Royal Gold, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context
Royal Gold acquires and manages precious-metal streams and royalties; it does not operate the mines. Streams represented 72% of Q2 revenue and 68% of first-half revenue. At quarter-end, the portfolio included nine stream interests and royalties on 33 producing properties, among other development- and exploration-stage interests.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $146.4 million | $168.0 million | $308.8 million | $310.6 million |
| Operating income | $67.9 million | $86.0 million | $148.5 million | $157.0 million |
| Net income attributable to Royal Gold stockholders | $71.1 million | $81.7 million | $136.8 million | $135.7 million |
| Basic and diluted EPS | $1.08 | $1.24 | $2.08 | $2.07 |
| Operating margin | 46.4% | 51.2% | 48.1% | 50.5% |
- Q2 revenue declined 12.8% year over year, while first-half revenue was down 0.6%. Q2 operating income fell 21.0%; first-half operating income fell 5.4%. First-half attributable net income increased 0.8%.
- Q2 revenue comprised $104.9 million from streams and $41.6 million from royalties. Gold accounted for 71% of first-half revenue; average gold, silver and copper prices were $1,874/oz, $23.32/oz and $4.43/lb, respectively.
- First-half operating cash flow was $221.3 million, compared with $213.1 million a year earlier. Investing activities used $37.9 million (versus $128.8 million); financing activities used $46.4 million (versus $240.2 million). Cash increased by $137.1 million to $280.6 million.
- At June 30, current assets were $340.3 million and current liabilities $64.0 million: working capital was $276.3 million and the current ratio was 5:1. The company had no borrowings under its revolving credit facility at quarter-end, with $1 billion available. Total liabilities were $156.4 million.
- Cash dividends declared were $0.35 per share in Q2 and $0.70 per share for the first half, compared with $0.30 and $0.60 in the prior-year periods.
Material changes and operating developments
- Q2 revenue weakness primarily reflected lower gold sales at Andacollo and Pueblo Viejo and lower gold production at Cortez and Peñasquito. New NX Gold and Khoemacau stream revenue partly offset the decline: $9.4 million in Q2 and $15.8 million for the first half.
- General and administrative expense increased to $9.3 million in Q2 from $7.2 million, and to $18.2 million in the first half from $14.1 million, mainly due to employee-related and ESG costs. Q2 depreciation, depletion and amortization decreased to $44.0 million from $48.0 million; first-half expense rose to $92.0 million from $89.3 million.
- Q2 income included a $5.9 million tax benefit, including an $18.8 million discrete benefit from releasing a valuation allowance on certain deferred tax assets. First-half income tax expense was $9.4 million, versus $23.2 million a year earlier.
- At Pueblo Viejo, approximately 484,000 silver ounces remained deferred at June 30 because of contractual recovery provisions; timing of delivery is uncertain. Khoemacau continued ramping up, but an underground accident on May 11 caused two fatalities and short-term production disruptions; the investigation was ongoing.
Outlook, transactions and risks
- The filing provides operator-reported 2022 production estimates for certain properties, not company-wide revenue or earnings guidance. Khoemacau’s operator expected full sustained production by Q4 2022, subject to further impacts, and forecast annual payable silver of 1.8–2.0 million ounces at full production. Operator estimates are not assured.
- After quarter-end, Royal Gold acquired a Cortez Complex sliding-scale gross royalty for $525 million. It borrowed $500 million under its revolver in July, leaving $500 million available; the initial Base Rate loan carried an approximately 5.6% all-in rate. The acquisition was funded with debt and cash on hand.
- Royal Gold also agreed to acquire Great Bear Royalties for approximately C$199.5 million (about US$155 million), subject to shareholder, regulatory and court approvals. The company expected closing in the quarter ending September 30, 2022, and planned to use available cash.
- Other commitments include up to $6.8 million of additional NX Gold payments if specified targets are met through 2024, and a conditional $163.75 million Ilovica stream funding schedule. Management said existing financial resources and operating cash flow were adequate for foreseeable needs, while noting substantial acquisitions may require additional financing.
- Key risks include volatile metal prices, mine production and delivery variability, operator and permitting risks, environmental and public-health disruptions, and acquisition approval/closing risks. Management reported no material change to previously disclosed risk factors and no material litigation proceedings.
Important facts for investors to verify
- Whether the Cortez royalty produces expected returns relative to its $525 million purchase price and the new revolving-credit borrowing and interest cost.
- Great Bear transaction approvals, closing timing, funding, and terms of Kinross’s option over 25% of the royalty.
- Progress at Khoemacau after the fatal accident and ramp-up disruptions, and the timing of delivery of Pueblo Viejo’s deferred silver ounces.
- Actual operator production versus estimates, especially at properties with reported lower grades, recoveries or mine-sequencing changes.
- Effects of metal-price changes: for the first half, a 10% change in gold, copper or silver prices would have changed reported revenue by approximately $24.9 million, $7.9 million or $1.7 million, respectively.