasquito guidance of 510,000 ounces of gold and 28 million ounces of silver. Operators cautioned that estimates may not be achieved.
- Khoemacau: The Botswana silver-stream project was reported approximately 54% complete at June 30, with 81% of capital committed. Royal Gold had advanced $135.7 million by fiscal year-end and made a further $11.1 million payment on July 5, 2020. Subject to further pandemic impacts, the company expected first concentrate shipment late in calendar Q3 2021. Remaining funding is conditional; the filing describes a possible additional $53 million option stream.
- Acquisitions: Royal Gold paid $11 million toward an Alturas royalty, with up to $30 million of additional payments contingent on a construction decision and first production. It completed a $7.5 million Castelo de Sonhos royalty and warrant transaction.
- Concentration and control: Approximately 75% of FY2020 revenue came from six properties: Mount Milligan, Andacollo, Pueblo Viejo, Wassa, Peñasquito, and Cortez. Royal Gold is largely a passive investor, depends on operator-provided information, and generally cannot direct mine operations.
- Other material risks: Revenue and cash flow are sensitive to metal prices and production; more than 90% of revenue came from outside the United States. Risks include operating or permitting interruptions, political and regulatory changes, contractual disputes, operator insolvency, reserve revisions, and COVID-19-related disruptions. The company recorded a $1.3 million impairment on the El Toqui royalty; it recorded no impairment on Mount Milligan despite reserve reductions. A prior $239.1 million Pascua-Lama impairment was recorded in FY2018, and that interest remained at a $177.7 million carrying value.
- Management and assurance: William Heissenbuttel became CEO effective January 2, 2020, alongside other succession-related executive changes. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified impairment assessment of the $2.3 billion stream and royalty asset balance as a critical audit matter.
Important facts for investors to verify
- Whether operator production guidance and recovery plans were achieved, particularly at the six properties responsible for about 75% of revenue.
- Current status, timeline, and remaining conditional funding for Khoemacau, including the option stream and expected 2021 first shipment.
- Effects of Mount Milligan reserve reductions and higher depletion rates, and the status of water supply and production plans.
- How much FY2020 earnings growth is repeatable after separating operating performance from discrete tax benefits and other unusual items.
- Current revolver borrowings, liquidity, covenant headroom, repayment plans, and capacity to fund acquisitions and dividends.
- Any subsequent changes to metal prices, operator forecasts, COVID-related restrictions, or impairment assumptions; operator estimates in this filing were not independently verified by Royal Gold.