Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2012 (fiscal 2013 second quarter and first half). Financial statements are unaudited; dollar amounts below are in millions unless otherwise stated.
Business context
Royal Gold acquires and manages precious-metals royalties and streams. It does not operate mines. At period-end, it held interests in 39 producing, 28 development-stage and 138 exploration-stage properties. Results depend mainly on gold prices and production at partner-operated mines.
Financial performance
| Metric | Quarter ended Dec. 31, 2012 | Prior-year quarter | Six months ended Dec. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Royalty revenue | $79.9 | $68.8 | $157.7 | $133.3 |
| Operating income | $50.8 | $39.4 | $98.6 | $76.9 |
| Operating margin | 63.6% | 57.3% | 62.5% | 57.7% |
| Net income attributable to Royal Gold | $27.2 | $23.4 | $52.0 | $45.9 |
| EPS, diluted | $0.42 | $0.42 | $0.84 | $0.82 |
| Operating cash flow | Not separately stated | Not separately stated | $64.4 | $75.4 |
Quarterly revenue rose about 16% and attributable net income about 16%; six-month revenue rose about 18% and attributable net income about 13%. Quarterly EPS was unchanged, partly because of share issuance; first-half EPS increased modestly. First-half depletion, depreciation and amortization was $42.6, up from $38.6. Interest and other expense was $13.2 for the first half, versus $3.4, largely reflecting the 2019 convertible notes.
Six-month investing cash outflow was $215.0, primarily royalty-interest acquisitions and Mt. Milligan funding. Financing inflow was $455.8, principally from the October common-stock offering. Cash and equivalents rose to $680.7 at December 31, from $375.5 at June 30. Current assets were $781.1 and current liabilities $18.6, a reported current ratio of 42:1.
Debt consisted of $297.7 carrying value of convertible notes due 2019 ($370.0 principal); the notes carry a 2.875% coupon. No borrowings were outstanding on the $350.0 revolving credit facility, and the company reported covenant compliance at December 31. The reported 42:1 current ratio and high cash balance were substantially supported by the equity offering proceeds.
Material changes and transactions
- Royalty revenue growth reflected higher quarterly average gold, silver and copper prices and increased or ramping production at several properties, including Andacollo, Mulatos, Robinson and Canadian Malartic. Lower production or sales at Voisey’s Bay, Leeville and Cortez partly offset gains. In the first half, average prices for gold, silver, copper and nickel were lower than the prior-year period, so production growth was the principal revenue driver.
- In October, Royal Gold issued 5.25 million common shares at $90 each, generating $472.5 gross proceeds. Proceeds were held in U.S. Treasury bills or cash and intended for acquisitions and general corporate purposes.
- Mt. Milligan gold-stream commitments increased to $781.5; $669.6 had been paid by December 31. Remaining scheduled payments totaled $111.9: $62.0 in March 2013, $37.0 in June and $12.9 in September, subject to agreement conditions. A separate $50.0 commitment remained for the Tulsequah Chief stream.
- The company acquired an option to increase its potential KSM project NSR royalty by 0.75%; the option permits purchase of a 1.25% royalty for C$100 or a 2.0% royalty for C$160. The related share transaction produced a reported $1.3 realized loss; approximately $2.4 of option value and costs was recorded in other assets.
- The annual dividend for calendar 2013 was raised from $0.60 to $0.80 per share, payable quarterly at $0.20. First-half dividends declared were $0.35 per share, versus $0.26 a year earlier.
Outlook, commentary and risks
- Management stated that current financial resources and operating funds should cover foreseeable debt service, overhead, exploration and capital needs, dividends, and existing acquisition commitments. Substantial additional acquisitions could require debt or equity financing. The filing provides no company-wide revenue or earnings guidance.
- Operator-reported outlook included Mt. Milligan commercial production expected in calendar Q4 2013, with construction reported 75% complete as of September 2012. Barrick expected initial Pascua-Lama production in the second half of 2014, while its definitive cost and schedule estimate was pending at filing time.
- Peñasquito throughput was constrained by water availability; additional wells and a water strategy were under development. Canadian Malartic’s delayed access to part of its pit was expected to affect early 2013 production. Barrick’s lower production at royalty-covered Cortez areas was expected to persist until steady-state mining returned to the Pipeline Complex.
- Metal prices and operator production are key risks. Gold represented approximately 70% of first-half recognized revenue; management estimated that a 10% gold-price move would change first-half revenue by roughly $11.7–$11.9. Corresponding estimated revenue sensitivity was about $2.3 for copper, $1.3 for silver and $1.5 for nickel.
- The Voisey’s Bay royalty litigation over NSR calculations remained in discovery. The claim seeks at least $29 in past underpayments, plus additional damages, interest and costs; no material litigation development was reported in the quarter.
- Gross unrecognized tax benefits were $19.8, and the six-month effective tax rate increased to 38.3% from 34.4%. A $17.2 foreign withholding tax payment was recorded as a current prepaid asset and was expected to be recovered within 12 months.
- On January 21, 2013, the revolving-credit agreement was amended: several existing financial covenants were removed, a secured-debt-ratio covenant was added, and provisions governing permitted unsecured debt and borrowing rates were revised.
Key facts for investors to verify
- Progress and funding conditions for Mt. Milligan’s remaining $111.9 scheduled commitment, and whether the operator meets its production timetable.
- Actual production, water availability and mine sequencing at key royalty properties, particularly Peñasquito, Canadian Malartic, Cortez and Voisey’s Bay.
- Use of the $472.5 gross equity proceeds, future acquisition funding needs, and the effect of share dilution on per-share results.
- Convertible-note terms, amended credit-facility covenants and future interest expense.
- Recovery of the $17.2 withholding-tax prepayment, changes in uncertain tax positions, and developments in the Voisey’s Bay royalty dispute.