Royal Gold, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Royal Gold acquires and manages precious-metals streams and royalties; it does not operate the mines. This unaudited filing covers the three and nine months ended September 30, 2022, compared with the same periods in 2021. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $131.4m | $174.4m | $440.2m | $485.0m |
| Operating income | $61.8m | $87.4m | $210.3m | $244.4m |
| Net income attributable to Royal Gold shareholders | $45.8m | $70.2m | $182.6m | $205.9m |
| Basic and diluted EPS | $0.70 | $1.07 | $2.78 | $3.14 basic; $3.13 diluted |
| Operating cash flow | Not separately provided | Not separately provided | $316.3m | $343.0m |
Q3 operating margin was approximately 47.0%, versus 50.1% a year earlier; nine-month operating margin was approximately 47.8%, versus 50.4%. Cash dividends declared were $0.35 per share in Q3 and $1.05 per share for the nine months, up from $0.30 and $0.90, respectively.
At September 30, 2022, cash and equivalents were $122.2m, current assets $181.8m, and current liabilities $64.5m. Working capital was $117.3m and the current ratio was 3:1. Revolver debt was $450m principal ($446.3m net of issuance costs), with $550m available; the borrowing rate was 4.2%. The company reported approximately $667m of total liquidity and compliance with its financial covenants. Total assets were $3.38bn and total liabilities $656.9m.
For the nine months, investing activities used $716.5m, principally for acquisitions; financing activities provided $378.9m, including a $500m revolver draw, $50m repayment, and $68.9m of dividends paid. Cash declined by $21.3m from year-end 2021.
Material changes versus comparable periods
- Q3 revenue fell 24.7% year over year and nine-month revenue fell 9.2%. Q3 net income declined 34.7%; nine-month net income declined 11.3%.
- Lower Q3 revenue reflected lower sales or production at several properties, including Cortez, Peñasquito, Mount Milligan and Pueblo Viejo, as well as lower average gold, silver and copper prices. Q3 average prices were gold $1,729/oz, silver $19.23/oz and copper $3.51/lb. Higher Khoemacau silver sales partly offset the decline.
- Nine-month revenue was also pressured by lower production or sales at Andacollo, Pueblo Viejo, Cortez and Peñasquito. New revenue from Khoemacau and NX Gold streams partly offset the decline.
- Interest and other expense rose to $8.8m in Q3 and $11.1m for the nine months, primarily due to revolver borrowing and foreign-exchange losses related to the Great Bear acquisition. Nine-month general and administrative expense increased to $25.8m from $21.3m.
- Nine-month effective tax rate was 10.0%, versus 16.0%, including an $18.8m discrete benefit from releasing a valuation allowance on certain deferred tax assets. The prior-year period included a $12.0m benefit from settling a foreign uncertain tax position.
Acquisitions, outlook and risks
- In August, Royal Gold acquired the Cortez Complex sliding-scale gross royalty for $525m. At gold prices above $900/oz, the royalty rate reaches 3% on 40% of covered production; the company described it as an effective 1.2% gross royalty at current gold prices. The royalty began generating attributable production in Q3 after a cumulative-production threshold was reached; Royal Gold expected all Q4 Cortez Complex production to be subject to it.
- In September, Royal Gold acquired Great Bear Royalties for approximately C$199.6m (US$151.7m), funded from cash. Its principal asset is a 2.0% NSR royalty on the Great Bear Project. Kinross holds an option to acquire 25% of that royalty, subject to the agreement’s terms.
- Management said existing financial resources and operating cash flow should cover anticipated expenses, debt service and dividends for the foreseeable future. It may seek additional debt or equity financing for substantial acquisitions. No company-wide revenue or earnings guidance is provided in the filing.
- Operator updates include expected Khoemacau ramp-up to its sustained target rate toward late 2022 or early 2023; Mount Milligan’s updated mine plan extended expected mine life to 2033; and Pueblo Viejo’s expansion was expected to be substantially complete by year-end 2022, with commissioning in Q1 2023. These are operator forecasts, not Royal Gold guarantees.
- Risks include volatile metal prices, mine operating or production shortfalls, permitting and environmental matters, project delays, geopolitical and market conditions, and dependence on third-party operators. Pueblo Viejo had approximately 530,000 ounces of deferred silver deliveries at quarter-end; Royal Gold did not expect material delivery of deferred ounces during 2022. Andacollo’s lower-grade period was expected to continue through 2023, and a July rainfall-related shutdown was expected to affect Q1 2023 stream deliveries.
- The filing reports no legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2022.
Important facts for investors to verify
- Whether production, mine plans, project expansions and ramp-up expectations reported by operators are achieved; Royal Gold states it has not independently verified much operator-supplied information.
- The realized contribution and timing of cash receipts from the new Cortez and Great Bear interests, including Kinross’s Great Bear royalty option.
- Metal-price sensitivity: for the nine months, a 10% change in average gold, copper or silver prices would have changed reported revenue by approximately $32.8m, $9.7m or $2.5m, respectively.
- The effect of deferred Pueblo Viejo silver deliveries, Andacollo’s expected lower-grade period, and other property-specific production changes on future revenue.
- Revolver balance, interest expense and available liquidity if additional acquisitions or operating cash-flow changes occur; also note conditional funding obligations, including up to $6.8m for NX Gold upon specified targets and a $163.75m conditional Ilovica funding schedule subject to conditions.