Royal Gold, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 30, 2018, Royal Gold’s first quarter of fiscal 2019 (not calendar 2018 Q1). Royal Gold acquires and manages metal streams and royalties; it generally does not operate the mines. Stream interests generated about 70% of quarterly revenue and royalty interests about 30%.
Financial performance and liquidity
- Revenue: $100.0 million, down 11.1% from $112.5 million in the prior-year quarter. Stream revenue was $70.0 million versus $78.8 million; royalty revenue was $30.0 million versus $33.7 million.
- Profit: Operating income was $25.3 million, down from $41.7 million. Net income attributable to Royal Gold common stockholders was $15.0 million, or $0.23 per diluted share, versus $28.6 million, or $0.44 per share. The filing reports consolidated net income of $12.0 million; the difference reflects the reported net loss attributable to non-controlling interests.
- Costs and margins: Total costs and expenses rose to $74.7 million from $70.8 million. Operating margin was approximately 25.3%, versus 37.1% a year earlier. General and administrative expense increased to $9.9 million from $6.9 million, primarily due to legal costs related to the Voisey’s Bay royalty dispute and settlement. Depletion and amortization rose to $42.6 million from $39.7 million.
- Cash flow: Operating cash flow was $44.6 million, down from $71.6 million, primarily reflecting higher income taxes paid and lower net proceeds from stream and royalty interests. Investing activities used $0.1 million; financing activities used $16.2 million, including $16.4 million of dividends. Cash increased $28.3 million to $117.1 million.
- Liquidity and debt: Working capital was $122.0 million and the current ratio was about 4:1. The company had no revolver borrowings and $1.0 billion available on its revolving credit facility, for reported total liquidity of approximately $1.1 billion. Debt’s carrying value was $354.9 million; it includes $370 million principal of 2.875% convertible notes due June 2019. Royal Gold said it intended and was able to fund principal repayment in cash, primarily from the revolver. It was in compliance with facility covenants.
- Dividends: $0.25 per common share declared, versus $0.24 in the prior-year quarter.
Material changes versus the prior-year quarter
- Lower revenue reflected lower average metal prices and weaker sales, particularly gold and copper at Mount Milligan, gold at Pueblo Viejo, and royalty production at Peñasquito and Cortez. Average gold, silver and copper prices were $1,213/oz, $15.02/oz and $2.77/lb, respectively, compared with $1,278/oz, $16.84/oz and $2.88/lb.
- Mount Milligan stream deliveries were affected by earlier water shortages and further mill interruptions for crusher maintenance and transformer repairs. Centerra reaffirmed annual guidance but expected to manage throughput as short-term water supply declined; applications for additional water access had not yet been granted.
- Pueblo Viejo gold deliveries declined amid lower grades and carbonaceous ore. Its operator lowered 2018 gold guidance to 575,000–590,000 ounces from 585,000–615,000 ounces.
- Peñasquito production attributable to Royal Gold’s royalty fell year over year across gold, silver, lead and zinc, reflecting lower-grade stockpiles and reduced mill throughput during plant commissioning. The operator expected improved production in the December quarter.
Outlook, commentary, risks and unusual items
- Management said existing financial resources and operating cash flow should cover foreseeable debt service, general and administrative costs, and capital expenditures; substantial acquisitions could require additional debt or equity financing. No company-wide revenue or earnings guidance was provided.
- On September 13, 2018, Royal Gold’s subsidiary settled long-standing litigation with Vale concerning the Voisey’s Bay royalty calculation. For production after April 1, 2018, the settlement applies the 3% royalty rate to approximately 50% of gross concentrate metal value at prevailing nickel, copper and cobalt prices; the applicable share varies with those prices. Royal Gold recognized about $4.9 million of Voisey’s Bay royalty revenue in the quarter, including amounts attributable to the June quarter.
- Royal Gold adopted ASC 606 with no reported impact on quarterly revenue, expenses or attributable net income. Adoption of financial-instrument guidance resulted in a $1.2 million cumulative adjustment to accumulated losses and requires equity-security fair-value changes to flow through earnings. A $1.5 million fair-value loss was recorded in the quarter; management noted this may increase earnings volatility.
- Metal-price exposure is significant: gold accounted for about 78% of revenue. The company estimated that a 10% change in average gold, silver or copper prices would change quarterly revenue by approximately $8.0 million, $1.0 million or $0.6 million, respectively.
- Other risks include mine performance and operator forecasts, permitting, water availability, commodity prices, and developments at properties Royal Gold does not operate. Operator production estimates and property updates are third-party information that Royal Gold said it had not independently verified.
- As of September 30, $163.75 million of conditional funding for the Ilovica gold stream remained subject to certain conditions. On October 3, the company bought the final tranche of Contango Ore shares for $3.3 million.
Important facts for investors to verify
- Progress on Mount Milligan’s water applications and the resulting mine throughput and stream deliveries.
- Actual versus operator-estimated production at principal properties, especially Pueblo Viejo, Peñasquito and Mount Milligan.
- Implementation and financial effect of the Voisey’s Bay settlement, including how metal prices affect the royalty base.
- Repayment or refinancing of the $370 million notes due June 2019 and continued covenant compliance.
- Metal-price movements, acquisition commitments and any changes in expected liquidity or financing needs.