Royal Gold, Inc. — Form 10-Q Summary
Business context and reporting period: Royal Gold acquires and manages precious-metals royalties and streams; it does not operate mines. This fiscal second-quarter filing covers the three and six months ended December 31, 2011, with comparisons to the corresponding 2010 periods. The financial statements are unaudited. At quarter-end, the company held royalties on 38 producing, 22 development-stage and 128 exploration-stage properties.
Financial performance and position
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Royalty revenue | $68.8 million; up 22% year over year | $133.3 million; up 31% |
| Operating income | $39.4 million; up 25% | $76.9 million; up 47% |
| Operating margin | 57.3%, versus 56.1% | 57.7%, versus 51.6% |
| Net income attributable to Royal Gold stockholders | $23.4 million, or $0.42 per diluted share; prior year $18.3 million, or $0.33 | $45.9 million, or $0.82 per diluted share; prior year $30.1 million, or $0.55 |
| Operating cash flow | $75.4 million for six months, versus $61.4 million |
For the six-month period, investing activities used $143.5 million, including $148.2 million for royalty acquisitions; financing activities provided $49.7 million. Cash declined $18.4 million to $95.8 million. At December 31, current assets were $166.1 million and current liabilities $30.2 million, a 6:1 current ratio. Total debt was $288.3 million: $170.0 million under the revolving facility and $118.3 million under the term loan. The company reported compliance with financial covenants.
At quarter-end, royalty interests in mineral properties were $1.799 billion, total assets $1.994 billion and total equity $1.515 billion. The company declared dividends of $0.15 per share for the quarter, versus $0.11 a year earlier.
Material changes and business developments
- Revenue growth reflected higher average gold and silver prices, increased production at Andacollo and Voisey’s Bay, the Peñasquito ramp-up, and new production at Holt and Canadian Malartic. Lower production at Cortez and Robinson partly offset gains. For the six months, gold represented 68% of royalty revenue; copper 13% and nickel 9%.
- Depletion and amortization rose to $21.4 million for the quarter and $38.6 million for six months, principally due to higher production and the start of production at Holt and Canadian Malartic. Six-month production taxes increased to $5.1 million from $3.7 million. A $1.3 million restructuring charge was recorded for amending the Relief Canyon royalty, reducing its rate from 4% to 2% and removing its area of interest.
- Royal Gold agreed to increase its Mt. Milligan gold stream to 40% of payable gold for total aggregate investment of $581.5 million. It paid $112 million in December and had $216.9 million of remaining scheduled commitments, subject to contractual conditions. The operator expected production to start in fourth-quarter 2013.
- The company agreed to advance up to $60 million for a Tulsequah Chief gold and silver stream, of which $10 million had been paid by December 31; up to $50 million remained subject to conditions. The operator anticipated production in 2015. If Royal Gold suspends further payments under specified circumstances, stream percentages would be reduced.
- Subsequent to quarter-end, Royal Gold sold 4 million shares in January 2012 for approximately $268.4 million gross proceeds. It repaid the $170 million revolver balance on February 2, leaving $225 million available. The company also announced an increase in its annual dividend for calendar 2012 from $0.44 to $0.60 per share.
Outlook, commentary and risks
Management stated that available financial resources and operating cash generation should cover anticipated debt service, operating costs, exploration and capital expenditures, dividends, and current royalty commitments for the foreseeable future. It may seek additional debt or equity financing for a substantial acquisition. The filing gives no company-wide revenue or earnings guidance; production estimates cited are forecasts from mine operators, not independently verified company estimates.
Key operating updates included operator forecasts for 2012 production growth at Canadian Malartic, Las Cruces and Peñasquito, and ongoing development at Mt. Milligan and Pascua-Lama. Actual results remain dependent on operator execution, production, mine construction and permitting. Royal Gold identified metal-price volatility, mine performance, reserve and geological changes, legal or title disputes, foreign-country risks, and access to acquisition financing as material risks. A 10% change in average gold price for the six-month period would have changed revenue by approximately $11.1–$11.3 million; comparable 10% copper or nickel changes would have changed revenue by about $2.1 million or $1.9 million, respectively.
A Voisey’s Bay royalty lawsuit seeking at least $29 million in past damages, plus additional damages and other relief, remained in discovery; no material litigation development was reported for the quarter. Available-for-sale securities declined in fair value, producing a $12.3 million six-month unrealized loss in other comprehensive income, with no impairment write-down reported. Unrecognized tax benefits were $20.6 million at quarter-end. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress, costs, contractual conditions and timing of the remaining $216.9 million Mt. Milligan and up to $50 million Tulsequah commitments.
- Whether operator production and construction forecasts are achieved, particularly at Mt. Milligan, Pascua-Lama, Canadian Malartic, Peñasquito and other key properties.
- Royalty revenue sensitivity to metal prices and production, including the reported concentration in gold and the performance of major royalty properties.
- Status and potential outcome of the Voisey’s Bay royalty calculation litigation and the company’s tax positions.
- Use of equity-offering proceeds, debt levels after the revolver repayment, and funding needs for future acquisitions and dividends.