Royal Gold Inc. (RGLD) is financially robust and continued to invest in the business, adding four new interests to its portfolio over the fiscal year 2014. The company claims that it outperformed its sector and gold for fiscal 2014, delivering a total shareholder return of about 84%.
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Company Snapshot
This precious metals company acquires and manages precious metals royalties and streams, with a primary focus on gold. Royal Gold's portfolio provides investors with a unique opportunity to capture value in the precious metal sector without incurring many of the costs and risks associated with mine operations.
Royal Gold holds interests in over 200 producing, development, evaluation and exploration stage royalties and similar interests located in some of the world's most prolific gold regions.
As of September 30, 2014, the company owned royalty interests on 37 producing mines, 23 development stage properties and 138 exploration stage properties, of which the company considers 47 to be evaluation stage projects.
Financial Growth Picture
Royal Gold's compounded annual growth rate, on a per share basis, over the past decade (June 30, 2003 through June 30, 2013) for revenue, adjusted EBITDA and normalized earnings was 19%, 22% and 11%, respectively. These financial results were derived from its interests in 38 active mining operations which provide portfolio diversification and revenue stability.
Higher average metal prices for the majority of the decade also contributed to the company's strong performance. Royal Gold holds a strong balance sheet and, combined with its growing cash flows, is well positioned for future growth opportunities.
Annual Financial Highlights
Net income attributable to Royal Gold common stockholders totaled $62.6 million or $0.96 per share in fiscal 2014, compared to $69.2 million or $1.09 per share in 2013, $92.5 million or $1.61 per share in 2012, $71.4 million or $0.42 per share in 2011, and $21.5 million or $0.34 per share in fiscal 2010.
Revenue amounted to $237.2 million in fiscal 2014, compared to $289.2 million in 2013, $263.1 million in 2012, $216.5 million in 2011, and $136.6 million in fiscal 2010.
Revenue Base
About 71% of Royal Gold's fiscal 2014 revenue was derived from its Principal Producing Properties, including Andacollo, Peñasquito, Mt. Milligan, Voisey's Bay, Holt, Mulatos, Cortez and Robinson.
During the fiscal year ended June 30, 2014, the company derived about 78% of its revenue from precious metals - including 72% from gold and 6% from silver -, 8% from copper and 8% from nickel.
About 85% of the company's revenues were derived from foreign sources during fiscal year 2014, compared to about 83% in fiscal year 2013 and 82% in fiscal year 2012.
During the latest first quarter, Mt. Milligan contributed 29% or $19.7 million of the company's total revenues, while Andacollo, Peñasquito, and Voisey's Bay contributed 15% or $10.5 million, 10% or $7.1 million, and 8% or $5.6 million, respectively.
Unique Business Model
The company's business model is inherently scalable and efficient, resulting in margin expansion as the price of gold increases.
Royal Gold's lower risk business model is based on acquiring royalty interests in precious metals properties or entering into precious metals stream transactions rather than engaging in costly and more complex mining operations. To acquire a royalty, Royal Gold buys a percentage of the metal produced from a mineral property in exchange for an initial payment.
The company owns a large portfolio of producing, development, evaluation and exploration stage royalties and streams located in some of the world's most prolific gold regions. With this high quality portfolio, Royal Gold maintains upside potential through exploration successes by the operators and generally benefits when new reserves are discovered and produced.
Possibly, the best aspect of the company's strategy is that it does not contribute to the exploration, operating, or capital costs at the mine after the investment is made, and does not assume any responsibility for actual mine operations.
This successful business model generates strong cash flow and high margins with a lower cost structure, providing shareholders with a premium precious metal investment.
An important caveat worth mentioning here is that the profitability of the company's royalty interests is directly affiliated to the market price of gold, silver, copper, nickel and other metals. Hence, volatility in gold, silver, copper, nickel and other metal prices may have an adverse impact on the value of the company's royalty interests and may reduce its top line.
