Royal Gold, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2014 (the first quarter of fiscal 2015); compared with the three months ended September 30, 2013. Royal Gold acquires and manages precious-metals royalties and streams and does not operate mines. Financial statements are unaudited.
Financial performance and position
- Revenue: $69.0 million, up 22% from $56.5 million. Royalty revenue was $49.4 million; stream revenue was $19.7 million, primarily from Mt. Milligan, which had no comparable stream revenue in the prior-year quarter.
- Profit: Operating income was $29.5 million versus $25.7 million. Net income attributable to Royal Gold stockholders was $18.7 million, or $0.29 per basic and diluted share, compared with $15.2 million, or $0.23 per share. Operating margin was approximately 42.8%, versus 45.6%.
- Cash flow: Operating cash flow was $52.5 million, up from $35.5 million. Investing used $6.3 million, compared with $48.1 million; financing used $14.2 million, mainly for dividends. Cash increased $31.9 million to $691.4 million.
- Liquidity: Current assets were $757.4 million and current liabilities $20.8 million, a reported current ratio of 36:1. The company had $450 million available under its revolving facility and no borrowings on it; it reported compliance with its covenants.
- Debt and equity: Balance-sheet debt, net, was $314.3 million, representing convertible notes due 2019 with $370 million aggregate principal and a 2.875% coupon. Total assets were $2.893 billion and total equity was $2.378 billion. Dividends declared were $0.21 per common share, up from $0.20.
- Revenue exposure: Gold accounted for 76% of revenue, copper 10%, silver 4%, and nickel 4%. Average prices were $1,282/oz gold, $19.76/oz silver, $3.17/lb copper, and $8.43/lb nickel. Management estimated a 10% gold-price move would change quarterly revenue by about $5.7 million.
Changes and operating developments
- Revenue growth primarily reflected Mt. Milligan stream sales and higher production at Cortez and Peñasquito, partly offset by lower average gold, silver, and copper prices and reduced production at Andacollo, Voisey’s Bay, and Mulatos.
- Mt. Milligan generated $19.7 million of stream revenue. Thompson Creek reported higher quarterly payable-gold production than in the prior quarter, but mill throughput remained affected by operating adjustments and electrical issues; the operator targeted 80% of design capacity by year-end 2014.
- Reported production at Cortez rose sharply from a low prior-year comparison. Andacollo, Mulatos, and Voisey’s Bay production declined year over year; Voisey’s Bay was affected by lower grades and planned maintenance. Peñasquito gold, lead, and zinc production increased year over year.
- Cost of sales rose to $6.7 million from zero, reflecting Mt. Milligan stream gold purchases. A $1.8 million impairment wrote one producing-stage and one exploration-stage royalty interest down to zero.
- The effective tax rate fell to 17.3% from 24.1%, mainly due to lower-tax jurisdictions and Chilean tax legislation and deferred-tax remeasurement. Excluding the Chilean legislation effect, management said the quarter’s rate would have been 28.2%. Accruals for uncertain tax positions partly offset the benefit.
Outlook, commitments, and risks
- Management said current financial resources and operating cash generation should cover anticipated debt service, general and administrative costs, and capital expenditures for the foreseeable future. No company-wide revenue or earnings guidance is provided; mine production estimates cited are operators’ estimates and are not independently verified by Royal Gold.
- At quarter-end, remaining commitments included $45 million for the Phoenix Gold stream and $45 million for the Tulsequah Chief stream, the latter subject to conditions. Royal Gold paid $17 million toward Phoenix on October 3, 2014.
- After quarter-end, the company entered a conditional $175 million gold-stream transaction for Euromax’s Ilovitza project in Macedonia. Funding depends on feasibility, environmental, financing, permitting, and other conditions; production startup was estimated by the operator for 2018.
- Royal Gold acquired Tetlin project royalties for $6 million and agreed to a framework under which it could obtain up to a 40% interest in a Tetlin joint venture for contributions of up to $30 million, subject to conditions.
- Voisey’s Bay: Royal Gold alleges Vale has undercalculated the royalty and seeks at least $29 million in past damages, plus additional amounts and other relief; the litigation remained in discovery. Vale’s proposed royalty calculation for future processing at Long Harbour could substantially reduce payments, and no agreement was assured.
- Key risks include metal-price volatility, mine performance and production timing, operator and project risks, permitting and political or jurisdictional issues, and the accuracy of reserve, cost, and valuation assumptions. Management recorded no impairment of its available-for-sale securities this quarter, although the Seabridge investment had an accumulated unrealized loss of $1.5 million at September 30.
Important facts for investors to verify
- Mt. Milligan production, shipment settlements, and stream deliveries, which affect the timing and amount of recognized revenue.
- Progress at Long Harbour and the outcome of the Voisey’s Bay royalty calculation dispute, including potential effects on royalty receipts.
- Whether the Phoenix, Tulsequah Chief, Tetlin, and Ilovitza commitments proceed, and the associated funding requirements and conditions.
- Operator production estimates and project timelines, particularly for development-stage interests; the filing cautions that actual results may differ.
- Metal prices, royalty asset impairment assumptions, and the company’s tax exposures, including $14.2 million of gross unrecognized tax benefits at quarter-end.