Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, the first quarter of fiscal 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Royal Gold acquires and manages metal streams and royalties and generally does not operate the mines underlying its interests.
Financial performance and position
- Revenue: $118.8 million, up 18.8% from $100.0 million a year earlier. Stream revenue was $87.0 million and royalty revenue was $31.8 million. Gold represented 79% of revenue; average gold, silver, and copper prices were $1,472/oz, $16.98/oz, and $2.63/lb, respectively.
- Profit: Operating income was $48.8 million versus $25.3 million; operating margin was approximately 41.1% versus 25.3%. Net income attributable to Royal Gold stockholders was $70.5 million, or $1.07 per diluted share, compared with $15.0 million, or $0.23 per share.
- Tax and unusual earnings driver: The quarter included a $23.5 million income tax benefit and a negative 51.9% effective tax rate, versus $4.1 million of tax expense and a 25.6% rate in the prior-year quarter. The filing attributes this chiefly to $32.3 million of discrete benefits from Swiss tax reform and deferred-tax asset remeasurement. Earnings growth therefore was not solely operational.
- Cash flow: Operating cash flow was $71.2 million, compared with $44.6 million. Investing activities provided $0.5 million. Financing activities used $69.2 million, including $50.0 million of revolving-credit repayment and $17.4 million of dividends. Cash increased $2.5 million to $122.0 million.
- Liquidity and debt: Current assets were $164.2 million and current liabilities $32.4 million, yielding $131.8 million of working capital and a 5:1 current ratio. Revolver borrowings were $170.0 million principal ($164.6 million net of issuance costs), with $830.0 million available. The company reported approximately $1.0 billion of total liquidity and compliance with its financial covenants.
- Other: Stream and royalty interests, net, were $2.305 billion. Cash dividends declared were $0.265 per share, up from $0.25. Adoption of lease accounting resulted in recognition of $2.4 million of operating lease right-of-use assets and liabilities, with no stated material effect on results or cash flows.
Changes versus the prior-year quarter
- Revenue rose $18.8 million, primarily from higher stream revenue and higher average gold and silver prices. Mount Milligan gold and copper sales increased; lower Andacollo gold sales, attributed to delivery timing, partly offset the gains.
- Cost of sales increased to $20.1 million from $16.5 million, mainly with higher Mount Milligan sales. General and administrative expense fell to $7.4 million from $9.9 million, primarily due to lower legal costs following resolution of the Voisey’s Bay royalty dispute. Depreciation, depletion and amortization declined to $38.7 million from $42.6 million.
- Interest and other expense declined to $2.8 million from $7.9 million, principally reflecting lower average debt after the June 2019 maturity and settlement of $370 million of convertible notes.
- Operating cash flow increased by $26.6 million, mainly from higher net proceeds from stream interests and lower income taxes paid. Debt principal declined by $50.0 million during the quarter.
Outlook, commentary, and risks
- Management stated that existing resources and operating cash flow should cover foreseeable debt service, overhead, capital needs, and dividends. Acquisitions remain a key potential use of capital; substantial transactions could require additional debt or equity financing. The filing does not provide company-wide revenue or earnings guidance.
- Mount Milligan: Centerra reported declining long-term gold recoveries, higher near- to medium-term costs, and an impairment at its mine, and expected materially lower reserves and mineralized material following a technical review. Royal Gold said the effect on its $597.9 million stream carrying value was unclear and would be monitored; a reduction in reserves could indicate impairment.
- Operating disruptions: A labor strike suspended Andacollo operations beginning October 14, 2019; Royal Gold expected effects to appear in its March 2020 quarter because of delivery timing. Peñasquito’s blockade was lifted October 8 and operations returned to full operation after restart, but the operator said the disruption affected production and full-year results.
- Development funding: Khoemacau construction was reported at approximately 11% complete, with first concentrate shipment expected by mid-2021. Royal Gold made a $65.8 million advance payment on November 5, after quarter-end; further payments are conditional, with remaining commitment reported at $146.2 million to $199.2 million. Ilovica funding also remained conditional.
- Acquisition and contingencies: Royal Gold agreed to fund up to $7.5 million for a staged royalty and warrants tied to Brazil’s Castelo de Sonhos project; $4.5 million had been paid by quarter-end. Insolvency proceedings at El Toqui and an evaluation-stage property could lead to write-downs of interests carried at approximately $1.4 million and $2.7 million, respectively.
- Results are exposed to metal prices, mine production and operator performance, permitting and development delays, water availability, labor and community disputes, reserve changes, and foreign-country, tax, and financing risks. A 10% change in average quarterly prices would have changed revenue by approximately $9.9 million for gold, $1.1 million for silver, and $1.0 million for copper, according to the filing.
Important facts for investors to verify
- How much of the quarter’s earnings increase is sustainable, given the material discrete tax benefit?
- What conclusions will Centerra’s Mount Milligan technical review reach, and will Royal Gold record any impairment?
- What are the duration and financial effects of the Andacollo strike and the Peñasquito disruption?
- Will Khoemacau meet its construction, budget, and first-shipment expectations, and what additional funding will Royal Gold ultimately provide?
- How do production, metal prices, and cash conversion develop across principal properties, and do any insolvency proceedings require asset write-downs?