Shareholder Value
The company delivered a total shareholder return of 84%. Royal Gold returned over $53 million to shareholders in the form of dividends, which equates to about 36% of operating cash flow. Fiscal 2014 was the company's 13th consecutive year of increasing dividends.
Royal Gold increased its calendar year dividend to $0.84 per basic share, which is paid in quarterly installments throughout calendar year 2014. This represents a 5% increase compared with the dividend paid during calendar year 2013.
Over the five-year period beginning June 30, 2008 through June 30, 2013, the total number of properties in Royal Gold's portfolio grew from 49 to 204, while our employee count only increased from 15 to 21. The company's market capitalization over this same period grew from $681 million to $3.2 billion.
As of September 30, 2014, the company had a working capital surplus of $736.6 million. Current assets were $757.4 million, including $691.4 million in cash and equivalents, compared to current liabilities of $20.8 million, resulting in a current ratio of 36 to 1.
The company expanded and extended its revolving credit facility from a $350 million facility maturing in May 2017 to a $450 million facility maturing in January 2019.
The company has about $900 million in uncommitted liquidity to invest. It had nearly $1.2 billion of liquidity as of September 30th, including its working capital and undrawn credit line. Excluding about $64 million in post quarter end funding events and commitments at Phoenix Goldrush and the initial investment to Tetlin and Ilovitza, available liquidity totals $1.1 billion. Further deducting another $200 million in conditional commitments to Tulsequah Chief, Ilovitza and Tetlin, the company end with a pro forma liquidity balance of about $900 million.
Mt. Milligan Ramp Up
Royal Gold's wholly-owned subsidiary owns the right to purchase 52.25% of the payable gold from the Mt. Milligan project, at a cash purchase price of $435 for each payable ounce of gold delivered to Royal Gold. Mt. Milligan is an open-pit copper-gold mine located in central British Columbia, Canada and operated by a subsidiary of Thompson Creek Metals Co.
Thompson Creek's Mt. Milligan mine commenced production in September 2013. After three quarters of progressively higher production, it is now the company's largest single revenue generator even though it ended its fiscal year 2014 at only about 65% of design capacity.
Thompson Creek reported production of 60,400 ounces of payable gold in the latest quarter ended September 30, 2014, an increase of 63% over the previous quarter, primarily due to higher gold grades and recovery.
Thompson Creek expects the mine to generate improved performance in the December quarter as they target 80% (48,000 tonnes per day) of design capacity by the end of calendar 2014, with beginning production capacity scheduled for 2015. Payable gold production by calendar year-end is expected to be 185,000 - 195,000 ounces.
The new production from Mt. Milligan adds to 36 other producing properties also providing revenue to Royal Gold. An operating or investment-oriented metals company would be hard pressed to replicate this level of diversification.
Strong Portfolio
Andacollo Mine
Royal Gold owns a net smelter return or NSR royalty equal to 75% of all gold produced from the mine until 910,000 payable ounces have been sold, and 50% of the payable gold thereafter. Andacollo is an open-pit copper mine and milling operation operated by a subsidiary of Teck Resources Ltd. Gold is produced as a by-product of copper production. The mine is located in Coquimbo Province, Region IV, Chile, adjacent to the town of Andacollo.
During the latest first quarter of fiscal 2015, Andacolla reported a 37% decline in production, primarily due to lower grades, as expected in the mine plan throughout calendar 2014.
Peñasquito Mine
The company owns a 2.0% NSR royalty on all metals at the Peñasquito mine. The open-pit mine, composed of two main deposits, Peñasco and Chile Colorado, hosts one of the world's largest gold, silver, and zinc reserves, while also containing large lead reserves. Peñasquito is operated by a subsidiary of Goldcorp Inc. and is situated in the western half of the Concepción Del Oro district in the northeast corner of Zacatecas State, Mexico.
