Royal Gold, Inc. — Form 10-Q Summary
Business context and reporting period: Royal Gold acquires and manages precious-metal streams and royalties; it generally does not operate the mines. This filing covers the three and six months ended December 31, 2016, the second quarter and first half of fiscal 2017. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Revenue | $107.0 | $98.1 | $224.9 | $172.2 |
| Operating income | $34.5 | $27.2 | $75.4 | $48.4 |
| Net income (loss) attributable to Royal Gold stockholders | $28.1 | $15.1 | $57.9 | $(29.9) |
| Basic EPS | $0.43 | $0.23 | $0.89 | $(0.46) |
- Quarterly revenue grew 9%; first-half revenue grew 31%. First-half stream revenue rose to $159.5 million from $105.2 million, while royalty revenue declined to $65.4 million from $67.0 million.
- Operating margin was approximately 32.2% for the quarter and 33.5% for the first half, compared with approximately 27.7% and 28.1%, respectively, in the prior-year periods.
- First-half operating cash flow was $124.8 million, versus $54.6 million. Investing cash outflow was $191.0 million, compared with $1.00 billion, reflecting substantially lower acquisition spending than in the prior year. Financing cash inflow was $33.6 million, versus $320.4 million.
- Cash and equivalents were $84.0 million at December 31, down from $116.6 million at June 30, 2016. Working capital was $113.9 million; the current ratio was 6:1. Management reported total available liquidity of approximately $418.9 million, including undrawn credit.
- Debt was $677.4 million net of discount and issuance costs, compared with $600.7 million at June 30. Principal debt was $715 million: $370 million of 2.875% convertible notes due 2019 and $345 million drawn on a $650 million revolver. The company had $305 million available on the facility and was in compliance with its covenants.
- Cash dividends declared were $0.24 per share for the quarter and $0.47 for the first half. Total assets were $3.16 billion and total equity was $2.31 billion at December 31.
Material changes and unusual items
- Quarterly earnings improved with higher revenue and other income. For the first half, the comparison also reflects approximately $56 million of additional tax expense in the prior-year period associated with the Andacollo royalty termination and liquidation of the Chilean subsidiary; prior-year first-half net loss was $31.0 million.
- Royal Gold paid $70 million for an additional 3.75% net value royalty at Cortez, funded from the revolver. The acquired interest includes the Crossroads deposit, where production was expected to begin in 2018.
- The Mount Milligan stream was amended from a 52.25% gold stream to 35% gold and 18.75% copper streams. Deliveries under the amended terms were expected to begin around March 2017; approximately $7.7 million of transaction costs were capitalized.
- The Phoenix Gold stream was terminated following the operator’s restructuring. Royal Gold received approximately three million Rubicon shares valued at $3.4 million and three royalties; the previously impaired stream had been written down to zero. A separate legal settlement and termination of a non-principal royalty generated approximately $2.8 million of consideration.
- First-half revenue benefited from increased Pueblo Viejo stream contributions, including silver deliveries that began in March 2016, and higher average gold and silver prices. This was partly offset by lower production at Mount Milligan and lower Peñasquito royalty production.
Outlook, risks and contingencies
- Management said existing financial resources and operating cash generation should cover anticipated debt service, operating expenses and capital expenditures for the foreseeable future. It may seek additional financing for substantial acquisitions.
- Operator forecasts, not company guidance, included Mount Milligan 2017 payable gold production of 260,000–290,000 ounces and copper production of 55–65 million pounds; Golden Star forecast 255,000–280,000 ounces of gold for 2017; and Goldcorp forecast approximately 410,000 ounces of gold at Peñasquito. These estimates are operator-provided and not independently verified by Royal Gold.
- Rainy River’s operator targeted first production in September 2017 and commercial production on November 1, 2017. Ilovica remained subject to a conditional funding schedule of $163.75 million. The final $75 million Rainy River scheduled payment was made in November 2016; the final $10 million Wassa and Prestea payment was made in January 2017.
- Royal Gold’s Voisey’s Bay royalty litigation over calculation and underpayment of net smelter return royalties was in discovery. The claim seeks a ruling on future calculations and unspecified damages; the filing does not provide a clear estimate of potential recovery or exposure.
- Metal prices and mine production are key sensitivities. For the first half, management estimated that a 10% change in gold prices would change revenue by approximately $19.7 million; corresponding sensitivities were approximately $2.1 million for silver and $0.7 million for copper.
- Other principal risks include operator performance and project delays, permitting and construction, mining and environmental hazards, foreign-country and political risks, and the availability and financing of acquisitions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Mount Milligan’s amended gold-and-copper stream and the operator’s production plans deliver the expected revenue contribution.
- Actual ramp-up and timing at Rainy River, Wassa underground and Prestea underground, and progress at Cortez Crossroads.
- Developments in the Voisey’s Bay royalty dispute, including any effect on royalty calculations, receipts or depletion expense.
- Cash flow, revolver borrowings, covenant headroom and remaining conditional acquisition funding, particularly the Ilovica commitment.
- How much reported earnings growth reflects recurring stream and royalty operations versus prior-year tax charges and current-period gains or settlements.
- Actual mine production and metal prices versus operator estimates and the company’s disclosed sensitivities; operator estimates are not independently verified.