Business context and reporting period
Royal Gold, Inc. acquires and manages precious-metals royalties and similar interests; it does not operate mines or generally fund their operating costs. This unaudited Form 10-Q covers the three months ended September 30, 2010, the company’s fiscal first quarter, and compares results with the three months ended September 30, 2009. Results are not necessarily indicative of the full fiscal year.
Financial performance and position
| Metric | Three months ended September 30, 2010 | Prior-year period / comparison |
|---|---|---|
| Royalty revenue | $45.3 million | $26.1 million; up 73.6% |
| Operating income | $20.8 million | $10.8 million |
| Net income attributable to Royal Gold stockholders | $11.8 million | $7.1 million |
| EPS, basic / diluted | $0.22 / $0.21 | $0.18 / $0.17 |
| Operating cash flow | $34.2 million | $16.2 million |
| Cash and equivalents at September 30 | $321.5 million | $307.5 million at September 30, 2009 |
Operating margin was approximately 45.9%, versus 41.2% a year earlier. Total net income, including non-controlling interests, was $13.0 million; income tax expense was $6.9 million and the effective tax rate was 34.8%, versus 24.9%. Cash dividends declared were $0.09 per common share, compared with $0.08.
At September 30, 2010, current assets were $366.4 million and current liabilities were $37.2 million, a reported current ratio of approximately 10:1. Total debt was $242.0 million: $125.0 million outstanding under the credit facility and $117.0 million under the term loan, including $26.0 million current. The company reported compliance with its debt covenants. Operating cash flow less $25.0 million of royalty-interest acquisitions was not presented as a company-defined free-cash-flow measure.
Material changes and significant transactions
- Revenue growth reflected higher average gold and copper prices, acquired royalties, the Andacollo royalty, the Peñasquito ramp-up, and higher production at Taparko and Robinson. Average gold price increased to $1,227 per ounce from $960; average copper price increased to $3.29 per pound from $2.65. Lower production at Cortez and Dolores partly offset the gains.
- Newly acquired International Royalty Corporation (IRC) royalties contributed approximately $7.8 million of revenue. Higher depletion, including about $4.8 million associated with IRC royalties and $2.4 million from Andacollo, and increased interest expense partly offset revenue growth. G&A rose to $3.7 million from $2.2 million, including approximately $0.3 million of one-time severance costs.
- On July 1, Royal Gold agreed to acquire an additional 0.75% sliding-scale gold NSR at Pascua-Lama for $53 million. It paid $25 million in the quarter; the remaining $28 million was paid October 28. The acquired interest brought the gold royalty to 5.23% at gold prices above $800 per ounce and added a 0.20% copper NSR effective after January 1, 2017.
- After quarter-end, on October 20, the company paid $226.5 million in cash for a stream of 25% of payable gold from the Mt. Milligan project. It may make additional development payments of up to $85 million, subject to conditions. Once production begins, the stream price is the lesser of the prevailing market price or $400 per ounce for the first 550,000 ounces and $450 thereafter. The filing does not provide a pro forma cash balance after these subsequent payments.
- Taparko’s capped royalty arrangements reached their cap during the quarter; the capped interests terminated after final payment in October, when a perpetual 2.0% gold GSR became effective. Andacollo declared commercial production beginning October 1.
Outlook, commentary, risks and contingencies
Management said current financial resources and operating cash generation should cover anticipated debt service, operating and administrative costs, business-development costs, capital expenditures and dividends for the foreseeable future. The company also noted that substantial acquisitions could require additional debt or equity financing. It gave no company-wide revenue or earnings guidance. Mine production estimates in the filing were supplied by operators, were not independently verified by Royal Gold, and may not be achieved.
- Royal Gold’s results are exposed to metal prices and mine production. For the quarter, management estimated that a $100-per-ounce change in average gold price would change revenue by approximately $2.7 million; a $0.50-per-pound copper change or $1.00-per-pound nickel change would each change revenue by approximately $0.7 million.
- Operators reported operational or timing concerns at Dolores, where leach-pad repairs and lower grades could defer production; Las Cruces, where ramp-up was slower and the 2010 copper objective was reduced to 20,000 tonnes; and Voisey’s Bay, where labor disruption had affected operations. Peñasquito was reported on track for full production ramp-up in early 2011; Canadian Malartic was expected by its operator to be fully operational in the second quarter of 2011.
- A Voisey’s Bay royalty dispute seeks at least $29 million for alleged past underpayments, plus further damages, interest and costs. The litigation was in discovery and the outcome could not be reasonably estimated. A separate Holt royalty appeal was scheduled for oral argument in March 2011; Royal Gold was not receiving revenue from that development-stage royalty.
- Gross unrecognized tax benefits were $13.0 million at September 30, up from $11.9 million at June 30, primarily related to IRC entities’ tax positions. The filing notes these amounts could affect the effective tax rate if recognized.
- IRC purchase-price allocation remained preliminary, including valuations of royalty interests and deferred taxes; the company expected to finalize it during the quarter ending December 31, 2010. Management reported no impairment-triggering events for the relevant long-lived assets during the quarter.
Most important facts for investors to verify
- Whether post-quarter Pascua-Lama and Mt. Milligan payments, and any further Mt. Milligan development funding, materially change cash, liquidity and financing needs.
- Actual production and ramp-up at key royalty properties, especially Dolores, Las Cruces, Voisey’s Bay, Peñasquito, Andacollo and Canadian Malartic; operator forecasts are not independently verified.
- Metal-price exposure and the degree to which revenue growth reflects sustainable production versus higher commodity prices and acquisitions.
- Resolution and potential financial consequences of the Voisey’s Bay and Holt royalty disputes.
- Final IRC purchase-price allocation, tax exposures, and continued compliance with debt covenants.