Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2016, with nine-month comparisons to March 31, 2015. Although the request metadata says “2015 Q3,” the filing is for Royal Gold’s fiscal 2016 third quarter. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted. The interim financial statements are unaudited.
Business context
Royal Gold acquires and manages precious-metals royalties and metal streams; it does not generally operate the mines. Results depend chiefly on gold prices and production at operators’ mines. At March 31, 2016, the company reported streams on four producing and three development-stage properties, and royalties on 34 producing, 21 development-stage and 131 exploration-stage properties.
Financial results and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2016 / 2015 | $93.5 / $74.1 | $265.7 / $204.4 |
| Operating income (loss), 2016 / 2015 | $(72.1) / $32.2 | $(23.7) / $59.7 |
| Net income (loss) attributable to Royal Gold stockholders, 2016 / 2015 | $(67.7) / $25.0 | $(97.6) / $37.1 |
| Diluted earnings (loss) per share, 2016 / 2015 | $(1.04) / $0.38 | $(1.50) / $0.57 |
| Net cash provided by operating activities, 2016 / 2015 | $120.6 / $148.2 for the nine-month periods |
- Revenue mix: Quarterly stream revenue rose to $63.4 million from $29.7 million, while royalty revenue fell to $30.0 million from $44.4 million. For nine months, stream revenue was $168.6 million versus $66.7 million; royalty revenue was $97.1 million versus $137.7 million.
- Margins and unusual expense: Cost of sales was $17.9 million for the quarter and $52.0 million year to date. Depletion, depreciation and amortization was $38.2 million and $105.7 million, respectively. Impairment charges, including an allowance against an Inata receivable, totaled $99.0 million for the quarter and $98.6 million year to date; these drove the quarterly operating loss. The filing does not provide a single adjusted or normalized margin measure.
- Cash and liquidity: Cash and equivalents were $122.9 million at March 31, 2016, down from $742.8 million at June 30, 2015. Current assets were $175.2 million and current liabilities $24.2 million, a reported current ratio of approximately 7:1. Operating cash flow was $120.6 million for nine months.
- Investing and financing: Nine-month investing cash outflow was $994.6 million, principally reflecting stream acquisitions; financing provided $254.0 million, including net revolver borrowings. Cash decreased by $620.0 million over the period.
- Debt: Total debt was $630.3 million: $330.3 million net carrying value of 2.875% convertible notes due 2019 and $300.0 million drawn on a $650 million revolving facility. The facility had $350 million available, a 2.87% rate at quarter-end, and maturity extended to March 16, 2021. The company said it was in covenant compliance.
- Dividends: Dividends declared were $0.23 per share for the quarter and $0.68 per share for nine months.
Material changes versus the prior comparable periods
- Revenue increased 26% in the quarter and 30% year to date, mainly from newly producing streams at Andacollo, Pueblo Viejo and Wassa/Prestea, and increased Mount Milligan stream production.
- Royalty revenue declined in both comparison periods, reflecting lower metal prices, sale of the Andacollo royalty, and lower production at properties including Cortez and Peñasquito. Average gold price was $1,183/oz for the quarter versus $1,218/oz; year-to-date average was $1,138/oz versus $1,235/oz.
- Quarterly and year-to-date earnings moved to losses, principally because of the 2016 impairment charges. Nine-month results also included $55.7 million of income tax expense, primarily associated with the Andacollo transactions, liquidation of a Chilean subsidiary, and impairment-related tax effects. Management said the year-to-date effective tax rate excluding discrete items would have been 15.3%.
- Royalty and stream interests, net, increased to $2.86 billion from $2.08 billion at June 30, 2015, reflecting major acquisitions. Debt increased to $630.3 million from $322.1 million.
Outlook, management commentary and risks
- Management believed available resources and operating cash generation would cover foreseeable debt service, overhead and capital needs, while noting that substantial acquisitions could require additional debt or equity financing. Conditional remaining commitments included $75 million for Rainy River, $70 million for Wassa/Prestea and $163.75 million for Ilovica.
- The filing presents operator estimates, not company guidance. Examples for calendar 2016 include Pueblo Viejo gold production of 600,000–650,000 ounces attributable to Barrick’s 60% interest, and Wassa/Prestea production of 205,000–215,000 ounces. Rainy River construction was reported 25% complete at the end of February 2016, with startup projected by New Gold for mid-2017. Operator estimates and schedules are not guaranteed.
- Royal Gold wrote its Phoenix Gold stream interest down to zero after Rubicon reported substantially reduced mineralized material and suspended project activities. Inata and Wolverine royalty interests were also written down to zero; the company fully allowed for the approximately $2.9 million Inata royalty receivable and said it would continue collection efforts.
- At Voisey’s Bay, Royal Gold disputes Vale’s deductions of Long Harbour operating costs, depreciation and cost of capital in calculating the royalty. Litigation seeking appropriate future calculations and damages for alleged past underpayments remained in discovery.
- Gold accounted for approximately 87% of nine-month revenue. The filing estimated that a 10% change in average gold prices would have changed nine-month revenue by approximately $24.4 million. Other key risks include metal prices, mine output and reserve revisions, operator financing and construction, permitting, operating interruptions, and foreign-country exposure.
- Management reported disclosure controls were effective as of March 31, 2016; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether new streams deliver production and cash flow as operators forecast, particularly Wassa/Prestea and Rainy River, and whether the remaining acquisition commitments are funded on schedule.
- Whether the impairment assumptions for Phoenix Gold, Inata and Wolverine—and the zero carrying values recorded—remain appropriate as operator and project information changes.
- Progress and potential financial effect of the Voisey’s Bay royalty litigation and the disputed royalty deductions.
- How cash balances, revolver usage, covenant headroom and acquisition funding evolve, especially given the sharp decline in cash and the conditional commitments.
- Future metal prices and production at major properties; operator estimates are not independently verified by Royal Gold, and the filing does not provide company-level production guidance.
- The recurring versus discrete components of income tax expense, given the unusual nine-month tax charge despite a pretax loss.