During the first-quarter ended September 2014, reported gold, lead and zinc production increased 41%, 4% and 16%, respectively, while reported silver production decreased slightly, over the prior year quarter. Goldcorp reported that it is mining in the higher grade portion of the pit, which it expects will continue through calendar 2014 at a projected throughput of 110,000 tonnes per day.
Voisey's Bay Mine
The company holds a 2.7% NSR royalty on all metals from the Voisey's Bay mine operated by a subsidiary of Vale S.A. Voisey's Bay is presently a surface nickel-copper-cobalt mine and will transition into an underground operation in the future. The mines is located in northern Labrador, Canada.
Reported nickel and copper production decreased 40% and 37%, respectively, over the prior year quarter due to lower ore grades. Concentrate production was also impacted due to a ten day planned maintenance shutdown on the Voisey's Bay mill. In July, Long Harbour achieved a major milestone with the production of the first finished nickel from the facility. Initially, Long Harbour will process primarily nickel matte from PT Vale Indonesia, and transitioning to processing solely concentrate from Voisey´s Bay at a later stage.
The company's other principal properties include Holt, Mulatos, Cortez - Pipeline Complex, Robinson etc.
Acquisitions of Royalty & Streaming Interests
February 11, 2014, Royal Gold's wholly owned subsidiary, RGLD Gold AG, entered into a $75 million gold stream transaction with Rubicon Minerals Corp. (RBY) that will finance a significant portion of the construction of the Phoenix Gold Project in Ontario, Canada.
September 8, 2014, Rubicon Minerals reported that the Phoenix Gold Project remains on track for production in mid-2015, with mill construction on schedule and underground development 24% complete.
As of September 30, 2014, Royal Gold had a remaining commitment of $45 million as part of its Phoenix Gold Project stream acquisition. Subsequent to quarter end, the company made a $17 million payment as part of this commitment on October 3, 2014.
On September 30, 2014, Royal Gold acquired a 2.0% net smelter return or NSR royalty and a 3.0% NSR royalty held by private parties over areas comprising Contango ORE Inc.'s Tetlin mining project located near Tok, Alaska, for total consideration of $6.0 million. The acquisition of the Tetlin royalties has been accounted for as an asset acquisition.
October 20, 2014, RGLD Gold AG, a wholly owned subsidiary of the company, entered into a $175.0 million gold stream transaction with Euromax Resources Ltd. that will finance a definitive feasibility study, permitting work, early stage engineering and a significant portion of the construction at Euromax's Ilovitza gold-copper project located in southeast Macedonia, about nine miles west of the Bulgarian border.
Latest Q1 Results
For the quarter ended September 30, 2014, the company reported net income attributable to Royal Gold stockholders of $18.7 million or $0.29 per share compared to $15.2 million or $0.23 per share for the quarter ended September 30, 2013.
Total revenue for the latest first quarter was $69.0 million, higher than the previous year's revenue of $56.5 million, due primarily to new production at Mt. Milligan and production increases at Cortez and Peñasquito, partially offset by a decrease in the average gold, silver and copper prices and decreases in production primarily at Andacollo, Voisey's Bay and Mulatos.
The average gold price was $1,282 per ounce for the first quarter, down 3% from $1,326 per ounce in the year ago quarter. The average copper price was $3.17 per pound and an average nickel price was $8.43 per pound during the quarter ended September 2014, versus an average copper price of $3.21 per pound and an average nickel price of $6.31 per pound recorded last year.
Tony Jensen, President and CEO, said:
"Fiscal 2015 is off to a good start, with Mt. Milligan, Peñasquito and Cortez making strong contributions to our financial performance. We closed two creative transactions in the last 30 days that give us low cost options on attractive assets and our balance sheet remains robust to pursue additional opportunities for growth."
Approximately 10% of the company's total recognized revenues for the three months ended September 30, 2014 were attributable to copper sales from copper producing interests. About 4% of total recognized revenues for the quarter were attributable to silver sales from its silver producing interests, and about 4% of total recognized revenues for the quarter were attributable to nickel sales from nickel producing interests.
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