Royal Gold, Inc. — Form 10-Q Summary
Business context and reporting period. Royal Gold acquires and manages precious-metals royalties and similar interests; it does not generally operate mines. This filing covers the three months ended September 30, 2011, the first quarter of fiscal 2012, and compares results with the three months ended September 30, 2010. Unless noted, financial amounts below are in millions of dollars. The interim statements are unaudited.
Financial results and condition
| Metric | Quarter ended Sep. 30, 2011 | Quarter ended Sep. 30, 2010 / comparison |
|---|---|---|
| Royalty revenue | $64.5 | $45.3; up 42% |
| Operating income | $37.5 | $20.8; operating margin 58.1% vs. 45.9% |
| Net income attributable to Royal Gold stockholders | $22.5; diluted EPS $0.40 | $11.8; diluted EPS $0.21 |
| Operating cash flow | $46.2 | $34.2 |
| Cash and equivalents | $123.4 at Sep. 30, 2011 | $114.2 at Jun. 30, 2011 |
| Total debt | $192.2 | $226.1 at Jun. 30, 2011 |
| Current assets / current liabilities | $184.5 / $36.0; current ratio about 5.1 | $169.3 / $28.9 at Jun. 30, 2011; ratio about 5.9 |
| Dividends declared per common share | $0.11 | $0.09 |
Cash flow from investing activities was positive $4.3 million, including $4.5 million of proceeds from sale of restricted gold inventory; financing activities used $41.3 million, including $33.9 million of debt repayment, $6.1 million of dividends and $5.4 million of distributions to non-controlling interests. Cash increased by $9.2 million during the quarter. The company reported $70 million drawn and $155 million available under its $225 million revolving credit facility, plus $122.2 million outstanding under its term loan. It reported compliance with debt covenants.
Gold supplied 70% of quarterly royalty revenue; silver 6%, copper 11%, nickel 9% and other metals 4%. Average gold, silver and copper prices were higher year over year, as were several properties’ attributable production levels. Available-for-sale securities were $23.5 million, including Seabridge Gold shares with a $5.2 million unrealized loss at quarter-end; the quarter included a $5.3 million after-tax unrealized loss in other comprehensive income.
Material changes and operating developments
- Revenue growth reflected higher average metal prices, increased production at Andacollo, Cortez, Dolores and Voisey’s Bay, Peñasquito’s ramp-up, and the start of production at Holt and Canadian Malartic.
- General and administrative expense rose to $6.3 million from $5.0 million, primarily due to higher stock-based compensation. Production taxes rose to $2.2 million from $0.6 million, mainly because of higher Voisey’s Bay royalty revenue. Depletion and amortization fell to $17.2 million from $18.9 million, partly because royalty caps had been met at Taparko and Siguiri.
- The company recorded a $1.3 million Relief Canyon restructuring charge after amending the royalty rate from 4% to 2% and eliminating the ten-mile area of interest; management said the amendment was intended to improve project economics and the likelihood of royalty revenue.
- Debt fell by $33.9 million from June 30, 2011, largely reflecting repayments. The current ratio declined from about 5.9 to 5.1.
Outlook, risks and contingencies
Management said cash resources and operating funds should cover foreseeable debt service, expenses, exploration and capital expenditures, dividends, and the remaining Mt. Milligan commitment. The filing gives no company-wide revenue or earnings guidance. Management noted that substantial acquisitions could require additional debt or equity financing.
- Operator guidance and execution: Several operators reduced or revised 2011 production expectations. St Andrew lowered Holt gold guidance to 23,000–26,000 ounces from 45,000–50,000; Alamos reduced Mulatos guidance to 145,000–160,000 ounces from 160,000–175,000; Goldcorp reduced Peñasquito guidance to 250,000 ounces from 350,000; and Quadra lowered Robinson copper guidance to 95–100 million pounds from 105–120 million. Dolores reported third-quarter production issues but maintained its full-year guidance. These are operator estimates, not Royal Gold forecasts, and are not independently verified by Royal Gold.
- Development projects: Mt. Milligan remained scheduled for completion in calendar 2013; Pascua-Lama first production was expected in mid-2013. The Mt. Milligan agreement permits up to $85 million in additional development payments. No payment was made in the reported quarter; a $13.7 million payment was made October 13, 2011, leaving $71.3 million committed as of that date.
- Litigation: The Voisey’s Bay royalty partnership is pursuing a claim alleging incorrect net smelter return calculations. It seeks an order governing future calculations and past damages of at least $29 million, plus further damages, interest and costs. The case was in discovery, with no material quarterly development reported.
- Market and other risks: Results depend on metal prices and mine production, both outside Royal Gold’s control. A 10% change in gold price was estimated to change quarterly revenue by about $4.7 million; comparable 10% changes in copper and nickel prices would affect it by about $0.8 million and $0.9 million, respectively. Other risks include operator delays, project and permitting issues, foreign-country risks, acquisition financing and uncertain tax positions. Gross unrecognized tax benefits were $19.1 million at quarter-end.
Management assessed disclosure controls as effective as of September 30, 2011 and reported no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether operator production shortfalls and revised guidance affect royalty receipts, especially at Holt, Mulatos, Peñasquito and Robinson.
- Mt. Milligan construction progress and timing or amount of the remaining $71.3 million commitment.
- Progress and potential financial implications of the Voisey’s Bay royalty litigation.
- Changes in metal prices, production levels and the value of the Seabridge investment, given their effects on revenue and comprehensive income.
- Developments in unrecognized tax benefits and whether future acquisitions require additional borrowing or equity issuance.