Royal Gold, Inc. — Form 10-K summary
Reporting period: The filing is for the fiscal year ended June 30, 2016, not 2015 Q4 as indicated in the request metadata. It also reports the quarter ended June 30, 2016. Financial amounts below are U.S. dollars unless otherwise noted.
Business context and reporting period
Royal Gold acquires and manages precious-metal streams and royalties; it generally does not operate the mines. At June 30, 2016, it held streams on four producing and three development-stage properties, and royalties on 34 producing, 21 development-stage and 131 exploration-stage properties. Streams generated about 66% of fiscal 2016 revenue, versus 34% in 2015.
Major fiscal 2016 transactions included streams at Pueblo Viejo ($610 million advance), Andacollo ($525 million), Wassa and Prestea (up to $145 million), and Rainy River ($175 million committed). Royal Gold also received $345 million for terminating its prior Andacollo royalty.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $359.8 million | $278.0 million |
| Cost of sales | $71.0 million | $33.5 million |
| Net revenue (revenue less cost of sales) | $288.8 million | $244.6 million |
| Operating income | $4.8 million | $87.2 million |
| Net income (loss) attributable to Royal Gold common stockholders | $(77.1) million | $52.0 million |
| Basic and diluted EPS | $(1.18) | $0.80 |
| Cash from operating activities | $169.9 million | $192.1 million |
Revenue rose 29%, primarily from new stream deliveries and higher Mount Milligan production. Operating margin, calculated as operating income divided by revenue, fell to about 1.3% from 31.4%; the filing attributes the earnings decline mainly to $98.6 million of impairments and $60.7 million of income tax expense. The tax expense was unusually high in relation to the pretax loss and was primarily associated with the Andacollo transactions, liquidation of the Chilean subsidiary and impairments. Average gold, silver and copper prices were respectively $1,168/oz, $15.32/oz and $2.22/lb, below fiscal 2015 averages.
Cash and equivalents declined to $116.6 million from $742.8 million. Investing cash use was $1.010 billion, including $1.346 billion of stream and royalty acquisitions, partly offset by the $345 million Andacollo royalty termination proceeds. Financing provided $213.4 million, principally reflecting $350 million of revolver borrowings and $75 million of repayments. The company reported $169.9 million of operating cash flow.
At year-end, current assets were $164.8 million and current liabilities $22.7 million, producing working capital of $142.1 million and a current ratio of 7:1. The company reported $275 million drawn and $375 million available on its $650 million revolving facility, and total liquidity of $517.1 million including working capital. Debt carrying value was $600.7 million; principal outstanding was $370 million of 2.875% convertible notes due 2019 and $275 million on the revolver. The revolver maturity was extended to March 2021, and the company reported compliance with its financial covenants.
Dividends declared were $0.91 per share for fiscal 2016; the calendar-year 2016 dividend was raised 5% to $0.92 per share, subject to board approval for future installments.
Material changes versus the prior comparable period
- Stream revenue increased to $238.0 million from $94.1 million, while royalty revenue declined to $121.8 million from $183.9 million. The Andacollo royalty was sold as the new stream began, and lower metal prices and production at Peñasquito and Cortez also weighed on royalties.
- Cost of sales rose with production from the expanded stream portfolio; depreciation, depletion and amortization increased to $141.1 million from $93.5 million.
- Impairment charges increased to $98.6 million from $31.3 million. The largest item was a $75.7 million write-down of the Phoenix Gold stream to zero; Inata and Wolverine interests were also written down to zero, and an Inata receivable allowance of about $2.9 million was recorded.
- Operating cash flow decreased by $22.2 million, while net debt increased following acquisition spending. Cash used in investing increased substantially from $51.2 million in fiscal 2015.
For the quarter ended June 30, 2016, revenue was $94.1 million, operating income $28.5 million, net income attributable to common stockholders $20.4 million and EPS $0.32. In the comparable 2015 quarter, those figures were $73.6 million, $27.6 million, $14.8 million and $0.23.
Outlook, commentary, risks and contingencies
- Management said available financial resources and operating cash flow should cover foreseeable debt service, administrative costs and capital needs; larger acquisitions could require additional debt or equity financing. No company-wide revenue or earnings guidance was provided in the filing.
- Operator estimates for calendar 2016 included 240,000–270,000 oz of Mount Milligan gold, 600,000–650,000 oz at Pueblo Viejo (Barrick’s 60% share), and 180,000–205,000 oz for Golden Star’s Wassa and Prestea operations. These are operator forecasts, not Royal Gold guidance; Mount Milligan was expected at the low end of its range.
- Rainy River construction was reported over 40% complete, with first production targeted for mid-2017. Pascua-Lama construction remained suspended, with restart timing uncertain. Golden Star reported Wassa underground pre-commercial production after year-end and expected commercial production in early 2017; Prestea underground first production was expected in mid-2017.
- After year-end, Royal Gold signed a conditional commitment letter with Centerra relating to its proposed acquisition of Thompson Creek. The proposed Mount Milligan amendment would reduce the gold stream from 52.25% to 35% and add an 18.75% copper stream. Completion depended on the acquisition and other conditions; the filing cautioned that failure to close could create operator liquidity and mine-operation risks.
- Principal exposures include metal-price volatility, dependence on third-party operators and operator data, mine delays or shutdowns, reserve and production uncertainty, foreign-jurisdiction and permitting risks, and concentration in key properties. The five properties Mount Milligan, Andacollo, Pueblo Viejo, Wassa/Prestea and Peñasquito contributed nearly 72% of fiscal 2016 revenue.
- The Voisey’s Bay royalty dispute with Vale over royalty calculations remained in discovery; Royal Gold reported no Vale revenue for fiscal 2016 Q4. The filing also describes contingent future payments under the Pascua-Lama royalty and conditional remaining funding commitments of $75 million for Rainy River, $50 million for Wassa/Prestea and $163.75 million for Ilovica.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Royal Gold nevertheless notes that reserve, production and property information is supplied by operators and is not independently verified in many cases.
Most important facts for investors to verify
- Whether the new streams deliver expected production and margins as development projects ramp up, and whether operator forecasts are achieved.
- The valuation and future cash-flow implications of the $98.6 million impairments, particularly the Phoenix Gold write-down and Inata receivable collection efforts.
- Liquidity after acquisition spending, remaining conditional commitments and debt service; verify revolver availability, covenant headroom and refinancing or funding plans.
- Closing and final terms of the proposed Centerra–Thompson Creek acquisition and Mount Milligan stream amendment.
- Progress and potential outcome of the Voisey’s Bay litigation, and the potential effects of production interruptions, metal prices and other operator or jurisdiction risks.