Royal Gold, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017 (not calendar-year 2016 or a standalone fourth-quarter filing). Amounts are in U.S. dollars unless noted.
Business context
Royal Gold acquires and manages precious-metal streams and royalties; it generally does not operate the mines. Streams generated 71% of FY2017 revenue and royalties 29%. At year-end, the portfolio included streams on four producing and two development-stage properties, plus royalties on 35 producing, 18 development-stage and 135 exploration-stage properties.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $440.8 million | $359.8 million |
| Net revenue (revenue less stream cost of sales) | $353.5 million | $288.8 million |
| Operating income | $145.9 million | $4.8 million |
| Net income (loss) attributable to Royal Gold common stockholders | $101.5 million | ($77.1 million) |
| Basic and diluted EPS | $1.55 | ($1.18) |
| Cash from operating activities | $265.9 million | $169.9 million |
| Cash and equivalents at year-end | $85.8 million | $116.6 million |
Revenue rose 23%; operating margin was approximately 33% versus 1% in FY2016, when large impairment charges weighed on results. FY2017 stream cost of sales was $87.3 million; depletion and amortization was $159.6 million. Income tax expense was $26.4 million, with a 22.2% effective tax rate, compared with $60.7 million and a highly distorted negative 278.9% rate in FY2016.
Cash used in investing was $200.1 million, primarily for stream and royalty acquisitions; cash used in financing was $96.5 million. Working capital was $109.3 million, with a 5:1 current ratio. The company reported $859.3 million of total liquidity, including $750 million available on its revolving facility.
At June 30, 2017, the company had $370 million principal amount of 2.875% convertible notes due 2019 and $250 million drawn on its $1 billion revolving facility. Balance-sheet debt, net of unamortized discounts and issuance costs, was $586.2 million. The company reported compliance with credit-facility covenants. FY2017 dividends declared were $0.95 per share; the calendar-2017 annual dividend was set at $0.96 per share, subject to board approval.
Material changes versus prior year
- Stream revenue increased to $314.0 million from $238.0 million, while royalty revenue increased to $126.8 million from $121.8 million. Higher gold and silver prices and higher/new stream production, particularly at Pueblo Viejo and Andacollo, contributed to growth.
- Mount Milligan’s former 52.25% gold stream was amended to 35% gold and 18.75% copper. Gold deliveries under amended terms began in April 2017; copper deliveries began in the June quarter.
- Royal Gold paid $70 million for an additional Cortez royalty interest. Waste stripping at Crossroads was underway, with production expected to begin in calendar 2018.
- The company completed its remaining upfront stream payments for Rainy River and Wassa/Prestea; no further funding payments were due on those agreements as of year-end.
- The revolving credit facility increased from $650 million to $1 billion, with a five-year term to June 2022 and a further $250 million accordion feature.
Outlook, commentary, risks and unusual items
Royal Gold did not provide consolidated production or earnings guidance in the supplied filing text. Its outlook depends substantially on operator estimates. Notable operator expectations included Rainy River transitioning from construction to operation in the September 2017 quarter; Prestea underground targeting commercial production in the December 2017 quarter; and Cortez Crossroads production expected in calendar 2018. Barrick’s calendar-2017 Pueblo Viejo gold production guidance was 625,000–650,000 ounces. These are operator forecasts, not guarantees by Royal Gold.
Management said existing resources and operating cash flow should cover foreseeable debt service, corporate costs and capital needs, while noting substantial acquisitions could require additional debt or equity. Results are highly exposed to metal prices: gold accounted for 85% of FY2017 revenue, silver 8%, and copper 5%. A 10% change in average gold, silver or copper prices was estimated to change FY2017 revenue by approximately $39.6 million, $3.7 million or $1.5 million, respectively.
- Concentration and operator dependence: Mount Milligan, Andacollo, Pueblo Viejo, Wassa/Prestea and Peñasquito generated nearly 77% of FY2017 revenue. Royal Gold generally cannot control mine operations, permitting, financing or production.
- Voisey’s Bay litigation: Royal Gold’s subsidiary disputes Vale’s calculation of a 3% NSR royalty, including deductions for Long Harbour processing costs. No revenue from Vale was recognized in FY2017; trial was expected to begin in the second half of calendar 2018.
- Development and permitting risks: Pascua-Lama remained suspended, with restart dependent on improved economics and legal and permitting certainty. Rainy River required a Canadian regulatory amendment for planned tailings works; the operator expected it in calendar Q4 2017.
- Unusual prior-year comparisons: FY2016 included approximately $98.6 million of impairment charges, including a $75.7 million Phoenix Gold stream write-down, and approximately $56 million of additional tax expense associated with the Andacollo transactions and liquidation of the Chilean subsidiary. In FY2017, the Phoenix stream was terminated in Rubicon’s restructuring; Royal Gold received Rubicon shares valued at about $3.4 million and royalties, with no value assigned to the royalties in the filing.
- Other risks: metal-price volatility, foreign-jurisdiction and tax exposure, reserve and production estimates supplied by operators, potential stream/royalty caps, and possible payment-calculation errors. Approximately 92% of FY2017 revenue came from foreign sources.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of June 30, 2017.
Important facts for investors to verify
- Progress and production at Rainy River, Prestea underground, Cortez Crossroads and other development properties against operator schedules.
- Current status, potential recovery and timing of the Voisey’s Bay royalty dispute, and any effect on future revenue.
- Metal prices, portfolio concentration and operator updates that could change production, reserves or stream/royalty economics.
- Debt repayment and covenant capacity, dividend sustainability, and financing needs if significant acquisitions are pursued.
- How the calendar-2017 operator forecasts and project permitting assumptions compare with subsequent actual results.