Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016, the first quarter of fiscal 2017 (not calendar 2016 Q1). Amounts are in U.S. dollars unless stated otherwise. Financial statements are unaudited.
Business and financial performance
Royal Gold acquires and manages precious-metals streams and royalties; it generally does not operate the mines. Results depend primarily on metal prices and production at properties operated by third parties.
| Metric | Quarter ended Sep. 30, 2016 | Comparable 2015 quarter |
|---|---|---|
| Revenue | $117.9 million | $74.1 million |
| Operating income | $40.9 million | $21.2 million |
| Net income (loss) attributable to Royal Gold shareholders | $29.8 million; $0.46 per diluted share | $(45.0) million; $(0.69) per diluted share |
| Operating cash flow | $55.1 million | $2.5 million |
| Cash and equivalents at quarter-end | $133.0 million | $104.3 million |
- Revenue increased 59% year over year. Stream revenue rose to $85.5 million from $37.9 million, led by Pueblo Viejo deliveries and higher sales from Mount Milligan and Andacollo. Royalty revenue declined to $32.4 million from $36.2 million, mainly because of lower Peñasquito production.
- Cost of sales was $22.7 million versus $11.5 million; depreciation, depletion and amortization was $40.1 million versus $27.1 million. Operating margin was approximately 34.7% of revenue, compared with 28.6% in the prior-year quarter.
- Net income attributable to shareholders was $29.8 million; consolidated net income was $27.0 million, with non-controlling interests accounting for the difference. The prior-year loss included a $59.2 million tax expense and a 415.7% effective tax rate, primarily from discrete tax effects related to the Andacollo transaction and liquidation of the Chilean subsidiary. The current-quarter tax expense was $7.2 million, at a 21.1% effective rate.
- Operating cash flow improved to $55.1 million, primarily reflecting higher receipts from streams and royalties and lower cash taxes than in the prior-year period. Investing cash outflow was $90.3 million, including the $70 million Cortez royalty acquisition. Financing cash inflow was $51.6 million, including $70 million drawn on the revolving facility and $15.0 million of dividends paid.
Financial position and material changes
- At September 30, 2016, cash was $133.0 million; current assets were $192.0 million and current liabilities $25.6 million, for working capital of $166.4 million and a current ratio of about 8:1.
- Total debt was $715 million principal, reported at $674.0 million net of unamortized discount and issuance costs. It comprised $370 million of 2.875% convertible notes due 2019 and $345 million outstanding under a $650 million revolving facility; $305 million remained available. The revolver’s rate was 2.28% at quarter-end, and the company reported compliance with its covenants.
- Royal Gold acquired a 3.75% net value royalty over areas of Barrick’s Cortez mine for $70 million, funded with the revolver. The Crossroads portion is development-stage; production there was expected to begin in 2018.
- Revenue mix shifted toward streams: streams contributed approximately 72% of revenue versus 51% a year earlier. Average gold and silver prices rose to $1,335/oz and $19.61/oz, respectively, from $1,124/oz and $14.91/oz; average copper was $2.16/lb versus $2.39/lb.
Outlook, risks and contingencies
- Management stated available resources and operating funds should cover anticipated expenditures for the foreseeable future, including debt service, dividends, and remaining conditional stream commitments. Total liquidity, including working capital and undrawn revolver capacity, was approximately $470 million. The filing gives no company-wide revenue or earnings guidance.
- Conditional remaining funding commitments at quarter-end included $75.0 million for Rainy River, $30.0 million for Wassa and Prestea, and $163.75 million for Ilovica. After quarter-end, Royal Gold advanced $20 million for Wassa and Prestea and expected to fund the remaining $10 million in January 2017, subject to conditions.
- Effective October 20, 2016, the Mount Milligan stream changed from 52.25% gold to 35% gold plus 18.75% copper. Royal Gold continues to pay $435/oz for gold and will pay 15% of copper spot price per metric tonne. Deliveries under the amended terms were expected to begin around March 2017; gold already in transit remains under the former terms.
- Peñasquito production attributable to Royal Gold fell year over year across gold, silver, lead and zinc, primarily due to lower grades and recoveries from stockpiled ore. The operator expected gold grades to improve in the December 2016 quarter. Mount Milligan’s operator expected gold output near the low end of its 2016 guidance range, while copper output was expected near the high end; operator estimates are not independently verified by Royal Gold.
- Metal-price sensitivity was material: a 10% change in gold price was estimated to change quarterly revenue by about $10.7 million; equivalent changes for silver and copper by about $0.9 million and $0.4 million, respectively. Other risks include mine performance, permitting, development delays, operator financing, and commodity-price volatility.
- A dispute over calculation of the Voisey’s Bay royalty remained in discovery. The partnership seeks an order regarding future royalty calculations and unspecified damages for alleged past underpayments; the filing does not provide a clear value for any potential recovery.
Important facts for investors to verify
- Whether operator production forecasts and expected improvements at Peñasquito, Mount Milligan, and development properties are achieved; production data in the filing is operator-provided and may be incomplete.
- Funding timing and conditions for the remaining Rainy River, Wassa and Prestea, and Ilovica commitments, and the effect of additional borrowing on leverage and covenant headroom.
- Actual deliveries, revenue contribution, and economics under the amended Mount Milligan gold-and-copper stream.
- Progress and potential financial impact of the Voisey’s Bay royalty litigation.
- Metal-price exposure and the sustainability of earnings after considering depletion, stream purchase costs, and the unusually large prior-year tax charge.