Business context and reporting period
Royal Gold, Inc. acquires and manages precious-metals royalties and streams; it does not operate mines or generally fund operating costs. This unaudited Form 10-Q covers the three months ended September 30, 2012, the company’s fiscal first quarter of fiscal 2013. It held interests in 39 producing, 26 development-stage and 136 exploration-stage properties.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
- Revenue: Royalty revenue was $77.9 million, up 20.8% from $64.5 million. Production growth and mine ramp-ups more than offset lower average prices for gold, silver, copper and nickel.
- Profit: Operating income rose to $47.8 million from $37.5 million; operating margin was approximately 61.4%, versus 58.1%. Net income attributable to Royal Gold stockholders was $24.8 million, compared with $22.5 million. Basic and diluted EPS were $0.42 and $0.41, versus $0.41 and $0.40.
- Costs and taxes: Depletion and amortization rose to $21.5 million from $17.2 million, reflecting higher production. Interest and other expense increased to $6.2 million from $1.8 million, including $5.1 million on the 2019 convertible notes. The effective tax rate rose to 39.4% from 32.1%.
- Cash flow: Operating cash flow was $53.5 million, up from $46.2 million. Investing activities used $119.9 million, principally for Mt. Milligan; financing activities used $7.0 million. Cash declined $73.4 million during the quarter to $302.0 million.
- Liquidity and debt: Current assets were $371.8 million and current liabilities $19.3 million; the reported current ratio was 19:1, down from 29:1 at June 30, 2012. Convertible notes had a $295.4 million net carrying value; their principal is $370 million. The $350 million revolving facility was undrawn, and the company reported compliance with its covenants.
- Other: Total assets were $2.40 billion and total equity $1.89 billion. Dividends declared were $0.15 per common share, versus $0.11 a year earlier.
Material changes and significant developments
- On August 8, Royal Gold agreed to acquire an additional 12.25% of Mt. Milligan payable gold for $200 million, increasing its total stream interest to 52.25% and aggregate pre-production commitment to $781.5 million. It had paid $574.6 million by September 30; scheduled remaining payments totaled $206.9 million, subject to contractual conditions.
- On October 15, after quarter-end, the company sold 5.25 million shares at $90 each, generating $472.5 million gross proceeds. It intended to use net proceeds for royalty acquisitions and general corporate purposes.
- Royalty revenue growth reflected higher reported production at Voisey’s Bay, Mulatos, Andacollo, Peñasquito, Las Cruces, Holt, Canadian Malartic and Wolverine. Lower production at Cortez and Leeville and lower metal prices partly offset those gains.
- Gold represented 66% of revenue; copper 14%, silver 9%, nickel 8% and other sources 3%. Average gold price was $1,652/oz, versus $1,702; silver $29.80/oz versus $38.80; copper $3.50/lb versus $4.07; and nickel $7.40/lb versus $10.00.
Outlook, risks and contingencies
- Management said existing financial resources and operating cash flows were expected to cover foreseeable debt service, overhead, exploration, capital needs, dividends and committed acquisitions. Significant additional acquisitions could require new debt or equity financing.
- Thompson Creek reported Mt. Milligan construction was 79% complete overall and expected commercial production in the fourth quarter of calendar 2013. These are operator estimates, not company guidance.
- Barrick’s Pascua-Lama review indicated capital costs could be approximately $8.0–$8.5 billion and initial gold production was expected in the second half of 2014, later than previously planned. Royal Gold said it has no obligation to fund project capital costs.
- Operator production estimates are not independently verified, and actual results may differ. Key exposures include metal prices, mine production and delays, operator performance, project construction, permitting, water and other operating constraints, and foreign-country, title and acquisition risks. Management estimated that a 10% gold-price change would have changed quarterly revenue by about $5.5–$5.6 million.
- Royal Gold’s Voisey’s Bay partnership is pursuing litigation against Vale entities over calculation of the royalty on concentrate sales, seeking at least $29 million in past underpayments plus additional damages and other relief. The case was in discovery; no material development was reported for the quarter.
- The company reported $20.1 million of gross unrecognized tax benefits and $3.2 million of accrued tax-related interest and penalties at quarter-end. Its Seabridge investment had an $8.7 million unrealized loss, recorded in other comprehensive income; no impairment write-down was recorded.
Important facts for investors to verify
- Confirm Mt. Milligan’s construction progress, payment conditions and schedule, and the timing and terms of the remaining commitment.
- Assess how the October share offering affects shares outstanding, cash available and prospective acquisition funding.
- Track production and commodity-price trends, particularly at major revenue contributors, and compare operator estimates with actual results.
- Monitor Pascua-Lama’s revised cost and timing estimates and any further project changes.
- Review the Voisey’s Bay royalty litigation, tax-position exposures, and the company’s ability to maintain liquidity while funding commitments and acquisitions.