Royal Gold, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018; filed August 9, 2018. This is an annual filing, not a standalone fourth-quarter report. Royal Gold acquires and manages precious-metal streams and royalties; it generally does not operate the underlying mines.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $459.0 million | $440.8 million |
| Stream revenue | $324.5 million | $314.0 million |
| Royalty revenue | $134.5 million | $126.8 million |
| Cost of sales | $83.8 million | $87.3 million |
| Net revenue (revenue less cost of sales) | $375.2 million | $353.5 million |
| Operating income (loss) | $(74.5) million | $145.9 million |
| Net income (loss) attributable to Royal Gold common stockholders | $(113.1) million; $(1.73) per share | $101.5 million; $1.55 per share |
| Cash from operating activities | $328.8 million | $266.9 million |
| Cash and equivalents at year-end | $88.8 million | $85.8 million |
| Current assets / current liabilities | $125.8 million / $51.4 million | $143.6 million / $34.3 million |
| Debt carrying value | $351.0 million | $586.2 million |
Net revenue was approximately 81.7% of revenue in FY2018 (calculated from the filing’s figures). The company reported a $239.4 million impairment charge, primarily relating to its Pascua-Lama royalty, and $163.7 million of depreciation, depletion and amortization. The impairment drove the operating and net losses; it is not a measure of cash spent in the year.
Working capital was $74.4 million, down from $109.3 million; the current ratio was about 2:1 versus 4:1. The company attributed much of the decline to a roughly $21 million foreign tax refund received during the year. It repaid the remaining $250 million drawn on its revolving facility; at year-end the $1.0 billion facility was undrawn. Including working capital, stated total liquidity was approximately $1.1 billion. Cash from operations rose partly due to higher stream and royalty receipts and the tax refund.
Debt also includes $370 million principal of 2.875% convertible notes due June 15, 2019; their balance-sheet carrying value was reduced by unamortized discounts and issuance costs. The filing lists approximately $380.6 million of principal and estimated interest payments due in less than one year.
Material changes versus FY2017
- Revenue increased 4.1%; stream revenue rose to $324.5 million and royalty revenue to $134.5 million. Higher average gold and copper prices, Rainy River stream sales, increased Wassa and Prestea gold sales, and Mount Milligan copper sales contributed. Cost of sales declined.
- Average realized-period prices reported were gold $1,297/oz versus $1,259, silver $16.72/oz versus $17.88, and copper $3.06/lb versus $2.44. Revenue mix was 77% gold, 9% silver, 11% copper and 3% other.
- Mount Milligan gold stream deliveries fell, partly following the stream amendment that reduced the gold share from 52.25% to 35%; copper stream deliveries increased as the copper stream began contributing. Rainy River began production and contributed stream sales.
- The $239.4 million impairment included $239.1 million for Pascua-Lama, following the operator’s reserve reclassification and suspension of further development. The royalty’s remaining carrying value was $177.7 million.
- Operating cash flow increased to $328.8 million. Investing cash use fell to $10.6 million from $200.1 million, while financing cash use increased to $315.3 million, primarily due to repayment of the revolving facility.
Outlook, commentary and risks
- Management said existing financial resources and operating cash flows should cover foreseeable debt service, general and administrative costs and capital expenditures; acquisitions could require additional debt or equity financing. No company-wide revenue or earnings guidance is provided in the filing.
- Management expects the U.S. corporate tax rate to be 21% for fiscal years beginning July 1, 2018. FY2018 included a blended federal rate of about 28.1% and a provisional $30.7 million tax expense related to U.S. tax reform. A separate non-cash Canadian functional-currency election added approximately $18.3 million of tax expense.
- Mount Milligan faced water constraints and a 39-day mill suspension. In August 2018, its operator reduced calendar-2018 production guidance to 175,000–195,000 payable gold ounces and 40–47 million payable copper pounds. Water-access approvals and planned maintenance could further affect throughput; Royal Gold said some deliveries were deferred and expected the effect in FY2019’s first quarter.
- Other operator commentary included expected higher grades and throughput at Pueblo Viejo later in calendar 2018, and an accelerated commissioning schedule for Peñasquito’s Pyrite Leach project, with first gold expected in the December 2018 quarter. These are operator estimates, not Royal Gold guarantees.
- Concentration is significant: six properties—Mount Milligan, Andacollo, Pueblo Viejo, Wassa and Prestea, and Peñasquito—generated about $341.7 million, or 74% of FY2018 revenue. Approximately 91% of revenue came from outside the United States.
- Royal Gold is exposed to metal prices, mine production and operator decisions, permitting, water availability, environmental and political risks, foreign jurisdictions, reserve-estimate uncertainty, and the contractual limits or step-downs in certain streams and royalties. A 10% change in gold price, holding other factors constant, was estimated to change FY2018 revenue by about $37 million; equivalent copper and silver sensitivities were $5.2 million and $4.1 million.
- A dispute with Vale over calculation of the Voisey’s Bay NSR royalty remains in litigation; trial was expected to begin in the first quarter of FY2019. The company is seeking corrected future calculations and unspecified damages for alleged past underpayments.
- The 2018 annual dividend was set at $1.00 per share, up 4.2% from calendar 2017; future dividends remain subject to board approval. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Mount Milligan secures sufficient water and achieves the operator’s revised production guidance, and how deferred deliveries affect FY2019 results.
- Whether Pascua-Lama’s remaining royalty value is recoverable and whether the project advances, remains suspended or is closed.
- The outcome and potential financial impact of the Voisey’s Bay royalty litigation and any later payment adjustments.
- The timing and funding of the $370 million convertible notes due in June 2019, including the intended cash repayment or refinancing.
- Whether major operators’ production plans and reserve estimates support Royal Gold’s future revenue, given portfolio concentration and reliance on third-party information.
- The final tax effects of U.S. tax reform and the treatment of uncertain tax positions; reported reform impacts were provisional.